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In a slow economy, organizations are likely to scrutinize technology spending even more than usual and look for ways to slash costs while staying innovative and responsive to market change.

For some, leasing rather than buying IT equipment might provide an advantage. But determining the short- and long-term benefits of leasing and buying isn’t simple. CIOs need to work closely with finance executives to figure out whether leasing is the right move. If they don’t, the result could be higher long-term costs than anticipated.

“Because innovation requires fast time to market, leasing is a great vehicle for quickly acquiring IT assets and providing flexibility to the internal organizations to enable growth,” says Ruben Melendez, CEO and executive analyst at technology and business consulting firm Glomark-Governan. “The key is to define and negotiate leasing agreements with vendors that provide the flexibility of fast deployment.”

Melendez says the question of leasing IT assets should be part of C-level discussions. “Now, more than in recent years, CIOs should carefully examine their annual spending on IT equipment and determine which assets are best to own and which are best to lease,” he says. Because leasing provides a different cash and financial alternative, CIOs have more options for obtaining IT assets when budgets are tight or cash flow is scarce.

Which are the most logical IT assets to lease? “There are no magic industry indicators that determine which IT assets are the best to lease and which are the best to buy,” Melendez says. “The company’s financial state, size, IT budget, business goals and many other factors contribute to the decision.” But for many businesses, some assets are leased more often than they’re purchased, he says. These include PCs, printers, small servers and mobile devices. Infrastructure assets such as routers and large servers are more frequently purchased.

“In general, leasing makes the most sense when investing in a rapidly changing technology or in an asset that holds little value past the first two to three years,” Melendez says. For example, laptops are commonly outdated after three years, while some servers can hold their value and deliver optimum performance for well over five years.

“In the simple example of laptops versus servers, for most companies, leasing laptops and purchasing servers provides the greatest economic and financial benefits,” Melendez says. Two common economic benefits of leasing are better initial cash flow and lower maintenance costs. Many vendors require minimal upfront investments for IT assets, and maintenance agreements are often included in the lease contract, he says.

If an investment is evaluated solely on the net cumulative cash flow that an asset generates during its life cycle (benefits minus cost during multiple years), most of the time purchasing might seem like a better alternative than leasing, Melendez says. “However, because leasing provides a better payback and better initial cash flow — compared to assets purchased and paid upfront — the internal rate of return [is] generally better for the leasing option,” he says.

But leasing IT equipment should not be selected based on its short-term ability to alleviate financial burdens, Melendez says. Leasing could, in the long run, be more expensive than buying. “C-level executives must prepare business cases with ‘best-,’ ‘most likely’ and ‘worst’-case scenarios to assess the economic benefits — including cost reductions and revenue enablers — to fully understand the long-term internal and external costs, and to evaluate the risks of buying versus leasing IT equipment,” he says.

Just as with any other investment initiative, those who make the decision to buy or lease IT equipment must not only evaluate how technology and operational costs can be reduced in the short term, but they also need to consider how business areas and functions will be affected, positively and negatively, in the long term.

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