1. W H I T E P AP E R
L e a s e V e r s u s P u r c h a s e : M o r e T h a n a N u m b e r s D e c i s i o n
Sponsored by: IBM Global Financing
William Roch
June 2007
I D C O P I N I O N
With relatively low interest rates and worldwide liquidity at historically high levels, is
leasing still a viable alternative to the outright purchase of information technology (IT)
assets? IDC continues to believe that in many situations, technology leasing offers
greater operational, strategic, and financial benefits than outright ownership. Most
important, leasing provides a significant hedge against technological obsolescence
and can assist in the disposal of equipment in an environmentally safe and secure
manner. Leasing makes it possible for organizations to acquire up-to-date equipment
while preserving cash and credit lines for more strategic business uses such as
facilities expansion, increased research and development, sales force expansion, or
receivables financing.
S I T U AT I O N O V E R V I E W
Today's global economy offers new opportunities and challenges to businesses on all
continents. Competitors frequently have widely diverging economics relative to
wages, taxes, and utility and environmental compliance costs. New technology
solutions can provide the competitive edge necessary for continued expansion and
profitability, but only if organizations can implement them in a timely manner, often
under significant budget constraints.
IT may be seen as a financial burden because new technology solutions are typically
expensive and may compete for the same capital as a manufacturing or distribution
expansion. Conversely, insufficient capacity or inefficient computing resources can
stunt growth or hinder profitability just as quickly as an inefficient manufacturing
facility. Frequently, the company that waits until it can afford to purchase the right
technology solution may find itself at a competitive disadvantage. Leasing can provide
an answer to this dilemma.
From the inception of technology leasing in the 1960s to today, leasing continues to
help organizations of all sizes. Technology providers such as IBM recognize the
importance of offering financing alternatives to their customers through IBM Global
Financing (IGF). Today, IGF provides a wide variety of financial programs and
services for both IBM and non-IBM technology assets on a worldwide basis. IGF
offerings cover all aspects of technology financing and asset management services,
such as short-term and long-term leases for large servers and peripherals, inventory
financing for IBM Business Partners, and complete project financing for major
technology implementations on a global basis.
GlobalHeadquarters:5SpeenStreetFramingham,MA01701USAP.508.872.8200F.508.935.4015www.idc.com

2. 2 #207113 ©2007 IDC
With technology leasing approaching its 50th anniversary, there are obviously many
satisfied users. Prior to examining the attributes that make leasing attractive to so
many organizations, we offer a review of the generic types of lessors and the most
common types of leasing arrangements.
Lessor types. Three general types of lessors are involved in the financing of IT
assets: captive, independent, and bank.
! The captive lessor is a subsidiary of a manufacturer, and its primary purpose is
the financing of its parent's products. The captive is typically heavily involved in
product transitions, upgrades, remarketing, and disposal of older technology.
! The independent lessor is not associated with a specific vendor; it finances
equipment based solely on its merits and the financial strength of the lessee. This
lessor may be small or large, regional or global, and privately held or publicly traded.
! Bank leasing organizations cover a broad spectrum of the market, from a
regional scope to a national scope. They provide an alternate funding source for
a bank's clients, or they may target at specific markets or assets.
Lease types. Many variations of lease financing are available. However, they are
based on two general types of financing structures: the full payout (FPO) lease and
the fair market value (FMV) lease. The choice of which type to use for a given portion
of an acquisition is typically based upon the user's long-term plans for the asset
involved.
! An FPO lease is one in which the present value of the payment stream equals
the acquisition cost of the asset. Options at the end of the lease typically include
return, renewal, or purchase — often for $1. The lessee is able to deploy and
utilize the equipment, while the periodic payments ease the financial burden of
making a large IT acquisition.
! An FMV lease derives it name from the options available to the lessee at the end
of the lease should he or she wish to retain the equipment. In addition to
termination, the lessee has the option to either renew or purchase the assets at
the FMV of the equipment; this value is often determined by an independent
party. Additionally, various accounting guidelines may be applied to these
transactions, which vary widely by geography.
! Although not truly a separate lease type, the sale/leaseback financing option
provides an opportunity for the end user to generate cash and at the same time
retain the right to continue using the equipment. This lease is typically combined
with either a current or a planned technology refresh, using installed assets, in
effect, to finance a portion of that refresh. The sale/leaseback also can provide a
vehicle to allow for the orderly disposal of equipment scheduled to be replaced at
a defined time in the future.
It is often to the lessee's benefit to include all of the preceding options in a major
technology deployment, utilizing a structure that is most advantageous from
operational, accounting, and cash flow perspectives. Given this background, what
factors should a technology buyer consider when determining the correct financing
method(s) for new technology deployments?
Sale/leaseback
financing option
provides an
opportunity for the
end user to generate
cash and at the same
time retain the right to
continue using the
equipment.

