THE BENEFITS OF LEASING FOR MODERN COMPANIES

It was true in ancient times and it is true today. The significant difference in the 20th and 21st centuries has been, and is, the acceleration of the rate of change. Tools and machines invented yesterday allow us to build and efficiently use the next generation of tools -- faster. It is a logarithmic progression. It does not matter what industry or field: durable products, soft goods or services (machine tools, computers, newspapers, aircraft, or advertising). All are subject to the relentless and ever accelerating rate of improvement and utilization – accompanied by the falling cost of such goods and services.

My 30+ year career has been spent helping companies acquire, deploy, finance, utilize and dispose of technology equipment. Over that period, I have concluded that technology is not fine wine. It does not get better and more expensive with age! In fact, if I focus strictly on information technology (IT): PCs, servers, storage, and networks, the built-in obsolescence and depreciation is staggering. IBM Corporation introduced the Model 5150, commonly known as the “IBM PC” in 1981. What has happened since then? The chart below helps put things into perspective.

There is poetic irony in that the technology we are compelled to use to become more efficient and competitive is also one of the worst investments to have on our balance sheet. It is obvious via hindsight that given the cost versus performance curve, any company that outright purchased IT equipment over the last 30 years and depreciated it over five years, was on the losing end of a war of attrition against technology.  In hindsight, companies would have best served their stakeholders had they utilized operating leases with an average term of 36 months on every piece of IT equipment. Preservation of cash on the balance sheet and synchronization with the pace of technology would have resulted in productivity gains accompanied by a lower total cost of ownership versus outright purchase. It is always interesting to me when a prospective client says that they only purchase IT equipment but, when I specifically inquire about their printers/copiers, 95% reply that they lease them. I suspect somewhere in the past they have made the decision that copiers have little future value and that they need to be refreshed with rigor on a regular basis. However, they have not reached the same conclusion regarding their PCs. Nothing could be further from the truth. In fact, a more frequent refresh of their PCs would have a vastly greater impact on lifecycle costs, such as, break/fix charges and help desk calls, not to mention increased data security by taking advantage of improvements in onboard hardware and firmware features such as Intel vPro.

Interest rates fluctuate up or down based on many external variables. Businesses utilize many tools and financial instruments to “hedge or arbitrage” possible interest rate risks. In contrast, the cost of technology only heads in one direction - downward. Hence, the acquisition strategy regarding technology is straightforward -- use of the technology does not require ownership of said technology.

So, where are we today? After 60 years of a hardware arms race to build faster, smaller and lower power consumption silicon chips, we are entering the era of software and artificial intelligence. By example, an automobile is a piece of hardware. It is useless without software to operate it. For the past century, that software has been us - human beings.  We use our CPU (brain) and our sensors (sight, sound, touch to direct the hardware to get us from point A to point B. However, our driving days are numbered as we are in the early stages of being replaced by the autonomous driving technology being developed by Uber, Lyft, Tesla and every other car manufacturer. John Ellis, managing director of Ellis and Associates, and the former Global Technologist of Ford Motor Company, has stated that the 2010 Ford Mustang had 25 million lines of software code, the 2012 had 50 million lines and by 2020 Ford vehicles would have over 100 million lines of code. A great portion of the software is to deliver drivetrain performance, emissions compliance, customer choice, and customization of the vehicle. But, it is also gathering valuable information on driver habits, destinations and the environment. This information is known as “big data.” Analysis of big data provides unimaginable insights into product use and improvement, proactive customer service and additional sales opportunities.

Which leads us to the recent books and articles regarding the new “gilded age.” In this new gilded age, the product is software as opposed to steel and railroads, and the new robber barons are software czars like Zuckerberg, Musk and Brin, as opposed to Rockefeller, Vanderbilt and Carnegie. At CHG-MERIDIAN we help our clients transition from the hardware era to this new gilded age. We are independent advisers, agile providers of ideas, and reliable project managers. We help our clients by providing lifecycle consulting and financing options to ensure the best use of their cash and highest leverage of their balance sheet. And today, that increasingly means leasing of hardware and using cash to fund the development or acquisition of software and the analysis of the big data it collects. This approach provides the highest return on invested capital to the stakeholders.