Thursday, July 25, 2013

The Incredible Power of Capital Leasing

"I will gladly pay you Tuesday for a hamburger today." - J. Wellington Wimpy (of Popeye fame)

A common criticism of CIOs today is that the incumbents lack an advanced understanding of Finance.  I've even heard some of these same people say, "Why do I need to know about that?  We have a whole Finance and Accounting department to handle these matters."  The problem, of course, is that without understanding all the ways that things can be bought and sold, the CIOs consign themselves to what I like to call "Binary Hell".

The term Binary Hell does not refer to the bits and bytes of programming.  What it describes instead is the realm where only "Yes" and "No" answers exist.  Most children learn at an early age to avoid this trap when they discovery the word "Maybe".  If you've ever dealt with a persistent child who wants you to say yes to something they want, you quickly find that saying "No" just puts you into the endless loop of the same question.  When the child will not accept no for an answer they will readily accept "Maybe".  The world of Maybe is an acceptable place because it is gray - not black or white.  In the world of Maybe, all possibilities are on the table.  That's a great place to be if you're a person looking to get whatever you need (or want).

Given what I've said above about "Maybe", CIOs can do even much better than that, yet many fail to use a very powerful tool in their arsenal.  Imagine the following scenario:  You need to invest $12 million in a series of IT improvements that your company desperately needs.  The company has been historically adverse to making large capital investments in IT.  As the CIO (or senior leader) you go through endless gyrations to create a business case that justifies the purchases.  There isn't a single item that you've failed to consider; your presentation is airtight.  You prepare to walk into your CEO's office or the board meeting, hands sweating, heart racing, hoping to get that affirmative "Yes!"

What do you think will happen?  How many of you have been in this situation in the past, right now, or expect to be in the future?

It is a fact of life that most companies will spend money freely on infrastructure, facilities, and new assets that generate money.  What they won't do is give IT big sums of money (in most cases) unless the data center is about to burn to the ground.  So in the scenario above you are much more likely to get a "No" or a deferral than a "Yes".  That's just history speaking.

Here is where the power of leasing comes into play.  It is such a simple, elegant solution that I am continually surprised how little IT leaders and their companies utilize it.

Let's take a look at that same $12 million investment mentioned above.  Instead of asking for all of the money up front, what if you discuss the total cost of the project but present the cash outlay like so:
  • Year 1 - $2.0M
  • Year 2 - $3.0M
  • Year 3 - $3.0M
  • Year 4 - $3.0M
  • Year 5 - $3.0M
All of a sudden, the big investment seems like a much smaller commitment.  I guarantee that this very legitimate financial tool will almost always get you to the "Yes" you seek if the business case is solid. 

In my career I've been able to gain approval for quite a few, large magnitude projects by leasing.  I can't say that I would have gained the same approvals had I created all or nothing scenarios.  It is just too easy for people to say "No" to large dollar requests, especially when they don't have an understanding of what the technology will actually do.  The typical response is, "Yes, we know that it's critically important but we just can't afford that price tag right now."

Remember that we are talking about Capital Leasing, not Expense Leases (what you get at the car dealership).  Capital expenditures do not have the same negative effect on bottom-line profitability that pure expenses, sometimes called SG&A or O&M, do.

Companies must commonly manage cash and cash flow very closely.  Not only will capital leases give you a much better chance of gaining approval for your project, they will also show everyone just how financially savvy you are.

Good things happen for financially savvy CIOs...

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