Thought Leadership

Leasing Can Facilitate Technology Refresh

Gautam Munish, Vice President, Cisco Capital India

A common subject of debate at various forums for CTOs and CIOs across the world today is increasing operational efficiencies. A key aspect involved in efficiency is that of how best to maximize returns from IT infrastructure. As organizations adopt more complex technology in order to meet the needs of their customers, IT purchase decisions too become increasingly time-consuming and vexing. The choice of the correct time and manner in which an organization should look to upgrade or refresh its IT infrastructure is crucial because most CTOs know that by the time a technology solution has been fully implemented, new and more advanced versions of the same technology begin to appear in the market. What was state-of-the-art today is passe within a span of 2-3 years. While networking technologies generally last longer than software or hardware, they too are experiencing shortening technology refresh cycles. In fact, in many cases the initial acquisition cost of technologies represents as low as 20 percent of the cost of ownership over a given period (generally 3-5 years). The remaining 80 percent of the cost, which includes the ongoing upgrades, maintenance and support are often overlooked during the initial phases of a new technology rollout. When it comes to widespread deployments that have mature capabilities, the financial implications of maintaining and upgrading IT infrastructure can be daunting, particularly when the costs are unforeseen and therefore not budgeted. "So, what is the solution?" is the question many CTOs are often found enquiring.

Before attempting to answer this question, an analysis of total cost of ownership or TCO is extremely relevant for SMBs and start-ups as they are almost always faced with the challenge of cash flow management. While the concept can be applied to any branch of technology, this article attempts to explore the subject from the perspective of setting-up and running an organization’s IT network. From the perspective of deploying networking technology, TCO is defined as all the costs associated with purchasing, installing, and running a network measured in discounted cash flows over a specified investment horizon.

TCO can be categorized into two main subheads: direct costs and indirect costs. Both have subcategories that can be readily analyzed. The TCO model calculates or estimates direct network costs in the various categories namely Hardware, Spares, Expected Upgrades, Implementation (Design, Configuration, Installation), Service, Training (network support staff) and Personnel (network support staff)

Direct costs are straightforward to measure and understand. However, they typically represent a smaller portion of TCO than indirect costs. Indirect costs are those associated with planning, audit and other incidental costs such as consulting, configuration management, downtime (both planned and unplanned) and integration. The larger consequence of an overlay solution is the increase in unplanned downtime created by additional hardware and network complexity. As carefully as organizations plan rollouts, purchase management tools, and invest in training for their IT staffs, unplanned downtime will occur simply because of the complexity of the network.

This brings us to the question - If a TCO analysis reveals that at the end of the fixed period (generally 3-5 years), the cost of maintenance and upgrades is beyond what the company can afford to incur, does that mean that the purchase decision is best deferred? Well, the answer is - Definitely Not. It only requires exploring financing instruments such as customized leasing.

Leasing provides the option to reduce upfront investment by focusing on a usage model where the costs of equipment are matched to business revenue. This allows businesses to spread the cost of equipment and services over several years. Thus they can opt for flexible upgrade options provided by technology players. Gartner, in a recent report on SMBs, noted that through leasing, total cost of ownership (TCO) is lowered as IT hardware and software standards are introduced and companies begin to proactively plan life cycles for IT assets. By adopting a more formalized approach to technology refresh and deployment, SMBs are often able to minimize ongoing support costs, improve productivity and maximize the usefulness of their assets.

Leasing provides multiple options for meeting both direct and indirect costs. Companies can factor in various aspects of the cost while working out the leasing agreement, and can choose to avail of the financing from OEM financers or third party financers, or even choose to mix and match. While direct costs can be factored in while financing from either third party or OEM financers, indirect costs are generally only considered by the latter. Since OEM financers understand the operating nuances and requirements of their technologies, they are more likely to finance requirements arising from indirect costs. Moreover, it is important to consider the gain in productivity due to reduced time spent by CTOs and CIOs on solving both day-to-day as well as unpredicted challenges related to financing needs. Also, differentiated OEM product offerings - Fair Market Value (FMV) leases where OEM financiers take aggressive residual positions in particular - help to further lower direct costs, which in turn further lower the TCO. For clients wanting to hedge against likely obsolescence, and for whom staying on the cutting edge of technology is a business criticality, such FMV solutions match their requirements extremely well.

As technology refresh becomes a regular phenomenon, most CIOs and CTOs will continue to face the question of how to create models that accurately predict budget requirements for the refresh. This is particularly the case when maintaining complex IT assets that are required to set-up and run networks spread across cities. Opting for customized leasing at an early stage of the purchase cycle can greatly help in minimizing the burden of technology upgrades. The ability to take such decisions is crucial for CTOs and CIOs to be able to judiciously allocate capital.

Gautum Munish

Gautam Munish
Vice President
Cisco Capital India

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