3. ©2007 IDC #207113 3
W H Y L E AS E ?
Historically, organizations of all sizes have looked at technology leasing as a way to
conserve capital. Technology solutions are often expensive and typically compete for
capital funding with physical plant improvements, new facilities, or market expansion
opportunities. Due to its inherent flexibility, leasing offers innovative ways to acquire
IT equipment that can reduce much of the risk and uncertainty in purchasing new
technology and increase the leverage of the operating budget.
However, IDC believes that the real benefit of leasing is in the opportunity it affords
organizations to remain current with the latest technology available while having the
ability to rapidly adapt to changing global requirements. Additionally, a lease can
provide the opportunity to maximize cash flow and in some cases provide financing
that might otherwise not be available.
Leasing — especially the FMV lease — has some unique benefits to the end user
beyond spreading out hardware payments over a period of years. Potential benefits
include the following:
Technological currency. Organizations that lease often refer to the fact that they are
able (or forced) to review their technology capabilities on a scheduled rather than
reactive basis. In our global economy, most companies find themselves competing
with emerging markets utilizing the latest technology. The newest, most operationally
efficient solution is often a competitive requirement — not a luxury. Refreshing
solutions at lease terminations can address this requirement.
Operational flexibility. Lease terms can vary from a few months to four or more
years, depending on the asset class involved. New technology assets are typically
depreciated over three to five years, while the actual projected useful life of the assets
may be shorter. With two- to three-year technology cycles, leasing enables the user
to take advantage of the continually improving price/performance curve rather than be
locked into equipment that might become obsolete before it is fully depreciated.
Conservation of capital. One of the obvious benefits of leasing is that it allows a
company to conserve capital for investment in its business rather than in the
infrastructure required to run it. Other methods of financing may require up-front
commitment fees, down payments, or progress payments. Many organizations are
subject to regulatory requirements regarding their financial liquidity as a percentage of
their asset base. In these cases, leasing allows a company's assets to be invested in
fluid financial instruments rather than in hard assets.
IDC believes that the
real benefit of leasing
is in the opportunity it
affords organizations
to remain current with
the latest technology.

4. 4 #207113 ©2007 IDC
Operating expense versus capital expense. Dependent on local accounting and
tax standards, the majority of FMV technology leases are written in such a way as to
qualify as operating leases, making the payments operating rather than capital
expenditures. Further, as the leased equipment is not included as an asset, a lease
may have little or no impact on a company's ability to borrow and could improve key
financial measurements such as a company's return on assets or debt-to-equity ratio.
Payment flexibility. All leases provide payment flexibility tailored to the user's
specific cash flow or budgetary requirements. Some lessors also can provide
payment and term flexibility tailored to match either project or revenue-generation
milestones. Further flexibility may be obtained by utilizing stepped or variable
payments that match expected revenue or seasonal patterns. A payment deferral
option provides the opportunity to delay payments for equipment until it can be put
into a revenue-generating position.
Upgrade flexibility. Leasing can provide additional flexibility when normal growth or
new demands require the user to consider upgrading an asset. Where additional
capacity or performance can be added directly to the original equipment, a lease can
frequently be tailored to provide a predetermined periodic cost for the upgrade, based
on the remaining finance term at the time of the upgrade. Upgrade provisions can be
negotiated that define upgrade costs in terms of cost per unit of capacity and
performance.
Changing requirements. When circumstances change and the lessee finds it
advantageous to keep equipment longer than originally anticipated — either from a
requirements or an operational perspective — the lessee has the option to renew
(often at a reduced rental rate) or purchase the equipment at the end of the lease at
market prices. Conversely, lessors are always willing to entertain midterm upgrades
or replacements, if business volumes justify this action.
Residual value risk. Leasing transfers the risk of obsolescence to the lessor while
allowing the lessee to benefit from the use of the technology at a predefined cost.
With a wide variety of vendors, configurations, and lease expirations, a typical lessor's
technology risk is spread across a broad spectrum of clients. When this portfolio
diversity is combined with an efficient remarketing operation, the lessee further
benefits — initially with a lower lease rate and later with an efficient source of
additional capacity.
Disposal risk. The disposal of equipment in an environmentally friendly and secure
manner is increasingly an issue on a worldwide basis. Forecasts for PC retirements
alone over the next four years are over 800 million units. In most cases, lessors can
provide an option to assure the lessee that ultimate disposal will be handled using
procedures that comply with all local laws. Additionally, the cost of secure data
erasure/destruction can be contracted for at lease inception rather than being an
afterthought at lease termination.
The disposal of
equipment in an
environmentally
friendly and secure
manner is
increasingly an issue
on a worldwide basis.
Forecasts for PC
retirements alone
over the next four
years are over 800
million units.

