15 May 2006

Leasing IT Equipment

Leasing IT equipment will change the way we operate as a Division.

On Wednesday 10 May 2006 Director of Financial Services gave a presentation on leasing of IT equipment. According to the Director VCAC has approved that the University move from owning to leasing of eligible IT equipment, effective immediately. A paper copy of his presentation is available on request.

Under leasing arrangements, the leasing company (Macquarie Bank) pays the vendor for equipment acquired by the University, and Macquarie charges the University a lease payment every three months for the period of the lease (normally three years). At the end of the lease the equipment goes to the Bank through its Macquarie Technology Services (MTS: formerly known as Reboot) group. MTS resells the equipment to make the Bank’s margin on the arrangement. At the end of the three-year period the cost of the equipment to the Division is almost exactly the same as it would have been had the Division purchased the equipment outright, except that the payments would be made quarterly over the life of the equipment rather than the full cost being paid upfront as is done now. Leased equipment is not on the University’s Asset Register and not subject to depreciation and is therefore easier for Financial Services to manage.

Eligible equipment covers desktop and portable computers, printers, photocopiers, network equipment and servers. While media equipment was not included in the list, it is open to the Division to approach the leasing company through Financial Services to discuss leasing of other items like video projectors, production equipment and studio infrastructure. Last year about 40% of the Division’s IT Infrastructure Fund loan was spent on media equipment.

If an item of leased equipment is lost or stolen, the Division will have to pay out the balance of the lease. Any repairs not covered by warranty will be at the Division’s expense. Leasing does not cover Operating System and application software, except where the software is part of the original purchase. Any upgrades will continue to be the Division’s (or the University’s) responsibility. In some cases original packaging, documentation and disks that come with a leased device will have to be kept in storage and given to MTS at the end of the lease with the equipment. The Division will need additional storage space to keep the required material.

As existing eligible equipment that was purchased outright is retired and replaced with leased equipment, in the first year of lease payments the Division will pay lease payments equal to one third of the capital cost of the equipment leased (only one third of eligible equipment will be leased in the first year, the rest is still owned outright). In the second year two thirds of the eligible equipment will be leased: and by the end of the third year all eligible equipment will be leased.

Assuming that the Division leases the same amount of equipment it currently buys, as much will be spent on lease payments from the beginning of the fourth year on as would have been spent each year in outright purchases: that is, assuming there is no difference in the amount of equipment used by the Division in four years’ time because of leasing, in four years’ time the Division will be committed to lease payments about equal to that which it now spends each year on capital purchases (there will however be savings in the first three years, and there should not be any requirement to replace a piece of equipment after three years when the original item is handed over to MTS so if the equipment is no longer required a saving could be made there).

Leasing does not provide additional funds for purchasing more equipment; it just spreads the cost over a nominated life for the gear. What is lost is the flexibility to vary expenditure on equipment year by year by, for example, reducing the number of new computers purchased in a lean year by keeping old computers for four years instead of three. There is also no longer a store of old equipment that can be sold, or repurposed to provide, for example:

  • postgraduate students with computers, or
  • staff using Macintosh computers with access to Callista (or Finance One), or
  • old gear to host dynamic websites, or
  • additional capacity for streaming television services.

These are all things the Division does now that won’t be an option if the equipment is all leased. From a Technical Services Unit point of view leasing is an advantage to us since the TSU is no longer required to look after old equipment and support a variety of services running on older equipment: for the same amount of money there will be less of a variety and extent of equipment and services available. Financial Services will handle disposal, but overall it is difficult to determine how the management of leased assets will differ from managing purchased assets. Certainly some current issues with disposing of old equipment will disappear, but there is uncertainty about how work is involved with any new procedures to be introduced.

It is expected that the IT Infrastructure Fund will disappear next year, 2007. Financial Services is preparing a submission to VCAC proposing that the money the University now spends on the Fund each year ($700,000?) is distributed among the Divisions in their budgets. Since the Division of Communication and Education repays its IT Infrastructure Fund loan each year, in theory this means that each year from 2007 the Division will receive sufficient funding to spend as much as it does now from the Fund.

Lease periods can vary from the three years suggested for IT equipment, but a condition of the lease is that the original manufacturer’s warranty on the equipment has to cover the lease period plus three months: in the case of a computer this would mean negotiating a non-standard warranty arrangement with the supplier (not impossible, just an added complication in the process).

Financial Services is proposing to establish an IT Procurement section to manage the leasing of IT equipment that will, among other things, be responsible for negotiating discounts with suppliers for standard configurations. Financial Services would pass on any savings to the Divisions in the form of reduced lease payments, but it seems these arrangements would be the same if equipment is leased or purchased (after all, the suppliers still get paid the full amount up front, either by the Bank or the University).

Since leasing has been mandated by VCAC (according to Financial Services), the best option for the Division might be a gradual transition to leasing over a number of years by continuing to purchase some equipment but leasing more each year. The IT Infrastructure Fund loan for 2006 is approved and can be spent to purchase equipment outright, or Financial Services has raised the prospect of being able to use the IT Infrastructure Fund loan in 2006 to service lease payments. The Division can purchase outright equipment that can be repurposed for non-core uses after its initial job is done, or equipment like installed media studio gear that is normally kept long after its warranty expires and it maintained by outside providers. The approach could be reassessed each year to see how the benefits of leasing compare with outright purchase and purchasing decisions adjusted accordingly.