Total Cost of Ownership Analysis Sapura Synergy Philippines

Outright vs. Lease Purchase? Which is most

appropriate? more effective?
By Nicolas V. Servino Jr. Education Solutions Manager Sapura Synergy Philippines.

Technology’s blistering pace has left people asking wether to Buy or to Lease. Most opinions are divided
regarding this, as buying and spending trends are different across companies. Although the principles for
both Outright Purchase and Leasing are financially sound, it can be argued that there is a more appropriate
approach to a specific requirement.

So how do we start to approach the situation correctly?

Historically, when equipments were designed to effectively and efficiently perform, as well as outlast it’s
manufacturing lifespan. They were considered good investments. Examples of such equipments are
typewriters, sewing machines, engines, movable typesetters and offset printers. These equipment are
mostly manufactured with metal as its primary material, and with a little elbow grease and a bit of fine
tuning, they can be returned back to its effectivity and efficiency.

In the advent of plastics and other electronic appliances, equipments became more lightweight and handy.
Television, Radios, telephones became a staple for households and companies. This gave rise to equipments
which performed within its warranties. The rise of consumerism also prompted the market to replace items
on the shelf with newer products within 1-2 years.

Prepared by Nicolas V. Servino Jr. for Sapura Synergy Phiilippines. All rights reserved 2008 1
Total Cost of Ownership Analysis Sapura Synergy Philippines

With innovation pushing technology and manufacturing, electronic equipments gave way to digital
electronics. Computers, fax machines, scanners mobile phones and PDA’s are common examples. The
increase of manufacturers as well as increase in production, have resulted in multitude of options for
consumers. Lifespan of equipment has also diminished. Newer models come out within 6-12 months across
diffferent vendors. Extended warranty ( normally at 1-3 years coverage) is now a premium for consumers.

Purchase models also differ. Individual purchases normally vary from Corporate or Institutional Purchases.
Individual purchases require little or no prerequisites but cost would often be higher than corporate
purchases. Corporate or Institutional purchases would require more documentation, but vendors normally
extend discounted prices and are offered installment packages as well.

Individual purchases require little or minimal service management, while Corporate purchases require
service level agreements with vendors or can be handled by an in house IT/technical team, outsourced to
service provider or considered as managed services.

OUTRIGHT PURCHASE:

Outright purchase is by far the easiest and the cheapest way to avail of
Although the principles for
technology. both Outright Purchase and
The amount of money that is available will determine if you can afford
Leasing are financially
to buy new equipment, machines and the digital devices you’ll need, sound, it can be argued that
or if you have to look at the used market for these purchases. there is a more appropriate
approach to a specific
Clearly the advantages are: requirement.
1. Buying is ultimately cheaper than Leasing. Comparing Costs
between Outright and Leasing would indicate that the price can
either add up to 1/3 of the total cost to the outright price.

2. You are the owner of the equipment or machines. There is no agreement or contract, and no monthly
amortizations to pay.

3. If machines or equipment are bought outright, you won’t be charged for any interest, and other costs.

4. You can later resell the machines or equipment and recoup a percentage of their purchase price.

Outiright Purchase has a number of disadvantages that include:

1. Obsolescence. Once machines are already taken out of the shop, the value has already dropped.

2. Usually you have to pay cash for your equipment or machines. This lump sum could be used elsewhere in
your business.

3. You are responsible for the maintenance of the equipment or machines. Also, you don’t have any
upgrade option as with some lease agreements.

LEASING SOLUTIONS:

Business leasing has been available for decades and can be a useful alternative to buying equipment and
machines - especially digital equipment that quickly becomes obsolete.

Prepared by Nicolas V. Servino Jr. for Sapura Synergy Phiilippines. All rights reserved 2008 2
Total Cost of Ownership Analysis Sapura Synergy Philippines

Leasing agreements can be complex documents, so always seek legal advice if you are unsure of any of the
details.

There are three basic types of equipment leasing agreement you could use:

Contract Hire

This type of equipment leasing can be complex due to the tax implications with. Take advice before signing
any lease agreement.

Finance Leasing

The most common form of lease agreement, any equipment or machines can
be leased with this kind of agreement. The length of contract usually lasts
three or more years. Companies/Institutions are responsible for the
maintenance and insurance of the equipment or machines. They eventually
show on up on the balance sheet as a capital item.
Purchasing equipment
that depreciate quickly
Operating Leasing isn’t a very efficient use
of your Companies/
Companies/Institutions may not need a piece of equipment or a machine for Institutions’ cash
a long period of time. Purchasing equipment that depreciate quickly isn’t a
very efficient use of your Companies/Institutions’ cash.

