Server refresh options: When to rent a server vs. when to buy

The economic turmoil of recent years has left many data centers behind the technology curve, using hardware that is poorly supported and well past its normal service life. But even though project budgets and technology refresh cycles are seeing renewed signs of life, IT managers are still under pressure to make the most of every capital expenditure. When it comes to new server acquisitions, shops can use a variety of financial vehicles to get shiny new systems into the data center. In this tip, we’ll explore the considerations of leasing and purchasing a server, as well as a combination of alternative approaches for updating data center equipment.

Buy a server or lease?
Because every data center environment is unique, selecting a leasing option may or may not be the best fit. There are certain benefits to being able to lease hardware, but if a new server purchase is what you’re intent on, there are also ways to be creative and smart when going about that process. There are two standard models that occur when a company decides to rent a server or buy a server:

Standard purchasing model

• Hardware is purchased
• Hardware is utilized
• Hardware is disposed

Standard leasing model

• Lessor purchases the hardware
• A company will then “borrow” the hardware
• The company will use the hardware
• The hardware is returned to the lessor
• The lessor will dispose of it

Before a company can decide whether to buy a server or rent a server, it must understand the scope of the server refresh project. Once the IT department understands what it needs in quantity, the company can begin to look at the advantages or disadvantages of leasing equipment. Working with a leasing model can lead to big savings, as well as other benefits, that are outlined below:

1. One of the biggest advantages of leasing, instead of buying, a server is that there will be a more consistent and manageable expense. Replacing a $150,000 hardware environment will eat up a huge chunk of an IT budget very quickly. Even in the best of times, it may be hard to justify that kind of immediate major expense. On the other hand, what if the costs occurred at a really bad time—like the middle of a recession? In the recent economic climate, many organizations are trying to keep a lid on technology spending until the market improves. If money is tight for an extended period of time, deciding to rent a server may be a good option.
2. Leasing will help keep an environment current with technology trends. Fixing broken equipment often raises IT costs, but staying on top of the tech curve can keep an environment streamlined and productive. By leasing, you eliminate maintenance costs and all funds can be directed toward improving infrastructure.
3. With leasing, a department can work toward driving down costs. With a fair market value lease, you can end up paying no more than if you had to buy a server. However, the lease payments are spread out, and there is no aged hardware to unload later. If you have a long leasing contract, many vendors will cut you some breaks.
4. Leasing payments can be tax deductible. If the IT department has no plans to purchase the equipment at the end of the lease term, then the lease payments can be claimed for a tax deduction. The larger the lease, the more money saved on taxes at the end of the year. Your accounting department can provide you with specific details for any particular business location.
5. Leasing is flexible with company growth. When a business begins to grow or change, the requirements of the IT department will change as well. Leasing brings the elasticity a business needs when it comes time to choose equipment that can expand in the future. Let’s say, for example, that a company’s call center is expanding. Through a purchased model, the company may have to either do a full hardware replacement or, at the least, purchase newer machines to facilitate the growth. On the other hand, in a leasing environment, the company can plan for this expansion and simply add to the lease or modify the terms. Also, the company won’t have to deal with old equipment and how to dispose of it.

Still, when looking at a lease versus buy comparison, there are downsides to a leasing option. Remember, if this is a new endeavor for the company, leasing terms and agreements can become complicated. Although there are advantages to leasing, it’s important to examine the drawbacks as well:

1. Funding for a lease may be hard to obtain. Surprisingly, it can be more difficult to get a lease than to get a loan at the bank. Most reputable lease providers require good corporate credit histories. Equipment leasing is also not an easy option for startups. Many lenders require the company be in operation for at least two years.
2. In many instances, leasing is only an option for a certain amount of equipment. Most lease providers also require a $3,000 to $5,000 minimum lease. For example, a smaller company may not find it financially feasible to lease three or four workstations. They may find it difficult to secure a provider or even get good leasing terms.
3. Depending on what is being leased and how the IT organization is structured, the cost of leasing may be higher in the long run. Over time, the cost of leasing the equipment could end up being more than the cost to actually purchase it. Yet, when the lease is finished, the company does not own anything and must either purchase or return the hardware. Any type of hardware that requires high maintenance or expensive parts may result in higher leasing fees. Consider this–when entering a leasing agreement, it’s important for a company to understand what that equipment is doing. IT is volatile, so if in the middle of a leasing term, a company suddenly requires more of the same equipment, they may be stuck with few options. At this point, depending on the contract, it may be far more expensive to renegotiate the lease and add more hardware than it would have been to make the purchases upfront.

