Lease vs. Buy: What’s Best for You?

HOW DO you acquire equipment? Do you lease? Do you buy? Do you even have a choice?

Different types of organizations tend to approach the lease-buy question from different perspectives. Businesses use a variety of tools, like computing the net present value of leasing vs. buying and picking the option that maximizes profitability. Non-profit organizations—including government agencies, colleges and universities—are not as concerned with profit, but they do need to look at the impact on operating and/or capital budgets to make financially sound decisions. In some cases, the decision is driven by organizational policy, legislative guidelines or procurement laws, so the in-plant manager has little if any choice.

The reality is, in today's economic environment, in-plant managers face a tough sell to get approval to acquire equipment because they are, more than ever before, competing with core organizational purposes for funding. The chances of winning approval are greater if the manager can demonstrate a complete understanding of the implications of the various funding options.

Both forms of acquisition come with long-range concerns. A purchase ties up organizational resources in the form of capital funds. Equipment purchases are approved, in part, because they promise healthier returns than those of competing proposals. Justifications include revenue projections and, perhaps, cost savings; but if those projections and/or savings fail to materialize, financial performance suffers.

The long-term impact of leasing is more obvious. A lease creates a financial obligation that spans multiple accounting periods, and may affect the unit's budget for several years. And while leasing may not commit capital funds, the impact of projected revenue shortfalls on the operational budget is real.

Several factors should be considered when deciding whether to lease or buy an asset. Purchasing ties up capital and may force the organization to choose between competing proposals. Private sector managers are likely all too familiar with having to show how a piece of printing equipment can contribute to the overall financial performance of the company. In business, where funds are often borrowed to acquire assets, purchasing an asset can tie up lines of credit and limit access to operating funds.

The Advantages of Leasing

On the other hand, leasing frees capital, preserves cash flow, and spreads the cost of acquisition over several accounting periods. Leasing usually does not require a large cash outlay at the beginning of the agreement. In a business, leasing may keep credit lines open and avoid increasing net liabilities on the balance sheet. In an inflationary economy, leasing allows repayment in cheaper dollars. Including lease costs in a budgeted hourly rate calculation is straightforward and easy to defend.

Perhaps the most attractive advantage of leasing lies in the ability to end the agreement. When an organization buys an asset, it owns it. That may be a little over simplistic, but it is true. You own the asset and you are stuck with it, regardless of its performance. Ever hear of someone buying a lemon press and getting the vendor to take it back? There are examples, to be sure, but they are rare.

Leasing, on the other hand, can be more flexible. Leases can be written to include cancellation clauses for non-performance. Quite a few in-plant managers have successfully gotten vendors to take back poorly performing equipment by persistently pointing out the offending performance. Vendors will often "do the right thing" if all chances of future business are on the line.

Leasing also has its detractors. Some business managers, especially in the not-for-profit arena, argue that interest rates for leased equipment are too high. They would rather purchase an asset and avoid interest fees. This can be short-sighted because the amount of capital available for all projects is likely to be limited, so buying an asset that could be leased means that the organization will be forced to put off purchases of other, equally important assets. And often, it is the print shop asset that is deferred.

Cost-per-copy Plans

Many in-plant managers either manage fleet copiers/MFDs or are thinking about a fleet agreement, so they may be interested in a third way to acquire equipment: the cost per copy (CPC) agreement. CPC plans are gaining in popularity as organizations struggle to control copy costs. The idea is that, by lumping all of the costs associated with making copies—including the cost of the device, service and supplies—into one agreement and pooling all of the copies into one pool, the organization may get a better deal.

The best value to the organization comes through a plan that:

(1) Fits the device to historical volume at each location;

(2) Pools all of the clicks into one program;

(3) Reconciles the click pool annually;

(4) Charges a standard cost per copy for each device.

In a pooled agreement, the organization agrees to buy a set number of copies (a minimum) at a fixed CPC. Prints made over the minimum are charged at an "overage" rate, generally something like .005 cents per copy.

The strength of CPC programs lies in the concept of "right sizing" copiers and MFDs. When an organization negotiates a master lease with a copier vendor, it assumes that the vendor is providing the equipment and service at the best possible price, and it may be. But these agreements often allow users to select the copier they can afford, not the right copier for the location.

When we look at copier use in colleges and universities for example, typically 50 percent of installed machines produce 2,500 copies per month or less. The "right" machine for this volume is in the 15-20 copy per month (cpm) range. However, a large percentage of machines producing 2,500 cpm or less (60-75 percent) are 30-35 cpm devices or higher. A 30-35 cpm device is about twice as expensive as the 15-20 cpm device. This inflates the real cost per copy. Matching the volume of the device to the historical volume at each location can reduce an organizations' CPC and ultimately its overall copier spend by as much as 50 percent.

When we look at CPC, we have a benchmark that can be used by in-plant managers to evaluate the comparative cost of hardware and software in a digital print workflow and compare operating costs of different types of machines. If excess capacity is present in a system, it shows up in the form of higher cost per copy.

CPC also provides a convenient and precise tool to use in evaluating competing pricing proposals from copier vendors. It's like looking at the cost per ounce of coffee in various size cans at the grocery store. If a 12.5 oz. can costs $2.59 and a 34.5 oz. can costs $7.99, how would you decide which is the better buy? By identifying a common unit, in this case ounces, and comparing the costs per unit.

Finally, pooling all of the copies into one contract with an institution-wide minimum adjusted annually allows individual machines to experience slow periods without penalty (as long as the organization-wide minimum is met). The same is true for vacation and break periods. The organization literally pays for what it uses. Not true in a lease where the department pays whether school is in session or not.

In summary, cost-per-copy contracts offer advantages over mainstream copier/MFD acquisition models and can substantially reduce the overall cost to the organization.IPG

Matching the volume of the device to the historical volume at each location can reduce an organizations' cost per copy and ultimately its overall copier spend by as much as 50 percent.