Be At Peace With Your Lease

Leasing can bring the latest technology into your in-plant now. But there are pitfalls. Learn how other managers make their decisions.

"Years ago, you could easily justify the purchase of a press and be confident of a 10- to 20-year productive life span. Technology changes so fast today, it's very difficult to commit to a major purchase unless the return on investment is relatively short."

That comment from Dean A. Focht, manager of GPU Energy's in-plant in Reading, Pa., probably has you shaking your head in agreement. But what can you do about it?

Leasing is one answer. It lets you try out a new technology without risking the full cost. When the vendor improves its product you can upgrade. And when newer technology renders your gear obsolete, you can move on to an advanced model.

There are pitfalls though. You'll pay more money in the end. And if you're not careful you could get locked into a contract that doesn't allow you to upgrade.

To learn more about the realities of leasing, we went right to the in-plant managers who do it. Government in-plants, we discovered, are motivated to lease by a different set of concerns than in-plants in the private sector.

Berry Spradley, with the City of Houston's 11-employee in-plant, lists three reasons why leasing might be better than buying in his situation.

• "We could get rapid delivery of needed equipment, because we might avoid waiting for voter approval or formal council approval."

• "There might not be enough money in the budget to make a cash purchase, but enough to make the first year's lease payment."

• "If money becomes available any time after the first year of the lease, the contract almost always allows an early purchase buyout without penalty."

On the corporate side, Focht, of GPU Energy, offers his own observations:

"Leasing becomes very attractive when it involves an area where you may only be involved for a limited time. For example, if a billing and inserting machine costs $1 million, and a company isn't sure if they want to be in that business a few years from now, that's a lot of money to invest.

"If their business strategy changes in two years, the resale value of this machine probably isn't high enough to justify the investment. However, a two-year lease may be the answer. This way, your investment may only be $30,000. That's a huge difference."

We talked with other in-plant managers, as well. Here are their suggestions:

Habitat for Humanity International

Americus, Ga.

Manager: Mike Chapman

In-plant employees: Eight

Operating budget: $500,000

Leased equipment: Xerox 5690, Canon 6085 and Ricoh 6010 copiers

Why lease instead of buying?

"The technology changes with these machines happen almost as fast as computer upgrades. If you lock yourself in with a purchase you may find your quality of work deteriorating, and you would have paid for a machine that has become outdated and has no real value in five years.

"Also, with high-volume usage of a machine, service becomes mandatory on a regular basis. This service cost can be built into the lease cost of the machine, saving dollars...and allowing better production for the lease life of the machine. If you paid the up front price for the machine, you would still incur maintenance costs on an annual or monthly basis.

"I haven't seen a machine yet that didn't break. So if you're already incurring the cost of maintenance, why not roll all that in a lease and reduce your overall expenses? That initial cost of buying wreaks havoc on a budget."

Why is it better to purchase certain equipment rather than lease it?

"If you have the technical expertise and operational understanding of maintaining the equipment, it may be better to purchase it, if it fits your financial planning budget.You will need to take a look at how you operate and determine if it would be a savings for you to own your equipment outright by reducing your overhead operating cost."

Is lease-to-buy a worthwhile arrangement?

"It truly would depend on the piece of equipment and your operational plan. If it's a press, cutter, collator or folder, I would say yes. If it's a more complex machine (e.g. copier, imagesetter) I would say no. Technology changes so fast I would rather have the option of a lease so the old equipment could be upgraded more easily."

Anthem Blue Cross and Blue Shield of CT

North Haven, Conn.

Manager: Jeffrey Gworek

In-plant employees: 10

Operating budget: $1,100,000

Leased equipment: Two Xerox DocuTech 6135s, one Canon color copier.

Why lease instead of buying?

"If we feel that equipment will be changing or obsolete within four or five years, we prefer to lease. That way we are keeping up with the technological advances.

"It also allows us to phase out of a particular production process if we feel it necessary. If we don't own the equipment, we don't have to worry about disposal. This thought actually applies to whether we are eliminating a process or just changing our equipment.

"Additionally, we are fortunate to have a national contract in place with Xerox that allows us to lease the equipment at a very reasonable price."

Things to avoid when considering a lease:

"I don't particularly like very short term leases because the equipment just seems to be installed and it's time to either renegotiate the lease or get new equipment.

"I also don't like $1 buyouts at the end of the lease term. The lease payments usually cost more, and if we wanted to own the equipment, we should have purchased it outright in the beginning."

Why is it better to purchase certain equipment rather than lease it?

"We tend to purchase our press and binding equipment. It has a longer shelf life, if you will. That is, the technology doesn't change nearly as fast, and this equipment, if properly maintained, will last almost indefinitely without degradation of production.

"Additionally, when we are truly in a lease-vs.-buy situation, meaning we don't have the lease preference I noted above, our finance people will perform an evaluation to confirm our thoughts on the lease-vs.-buy scenario. We will usually go along with the recommendations of the financial evaluation."

Tips for other managers?

"Do your homework. Have a clue as to the cost of the equipment vs. the actual selling price—just like with an automobile. The sticker price isn't the dealer's cost. This will allow you to determine the purchase cost or the lease costs. Then you can go into negotiations knowing what you expect to come away with.

Is lease-to-buy a worthwhile arrangement?

"I don't like it under normal circumstances because if we wanted it in the first place, why not buy it? However, if there are cash flow concerns, then this may be an alternative. Normally it is going to cost more to lease it and then buy it at the end of the lease term."

Fred Meyer Inc.

Portland, Ore.

Digital Printing Coordinator: Dana Bauer

In-plant employees: 25

Operating budget: 4.5 million

Leased equipment: Xerox DocuColor 40, Xerox 5390

Why lease instead of buying?

"It's hard to get capital, and capital requests seem to look worse to accountants than lease payments. Also, a lease provides some protection against obsolescence if you negotiate a clear upgrade path."

Things to avoid when considering a lease.

"Don't go longer than three years without an easy out or clear upgrade path, or the equipment will be obsolete."

Tips for other managers?

"Make sure everything is expressed in the same terminology. Some proposals seem purposely convoluted. You need to analyze so you can accurately ferret out the real cost per copy over the life of the lease vs. the cost over the projected life of the equipment.

"Also, you need to factor in the cost of the money being borrowed, which differs from company to company. So far we have leased only digital equipment; factors are probably different with presses since their time to obsolescence is much longer."

Is lease-to-buy a worthwhile arrangement?

"Probably not for digital equipment because it becomes obsolete too fast, and you will be wanting to upgrade."

Ethan Allen

Danbury, Conn.

Manager: Ronald Slater

In-plant employees: Six

Leased equipment: Danka ImageSource 70, Heidelberg Digimaster 9110, Canon IR600.

Why lease instead of buying?

"I believe it's smarter because copiers leased three to five years are worn out. Trade-in or resale is usually less than 10 percent of original value. Cost of operating has been expended in working expense budget."

Things to avoid when considering a lease:

"Not being able to upgrade or downgrade during the lease. Have reasonable arbitration if problems occur. Have a lawyer review the lease."

Why is it better to purchase certain equipment rather than lease it?

"This depends on lease factors, amount of use and period of time the equipment will be used."

Tips for other managers?

"When leasing try to get maintenance cost incorporated in the lease. This locks in cost and prevents yearly escalating cost. Shop for the best lease factors. You may have to go to third party leasing. Don't take too long a lease. This may cause incorporating buyout cost with new equipment cost, thus increasing lease payments."