Operating leasing is ideal as you don’t have to show the item as a capital item
on your balance sheet, the leasing company maintains the equipment or
machines and takes it back at the end of the short lease. The length of contract usually lasts three or more
years.

Leasing equipment or machines has a number of advantages that include:

1. Most Leasing Programs for digital equipment or machines enables you to update your devices at the end
of the lease. That way your Companies/Institutions are always using the latest equipment.

2. Equipment leasing can give you the option of buying the machines or devices at an advantageous rate
at the end of the lease agreement.

3. Leasing Program payments enable you to plan your Companies/Institutions cashflow as the lease
payments are fixed amounts payable at the same time each month, or each quarter.

Leasing equipment or machines has a number of disadvantages that include:

1. Equipment leasing for your business is generally more expensive than purchasing the equipment or
machines outright.

2. Look closely at the VAT and tax implications of leasing equipment and machines. Your accountant can
give you more detailed advice.

Prepared by Nicolas V. Servino Jr. for Sapura Synergy Phiilippines. All rights reserved 2008 3
Total Cost of Ownership Analysis Sapura Synergy Philippines

3. You never actually own the equipment or machines (unless you buy them at the end of the lease
agreement) so you never have the equipment or machines as an asset within your Company/Institutions.

TOTAL COST OF OWNERSHIP (TCO)

In determining which technology would better suite the requirement, as well a determine possible areas
which would require additional funding, a system of analyis and evaluation can be employed.

Total cost of ownership (TCO) is a financial estimate designed to help consumers and enterprise managers assess
direct and indirect costs. The clear advantage of seeing a specific purchase requirement (commonly for
hardware/software, mechanical/Industrial related items) holistically and defined by a particular timeframe is
that the real value of the purchase, and the underlying costs that would become imminent over time.

TCO tries to offer a statement on the financial impact of deploying information technology during its whole
life-cycle. The general idea is to look at the whole expense within a specific timeframe that the equipment
is effectively at work and what it would cost for it to continue working after it has exhausted the described
time.

Common components of the TCO evaluation are the following:

• End-user computer Hardware purchase costs

• Software license purchase costs
• Hardware and Software Implementation / deployment costs The general concept of
• Hardware warranties and maintenance costs
• Software license tracking costs
Total Cost of Ownership
• Operations Infrastructure Costs or TCO is to provide
• Infrastructure (floor space) costs
• Cost for electricity and cooling. decision makers with a
• Network hardware and software costs tool to effectively
• Server hardware and software costs
• Testing costs evaluate projects that
• Cost to upgrade or scalability
• IT Personnel costs require significant
• "C" Level Management Time costs
• Backup and Recovery Process costs amount of CAPEX.
• Costs associated with failure or outage
• Diminished performance incidents (i.e. users having to wait)
• Costs of security breaches (in loss of reputation and recovery costs)
• Technology training costs of users and IT staff.
• Audit costs
• Insurance costs
• Replacement costs
• Migration costs
• Decommissioning costs

CONCLUSIONS:

Technology has changed drastically since man has invented machines to help him perform better.
Understanding that these changes have also made huge impacts on how we make decisions regarding
how to avail of them. Outright purchases offer hassle-free transactions that fit most Companies/Institutions
with available resources to purchase. Leasing Programs offer a custom fit financial solution for Companies/
Institutions that require technology but prefers monthly amortizations, and would want to spread the
resources to other investments.

Determining the real value of the purchase is critical to the evaluation of the investment.Total Cost of
Ownership (TCO) is a financial tool that explains the whole investment cost. Bottomline, a clear direction
whether to go for an Outright Purchase or a Leasing Program will prove to be beneficial.

Prepared by Nicolas V. Servino Jr. for Sapura Synergy Phiilippines. All rights reserved 2008 4
Total Cost of Ownership Analysis Sapura Synergy Philippines

Related Resources:

Evaluating Education IT Infrastructure Purchases in the Philippines. Nicolas V. Servino Jr. 2008
The Technology Provisioning Program Refresher Primer. Nicolas V. Servino Jr. 2008
Business IT vs. Education IT. Nicolas V. Servino Jr. 2008
http://www.imanet.org/pdf/1927.pdf
http://www.abusinessfranchise.co.uk/lease-buy-business-equipment.html
http://www.adeptscience.co.uk/products/mathsim/mathcad/add-ons/free_ebooks/pers_fin_samp.htm
http://home.manhattan.edu/~fiona.maclachlan//leasing/one.htm
http://www.businesslink.gov.uk/bdotg/action/layer?topicId=1073959001
http://www.comsysbi.com/offerings/technology.html

Prepared by Nicolas V. Servino Jr. for Sapura Synergy Phiilippines. All rights reserved 2008 5