Leasing Can MAXIMIZE IT Strategies.

Companies that choose leasing over purchasing for their information technology needs are realizing compelling business advantages such as affordable access to the latest technologies, improved cash flow, pre served credit lines and significant tax savings. When speaking with CFOs around the world, I've heard some are surprised to hear that so many companies -- ranging from business start-ups to Global 100 powerhouses -- find it beneficial to lease technology assets.

IT leasing has become so prevalent, according to Equipment Leasing Association of America (ELA) data, that more than 80 percent of all U.S. companies now lease at least some of their equipment. Gartner Group, the technology research and services firm, reported in 2000 that more than 50 percent of newly acquired IT equipment is leased. IBM alone provides IT leasing or financing to tens of thousands of customers, including more than 98 of the 100 largest U.S.-based companies.

Companies of all sizes are not only leasing more equipment, they're also leasing "soft assets," such as software and consulting services, which can frequently be the most costly part of an IT solution. A recent ELA survey indicates that the volume of soft assets rolled into equipment leases rose more than 400 percent in 1999 alone. This staggering quintupling in a single year vividly illustrates the expanded role leasing plays in a company's IT and business strategy.

Staying Ahead of the Technology Curve

Constant technological advances, rendering yesterday's innovations obsolete, require companies to continually update technology to remain competitive. Today's mobile lifestyle has moved more technology out of the controlled office environment, making asset management progressively more difficult. Combined with an endless number of expansions, mergers and acquisitions, many organizations are left with a concoction of diverse technologies, making effective asset management even more difficult.

One response to this dilemma is a valuable service offered by a total solutions lessor, asset management and tracking. This includes customized reports that provide a complete picture of inventory to keep companies informed of the location, status and cost of every leased asset. Reports can also provide updates to specific aspects of the lease terms, such as contract renewal dates. In addition, leasing professionals can offer valuable consulting services that range from helping customers make effective technical decisions to advising them on how to pay for the services.

Clearly, leasing eliminates the large cash outlay required at the time of purchase and spreads this cost over an extended period of time. By preserving available cash and credit lines, companies -- particularly start-ups with limited cash reserves -free these resources to invest in other parts of the business. On the other hand, mid-size and large companies also have much to gain from a leasing strategy, especially when it improves their bottom line and cash flow.

Benefits: Some Examples

Two examples demonstrate how leasing has dramatically improved business results for individual companies. The first involves a leading U.S.-based chemical corporation with global operations, which acquired the most advanced technology available while realizing significantly reduced ownership costs.

Five years ago, the client was running multiple e-mail systems on more than a dozen platforms - from PCs to mainframes. Keeping accurate records of the locations, warranties, maintenance and soft ware upgrades of all its worldwide assets was virtually impossible. Recognizing losses in employee collaboration and productivity, the company reevaluated its IT quagmire and realized the importance of asset management and consolidation.

Deciding on two basic configurations of desktop and laptop hardware, an e-mail and operating system, the company chose to lease rather than purchase the hardware and software. The three-year lease also included services to manage the configuration and deployment of computers worldwide, as well as to handle asset management and disposition.

As the rollout progressed, this company quickly saw its PC costs drop by more than 30 percent. After reaping the benefits of the initial three-year lease, the company renewed the agreement for another term and also expanded the scope to include more than 70,000 PCs. The CIO explained that by leasing the PCs, he avoided a sizable capital investment in purchasing units that were nearly obsolete. He not only praised the financial benefits of leasing, but was pleased to provide his staff with the most current technology available.

In a second example, a telecommunications giant -- one that could easily have self-financed at low market rates --chose to lease, enabling it to gain greater control of its IT budget. Starting with a need to revamp its corporate data centers, the client evaluated several financing options and decided on a four-year lease arrangement that included mainframes, operating systems, storage, middleware and third-party software and services. The deal also included a feature that typifies the flexibility of IT leasing -- the "rent a-MIPS" feature, referring to MIPS, meaning millions of instructions per second, or raw computing capacity.

The company initially paid for only 65 percent of the computing capacity it had installed. This pay-as-you-go feature helped eliminate costs associated with changing technology requirements and ensured payments would only grow with actual usage. The company was able to navigate what could have been a steep rise in capacity cost as new demands were met and more advanced technologies exploited.

The E-Business Effect

Another catalyst in the rise of IT leasing popularity is the Internet, which has changed the way companies do business in today's global economy. Last year, International Data Corp. said that the global Web population would grow from 196 million in 1999 to 502 million in 2003 and projected consumer e-commerce spending to reach almost $190 billion in the U.S. in 2004, up From $44 billion in 2000.

Organizations simply can't afford to rely on older technology and equipment to manage this electronic tidal wave for gaining competitive advantage. In this environment, just staying competitive means deploying the most advanced e-business applications, such as enterprise resource planning, customer relationship management and supply chain management.

The new economy, rapid advancements in technology, an increasingly transient equipment landscape and an urgency to implement flexible and reactive e-business strategies have all impacted the traditional buy/lease analysis related to IT strategies. Should your company tie up significant capital by purchasing equipment that may or may not be part of its core revenue-producing business? Does leasing, which frees credit lines and affords more financial flexibility, provide a more effective solution for your company?

Answering these questions requires a different technology mindset than has historically existed. In the past, companies aligned their IT initiatives to complement a business strategy. Today, IT is much more fundamental to business strategy and is often the driving factor. IT considerations, having moved from the back office to the front office, now drive many of our everyday business decisions.

Today's e-economy is forcing every business to think about value in radically different ways. Where CEOs and CFOs once viewed leasing IT equipment and services as simply an alternate means of financing, they now embrace leasing as a potent strategy for developing and maintaining competitive IT capabilities, and for adding fiscal strength to enterprises of all sizes.

Joseph C. Lane is general manager, IBM Global Financing and president, IBM Credit Corp.

Why Lease IT?

* Gain access to latest technologies

* Improve cash flow

* Preserve credit lines

* Save on taxes

* Consolidate and manage IT assets

* Include "soft assets" (software and consulting services), the most costly part of an IT solution