Interview with Ingemar Lanevi, Treasurer, NetApp
Transcript: What internal problems did you overcome to make leasing successful? |
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Interviewer: Let’s talk about some internal problems that you’ve faced launching your internal lessee program and how you overcame them. Because your objective was really scalability.
Ingemar Lanevi: Correct. So, again, it was a tough process in the beginning. There were some negative sentiments, definitely, within the; both… We have two organizations: IT and engineering. Both are acquiring technology quite aggressively because of growth and everything else.
And in both camps it was pretty negative sentiment. More so on the IT side than on the engineering side, I would say. But for all intents and purposes very similar in nature that, again, by having a lease in place I think the biggest challenge people are faced with is it’s another overriding control in place that will force you to make decisions at some point in time down the road.
In a cash purchase (and this is why they like the cash purchase) there is not that same level of accountability and responsibility assigned to a cash purchase because once it’s fully depreciated it sort of like disappears off the radar screen from everybody.
And the owner of a data center or lab or whatever it may be can effectively play a little bit more with that; they can keep using it for another six, eight, twelve, fifteen months maybe.
Or they can decide to replace it at will, when they have money or whatever.
My challenge with it is, again, it’s an inefficient use of capital and by pushing the lease concept I am inserting a level of accountability in the IT organizations and the engineering organization on people who, again, we as a corporation have entrusted a huge amount of capital for them to manage as efficiently as possible.
And, again, I’m not suggesting that all IT people or engineers managing these data centers are willingly doing bad things or trying to circumvent systems or whatever. I think it’s just more a nature; human nature that we…
Interviewer: They’re busy. They’ve got other priorities.
Ingemar Lanevi: They have a million different things going on and, again, managing the assets down to the last minute or squeezing the most value out of pieces might not be the most important thing to them at any given point in time.
But, again, by having a lease program in place, I’m now inserting a certain level of urgency and accountability on behalf of these people that they need to have a plan. They need to prepare. They need to know when things are coming off lease and they need to be able to prepare for migrations.
And, again, this is even today, I find this is being the biggest challenge with running the program. Again, even though the economic benefits are there, a lot of the people in the business don’t understand or don’t want to understand all of the economic cash flow benefits.
They really only have one thing in mind and that is, “What’s my budget?” So, to them, it’s all about cash versus cash, and as long as I can show a lower monthly lease payment versus a monthly depreciation expense, they’re good. They’re happy, because I’m helping them. I’m saving; I’m giving them a saving in their budget.
They can effectively get more technology for the same depreciation expense that they had before in a lease scenario. So, they like that concept, but there is still pushback or concerns on the end-of-term process where, again, by getting forced into taking decisions they’re getting a little skittish about what they need to do or should do or the whole thing.
And in the current environment, obviously, everybody is being asked to do the same thing: Squeeze more out of what you have.
So, we’ve seen a drift towards longer utilizations. So, instead of three years they’re trying to squeeze four years out of them.
So what I’ve done there from a structuring point of view is really making sure that we have, up-front again, I bake in a not-to-exceed buyout value after three years, I also bake in extension pricing, so an additional 12 months after the first 36. And an additional 12 months after the first 48.
Pre-determined pricing; how much it’s going to cost me to renew it. Again, cap buyouts at the end of each term to make sure that I can always figure out what my worst-case scenario is and I can always calculate what my net present value basis in comparing to a cash purchase up front whether the lease alternative still makes sense or not.
And we’ve done a lot of work in modifying our models to make all of this information easily available to the business owners.
So, when they have the discussions and has to make; needs to make the decision in terms of buy versus lease type of thing up front, they get a full picture of what the picture looks like and here are the different scenarios: Where do you think you’re going to be with this piece of asset, specifically? Is it 36 months, is it 48, is it 50, 52, whatever.
And you can see on a continuum what the financial impact or economic impact is in either one of the scenarios, effectively. That has helped a lot in terms of getting them more comfortable with the whole lease program.
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