Hardware Today: Leasing Meets Outsourcing

Monday May 2nd 2005 by Drew Robb
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As server prices dropped, traditional leasing options became less prevalent. However, a new leasing model that adds value by rolling in IT services is gaining popularity.

Leasing was supposed to be one of those IT options that would die a slow but steady death due to the commoditization of server hardware. The era of the ubiquitous Intel/AMD white box was supposed to signal the end of the glory days of leasing.

"The attitude with commodity Intel stuff is typically 'It's broken, let's get a new one'," says Clive Longbottom, an analyst with U.K.-based Quocirca Ltd.

The arrival of commodity servers hasn't been the death knell of computer leasing. Rather, the business has quietly thrived. How? By adding value. While there are still many companies out there that will lease you equipment for your own shop, the industry appears to be gradually transitioning to hosted options. You lease servers, space and services inside someone else's data center — what could be described as a hybrid between traditional leasing and outsourcing.

After all, there is a steep learning curve for setting up an operational IT environment. Even with savvy IT veterans on hand, a good data center can provide service that goes far beyond what the average do-it-yourself option can achieve.

"Our facility features access to direct fiber optic connectivity to eight major Internet backbones, uninterruptible power from multiple UPS systems and a diesel generator, 24-hour surveillance and a sophisticated climate-control system," says Ivan Vachovsky, CEO of Aplus.Net, a server leasing/hosting and Web hosting firm based in San Diego. "It would be difficult and expensive for anybody to set that up on their own. The leasing option means you avoid the hassle of building and maintaining your own data center."

"Leasing enables customers to bundle server costs and their associated services into a low monthly payment, and avoid large upfront costs."

— Kris Snow, vice president, Sun Microsystems Finance

While leasing used to be very much the province of the high-end and mid-market, outfits like Aplus.Net have made it viable to lease lower-end models. Vachovsky reports that his company traditionally leased Intel servers exclusively, but due to popular demand has recently added a 64-bit server using the AMD Athlon 64 CPU. By constantly adjusting to the changes in the market, the leasing business remains healthy overall. Vachovsky says he is in operating in a growing billion-dollar per year market.

He personally reports double digit annual growth.

"The adoption rate of dedicated servers is picking up," he says. "As with other areas of this industry, after an initial price drop, prices tend to stabilize as do the number of quality providers."

Down the Food Chain
While mainstream leasers like Sun, Fujitsu and Unisys have traditionally earned their moeny by offering higher-end models, even they report that leasing as a whole is making its way down the food chain.

"As system consolidation has taken hold in the data center over the last couple of years, we have seen a notable shift in the market," says Kris Snow, vice president of Sun Microsystems Finance. "There appears to be a trend from the leasing of fewer high capacity, high-end servers to the leasing of greater numbers of mid-range and low-end servers supporting the enterprise environment."

He admits, though, that high-end and mid-range servers still account for a higher proportion of systems under lease. As such systems are expensive, those leasing gain the advantage of bundled professional services, installation and training.

"Leasing enables customers to bundle server costs and their associated services into a low monthly payment, and avoid large upfront costs," says Snow.

Through its finance arm, Sun leases the full spectrum of Sun Fire and Netra servers and workstations (both Opteron and SPARC processor based), as well as Sun StorEdge storage systems. In addition, the company has made available complete solutions that include servers, storage, software and services from Sun and third-party suppliers. Rather than just leasing a specific quantity of servers, Sun seeks to offer complementary equipment as a complete system for the computer room or data center.

>> Not Strictly a Cash-Flow Decision

Not Strictly a Cash-Flow Decision
So when should companies lease and when should they buy? Snow says the simple truth is that the availability of capital is a dominant factor in deciding whether to lease or buy IT. If you don't the cash but need the equipment now, leasing is your only option.

Snow, however, also offers several other considerations that may tip the balance in favor of leasing, even for companies with plenty of cash on hand. Those factors include built-in technology refresh options that allow for easy upgrade or expansion of systems during the term of the lease, as well as the flexibility at end of term to purchase the technology, replace it with newer technology or return it.

"For companies where the eventual aim is ownership," Snow says, "flexible leasing terms, technology-refresh and end-of-term lease options allow them to make informed and controlled decisions about the levels of ownership that suit their balance sheet and cash flow requirements."

Leasing might also be wise for those facing the challenge of managing fluctuating demand on IT resources. Some leasing plans can be structured on a "pay-per-use" basis, allowing them to match payment to usage, and make budgeting for IT more predictable.

"In terms of support, pay particular attention to how easily you can upgrade your specifications as needs change, and how much support you really have."

— Clive Longbottom, analyst, Quocirca Ltd.

A wide range of leasing plans and programs are available, he says, with the Fair Market Value (FMV) leases offer the lowest monthly payment as it enables off-balance sheet treatment of assets.

Snow cautions, though, against chasing equipment at the lowest possible monthly payment.

That often can come at the expense of flexibility in the terms of the lease, such as more stringent return conditions at the end of term," says Snow. "Companies need to weigh their short-term pricing requirements against their requirements two or three years down the road."

Not for Everyone
Quocirca's Longbottom, however, isn't the biggest fan of leasing. He suggests that leasing works best for companies that make lots of changes to their infrastructures, or don't have much in the way of support skills available. Buying, on the other hand, is better when the organization possesses solid support skills and it is unlikely that it will change things much over a period of some years.

If you do lease, Longbottom recommends building bail-out clauses into the contracts s you can return the kit without too much penalty. Further, he highlights the importance of not being locked into a specific platform or type of equipment for too long a period. Five years can see a world of change in IT, after all. Finally, he cautions those considering leasing to watch out for equipment disposal and support.

"Ensure that disposal is covered under the lease as the legislative climate is making disposal more and more expensive," says Longbottom. "In terms of support, pay particular attention to how easily you can upgrade your specifications as needs change, and how much support you really have. If you need four-hour turnout and fault fix, make sure that this is covered before you sign anything."

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