Vol. 75, No. 6, June 2002

Save Money on Hardware and Software Using "Smart Leasing" to Buy New Technology

by Ross L. Kodner

Every law firm is utterly frustrated by short product life cycles and fast product obsolescence. Using a clever combination of leases and purchases to acquire new hardware and software upgrades may be a way to combat this.

Forget about traditional leasing. For example, those ads on the backs of PC Magazine touting"only $90/month" for leases of the perfect Dell or Gateway PC configuration would seem to be "sucker leases" - high interest leases that are cash/profit cows for these companies. Today, dedicated technology lessors offer interest rates that are often below prime rate - in other words, cheaper than money.

Most banks are equally clueless about technology leasing. Banks all seem to offer $1 buyout "leases" that, if audited, the IRS likely would reclassify as "installment purchases." You would be penalized, not to mention having to re-do the "lease" on your books as a capitalized/depreciated fixed asset purchase.

Finding the Right Technology Lessor

Use leasing companies that specialize in technology and equipment leasing. The difference comes mostly from their experience in lease-end disposal of systems. They typically have connections to brokers who buy the turned-in components at the end of leases. The brokers in turn sell the components to third world countries, where a Pentium 166 may very well still be considered hot stuff. Because the lessor makes money at the end in sales to brokers, there is less need to make lots of money on the initial lease. The net result is a combination of a higher buyout amount offered (as much as 10 to 15 percent fair market value buyouts are not unusual), which translates to lower payments during the lease term. This translates to lower total cash outlays than if you were to purchase the equipment and, in most cases, if you were to finance the purchase out of your cash flow or by borrowing on your business line of credit.

Another plus is that the more than nominal buyout amount at the end of the lease term may properly act as a barrier to purchasing lease-end components. This is a good thing, since after the lease term (if the term matched the product's predicted obsolescence period) you don't want the products. Why? Because they're obsolete. This helps law firms work their way out of a common trap. They often buy out equipment at the end of a lease because it's so cheap. The problem is that "cheap" is a relative term that typically has an inverse relationship to the firm's productivity derived from using these systems. A three-year-old PC might be bought out for $100. Some bargain. If the software mix has been kept current, that once swift-feeling three-year-old PC is a boat anchor that will slow down your busy users and require more support to deal with the inevitable problems. It's also out of warranty, so any problems requiring repair are going to be on your nickel.

The key to cost-effective technology leasing is looking at the mix of hardware and software products you are acquiring and structuring a "layered" acquisition. More on this in a future column.

Wisconsin Lawyer