Why Do You Lease Equipment?

Michael Keeler

For executive sponsors of equipment leasing programs in large organizations, launching and managing a successful program requires clarity of purpose. I recently sat down to talk to Ingemar Lanevi, Treasurer of NetApp, Inc., to understand Ingemar’s recipe for success. NetApp leases equipment for one over-arching reason: cashflow (specifically free cashflow/share). However, the operations managers only really care about their budget and don’t want to be distracted by end-of-term deadlines. See the 10 interview video clips below to find out why NetApp leases and how Ingemar and his team overcame several significant challenges to create a low-friction, high-value leasing operation.

In our “how-to” article in this issue, we explore the challenges and problems facing companies at the End of Term and explain How to Fix Poor End of Term Performance. The first step revolves around clearly articulating and communicating to internal stakeholders why your firm leases equipment.

Interview with Ingemar Lanevi, Treasurer, NetApp

Why does NetApp lease equipment?
How do you do lease vs. buy analysis?
How important are timely returns to your analysis?
How do renewals and buyouts affect your analysis?
Are you concerned about IFRS and having to capitalize leases?
WACC or Cost of Debt: which do you use for leasing?
What internal problems did you overcome to make leasing successful?
How did outsourcing your leasing administration and automation help you?
What advice would you give to other finance and procurement executives?
What is your role at NetApp?

How to Fix Poor End of Term Performance

By Michael Keeler

The biggest threat to the economics of a lease, in which the lessor has taken a meaningful residual, is mismanagement at the end of the lease term. In the worst case, poor End of Term (EOT) management can lead to evergreen payments, in which the lessee misses the lessor’s notification deadline or fails to return the equipment on time and continues to pay for the equipment on a month-to-month basis. It can also lead to forced buyouts, double payments in the refresh cycle, and sub-optimal financial decisions. In this article, we explore why companies mismanage the EOT process and then examine the many tactics, techniques, and tools that companies can use to improve their EOT performance.

“I Don’t Have the Time or Resources to Return Equipment On-time”

No one likes another deadline added to their plate. Many equipment managers and users inside Fortune 1000 companies view returning equipment at the end of the lease term as a burden – an artificial deadline imposed by management with no direct benefit to them. Equipment managers often argue that they do not have the resources to decommission equipment at the end of term or manage the logistics of the return and refresh on schedule. They would prefer to continue using the equipment until the end of its life without considering the expiration of the warranty, the costs of maintenance, and other factors that increase total cost of ownership, until the equipment either is no longer useful or breaks and must be replaced.

Users miss return deadlines for a variety of reasons. Some users become attached to their machine, such as a car or a PC, and are reluctant to give it up and learn to use a new one; some consider their other responsibilities to be more important than dealing with return tasks; and some just ignore the issue or procrastinate.

Human behavior is difficult to predict, control and incent. Resistance to returning equipment on time is natural given how busy many people are, especially during a recession when headcount cuts have resulted in everyone having to do more with less. However, human nature aside, most people will comply with a request to return equipment, if given the chance – and a little help from their firm. The truth is most firms don’t give their equipment managers and users that chance.

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