Whether equipment leasing is right for your company will really depend on future plans and goals, as well as the general nature of the business. Equipment leasing is perfect for a rapidly expanding small business or for a business that will soon be sold. On the other hand, for business owners who have long-term goals or who are looking for equipment with a long operating life, purchasing the necessary equipment could be the more viable option.

Leasing best practices and pitfalls
Leasing can be complicated. When evaluating a lease, there are several elements within the agreement that must be reviewed. Many organizations leasing computer equipment for the first time experience several common pitfalls that may reduce, or even eliminate, the benefits of leasing and increase the costs. Here are some common pitfalls that can be avoided when choosing to rent a server:

• Pitfall 1: Poor evaluation of the lease offerings
  In making a lease versus buy decision, some organizations only look at the monthly lease rates and do not consider other costs that affect lease economics. To comprehend the full cost of leasing versus other alternatives, it is critical that detailed lease versus buy analyses be completed for all prospective transactions. Consider the hardware being acquired and how it will operate in the environment. Is there a chance that there needs to be a midterm hardware addition? Is there a good exit plan available? Corporate IT dynamics have a big factor in cost drivers when it comes to leasing. Always have a set and specific purpose for your leased hardware. That is, when purchasing five new servers for a database deployment, make sure that the five-server project is planned out, the variables are calculated and the lease-end route has been established (buy, sell, trade, etc).
• Pitfall 2: Not understanding or skipping over the terms and conditions of the lease
  Master lease agreements offered by leasing companies can vary significantly, and a failure to understand your lease obligations can result in unnecessary costs. A common feature of most leases is a requirement of 60 to 90 days prior written notice of a lessee's intent to terminate the lease at the end of the term. Failure to provide such notice generally results in a month-to-month extension, but could trigger an automatic lease renewal for an extended period of time.
• Pitfall 3: Failure to track leased assets and resources
  Lessors offering true leases retain ownership of the assets. One way in which they earn a profit is from the value of the equipment at lease end, either in the form of an outright sale to the lessee, a renewal of the lease, or a sale or lease to a third party. It is very common for lessees to delay making decisions on the disposal, retirement and replacement of leased equipment. Uncertainties surrounding new technology can cause decisions to be deferred, and current year budget constraints may delay decisions until the next budget cycle. Too often, IT managers simply forget that their lease is expiring, or they ignore or miss email reminders. Retaining leased equipment on a month-to-month basis after the lease has expired is a very common problem and causes the greatest amount of wasted lease dollars. Make sure to check whether your leasing agreement is set to auto-renew. Keep track of your lease, read and understand your agreement and be prepared with a plan for when that lease expires. When your lease is close to expiring, be ready with a decision on what needs to be done with that equipment. Know ahead of time whether the plan is to buy or trade in. That way, month-to-month fees can be avoided.

The benefits of leasing provide a variety of incentives to organizations that want to reduce costs and improve their management of computer assets. To some, the potential financial savings offer the largest incentive. When effectively managed, leasing can reduce hardware costs by 10% or more. Still, an IT manager needs to research the lease terms and agreements prior to signing any contract. Pulling out of a lease mid-term can be very costly. Remember that the terms of your agreement can be negotiated in many cases, so plan accordingly and carefully evaluate whether leasing hardware is right for your company.

About the expert: Bill Kleyman, MBA, MISM, is an avid technologist with experience in network infrastructure management. His engineering work includes large virtualization deployments as well as business network design and implementation. Currently, he is the Director of Technology at World Wide Fittings Inc., a global manufacturing firm with locations in China, Europe and the United States.