To buy or not to buy

Financial directors the world over regularly curse Moore's law, which dictates that processor power doubles every 18 months. As Intel and its competitors push PC power higher and storage capacities increase beyond expectations, desktop resources can become rapidly inadequate when compared to that of your competitors.

Upgrading your PC resources can be costly, however. Even if you take the trouble to plug in new processors and hard disks without replacing the entire system, the capital outlay and cost of maintenance can still be enormous when you factor human resources and asset management into the equation.

One potential answer to this problem is leasing.

According to David Roberts, national development manager at Schroder Leasing, the trend started on the other side of the pond.

'Leasing is coming to the UK from the US really. It has been big there in the IT sector since about 1993 and it's now hitting us big time, because we are always behind the US,' he says.

One of the main reasons that the cost-of-ownership issue has sprung up, he argues, is because more companies are running 'lean and keen' nowadays.

He explains that companies want the latest equipment, but are less prepared to pay for it than they were in the 'fat era' of the 1980s, when financial directors presided over more generous budgets.

Companies that avoid listing their equipment as capital assets also avoid having to sell them when they become too clapped out to use, explains Roberts.

This can be useful if you want to upgrade your equipment at an earlier stage, because of advances in technology.

By contrast, if you buy assets with cash and you sell them before amortisation is complete, then you take a hit.

Work out what you get on the sale, minus what you have to send back to the taxman because you sold before the set amortisation - ie, write-off - period (normally three years), and you may well find yourself out of pocket.

On the other hand, keeping your equipment off your capital assets list can have distinct tax-related advantages, according to Sean Williams, sales director at The Systems House Group.

He points out that when you gradually write off the initial cost of a capital asset, such as a purchased PC, you can only claim back part of the tax over the amortisation period, whereas leasing deals enable you to claim back the entire amount spent on leasing over the course of the amortisation.

Williams explains that when buying a thousand pounds worth of equipment, you can claim a certain proportion of it against tax. Companies do not simply get this amount back from the Inland Revenue, however. Instead, a percentage of the cost is deducted from profits to reduce the overall tax bill, much in the same way that business vehicle costs are offset through annual writing-down allowances. In a three-year amortisation period - during which time the taxman generally accepts that the IT equipment concerned is likely to be rendered technologically redundant and, therefore, of little resale worth - the sum claimed back in this way in the first year equates to a percentage of the overall capital expenditure. In the second year, companies claim a percentage of the remaining amount (the original amount minus the percentage claimed in the first year) and a percentage of the final amount left in the final year.

In a leasing arrangement, things are much simpler, as you simply claim the total amount that you pay to the leasing company over a set period of time - for example, a third of the sum per year over three years. By contrast, the amount that you can claim back from capital assets depends on your company size, but it can never equal the 100% that you can claim back on leasing deals.

Schroder's Roberts adds that there is yet another advantage to leasing when it is combined with outsourced desktop services.

Since manufacturers such as Compaq have targeted the cost-of-ownership issue with extended warranty programmes, many customers have expressed the need for an all-in monthly cost per user. 'That includes the maintenance, the support, the hardware and the software. It's a no-shocks principle,' he adds.

There are different leasing deals available, according to Tony Field, managing director of leas- ing company ECS International. He explains that customers can choose between a finance or an operational lease.

Under a finance lease, the provider of the equipment owns the asset. At the end of the lease, customers have the option to sell it as agents of the provider, retaining 99% of the profit. The other option is that they can pay 'peppercorn' rental at the end of the lease - a regular minimal amount which allows you to use the equipment, doing whatever you like with it as long as you have the letting company's agreement.

Under an operational lease, the customer doesn't have any assets on the balance sheet, meaning that the gearing of the company is improved in financial terms. The letting company keeps the asset and gets to keep the tax allowances, thus allowing it to feed back the tax allowance into the lease rate. The main difference here is that the leasing company also retains the residual value - meaning that it can sell the equipment at the end of the leasing period. This enables it to reduce the lease payments.

While leasing hardware sounds easy, there are problems when leasing software according to Schroder's Roberts. He explains that unlike hardware, software is not seen as a tangible asset by the Inland Revenue, which means that it has to be leased as part of an overall solution rather than on its own.

The other problem is the software licence - many software vendors do not allow leasing companies to pass on licences to a third party, he says. There are ways around this. A software loan enables the customer to retain the licence and simply pay for the full amount over a set period. This is effectively a hire purchase agreement.

Nevertheless, The Systems House Group's Williams says that if you find the right software vendor, licence transfers are possible, making it easier to lease the software. He has arrangements with Pegasus and Tetra which enable him to transfer the software licence to the customer.

'Typically, at the end of the term, the user pays a nominal sum. We can't extract lots of money out of them because they could just tell us come and collect it. It gets something off our books but it lets them keep leasing it,' he explains.

Leasing has its disadvantages, however. Customers wanting to move towards a total cost-of ownership lease, where the network, desktop systems, software and services are leased, may find themselves faced with a hefty amount of work to do at the start of the project.

Many companies don't even know how many PCs they already have, let alone what their configuration is or what software is running on them. This means that many companies will have to undergo an extensive inventory process to work out what they need to lease.

Companies such as ECS can handle this for you, but it is an extra cost which must be factored into the leasing project, reducing the cost effectiveness of the move. One upside of this is that once it is done, you can then begin to manage your cost of ownership more effectively. It also puts you in a better position to manage the security of your system.

Total cost of ownership is not the only reason that a company would want to lease, however. Sometimes it is simply more convenient than purchasing outright, especially if the company does not want to use the equipment for very long.

For example, conference organiser Coefficient UK found itself in a tricky position when organising an event in Spain. Its customer, a computer training company, wanted some equipment to use at the event, and Coefficient managing director Heather Doyan explains that leasing was the only option.

'We hired some kit and we had to have them on a two-week deal because we had to take them to Barcelona. We felt more comfortable having equipment that came from the UK. We took it to Barcelona and set everything up. They had the four-day conference and then we brought it back again,' Doyan says.

One of the advantages of using the equipment was that it was all identical with the same components and, therefore, easier to network, she adds.

The issues What's best for you

Leasing is a proposition whose attractiveness gets larger as the size of the leasing deal increases. This is mainly due to the tax benefits which can go alongside a leasing deal. However, a lot of it is based on PC churn and if you are moving down the thin-client route, you will need to think carefully about which parts of your IT infrastructure need to be leased. Companies should also make sure that they plan any leasing agreement to address the issues which are most important to them - be it the need to regulate their total cost of ownership, or simply to lease devices on a commodity basis, without any added value.

Thin clients From desktop to server

The real threat to PC leasing may come from the thin-client initiative. Companies using network computers may find that they do not need to upgrade their machines so often because their functionality does not change as much. Companies using Internet terminals or Windows terminals may find themselves even less likely to upgrade because all the functionality is contained at server level - the PC or dedicated terminal is purely a display device. This means that processing power and storage capacity will not be forced upwards so rapidly. ECS' Field says that if the thin-client computing model really does take off, then it will simply precipitate a switch in emphasis from desktop to server leasing. 'A good example is an AS/400 with dumb terminals on the end. AS/400 customers tend to upgrade their systems every 18 months on average, so there no reason why a server with a thin client on the end should not be similar,' he argues.