5. ©2007 IDC #207113 5
W H Y P U R C H AS E ?
Having looked at the operational and financial advantages of leasing, we consider the
set of circumstances under which a purchase would be the best business decision.
Organizations that historically purchase IT assets cite a number of reasons that
typically focus on the following areas: 1) the projected productive or useful life of the
asset is longer than that of economically viable leases, 2) purchasing is simpler, and
3) previous leasing experiences have ended badly. Each of these reasons may be
valid for specific situations or asset classes; however, looking at each shows that they
should be reconsidered in today's global economy.
Useful life considerations. Purchase may be the correct decision for situations in
which users determine that the useful life of an asset in their environment is longer
than that of an alternate lease scenario. An example would be the installation of a
new system for a specific project. The technology may be robust enough that a five-
to seven-year operational life can be reasonably projected. Additionally, some assets
offer the potential for significant upgrades in performance or capacity in excess of
projected business needs. In these cases, a purchase may be the correct economic
and operational decision. However, in all the preceding scenarios, a well-positioned
captive lessor may be able to offer an equally attractive FMV lease as an alternative
to a purchase.
Previous experience may influence the estimated life span of equipment. An example
would be the replacement of fully depreciated equipment that has been used longer
than originally anticipated. Although fully depreciated equipment is often considered
to be free, it usually is not. High maintenance costs, operational issues, and facility
costs (space, cooling, power) can actually be more expensive than new, more
efficient replacement equipment that utilizes lease financing.
Outright purchase is easier. Assuming a capital budget exists for the acquisition, a
purchase, on the surface, may be a simpler transaction. Leasing may require the
additional step of choosing a financing source as well as a vendor. In cases in which
an approved capital budget is not available, a lease with a fixed-priced purchase
option might allow an immediate acquisition, along with its benefits, rather than
deferral of both to a later date.
Previous leasing experience. An issue for many organizations may be a past lease
relationship that ended badly. There have been numerous situations involving the
bankruptcy or change of ownership of a lessor, which caused a strain between the
lessee and the new portfolio owner. End-of-lease issues is the most frequently cited
reason that leasing is not considered. History can't be changed; however, these
issues can and should be addressed during the current contract negotiations.
Although a purchase may be the right decision initially, purchased assets may
ultimately have an adverse effect on a company's ability to adopt new technology.
Replacing a fully depreciated asset may be difficult to justify — especially if accurate
maintenance, support, and utility costs are not considered In contrast, leasing can
provide multiple opportunities to take advantage of applicable new technology rather
than be held hostage to a depreciation schedule or the approval of a capital budget.
Although a purchase
may be the right
decision initially,
purchased assets
may ultimately have
an adverse effect on a
company's ability to
adopt new
technology.

6. 6 #207113 ©2007 IDC
W H AT T O L O O K F O R I N A L E AS E P AR T N E R
Choosing the right lessor is one of the most critical steps in maximizing the benefits of
any leasing arrangement. The typical "lowest rate" criterion often provides suboptimal
or even unsatisfactory results. The following criteria are suggested as universally
applicable:
Financial strength. Financial strength is important both in providing initial market-
rate financing and serving as insurance should unanticipated requirements arise
during the lease term. Today's global economy requires significantly more flexibility to
address corporate acquisitions, increased transaction volume, or significant
operational consolidations.
Technology expertise. Today's complex business environments require more
sophisticated solutions for organizations of all sizes. Most solutions require high
degrees of vendor cooperation over a long time frame. The lessor should be prepared
to finance all aspects of these solutions — including hardware, software,
implementation, and infrastructure — regardless of vendor, geography, or term
requirements. In the hardware area, strong reconfiguration and remarketing
capabilities not only can lower the initial lease rate but also may provide a source of
economical upgrades and capacity expansions in the future.
Terms and conditions. All leases contain common language regarding obligations,
default, representations, and warranties. Flexibility must be provided in areas such as
notice period, renewal terms, upgrade options, and return provisions. In some cases,
the right of limited substitution may be negotiated, while in other cases, advantageous
upgrade provisions may be more important.
Administration. The ability to administer multiple lease schedules easily, ideally
through a Web interface, is increasingly important as the volume of equipment and
the number of locations multiply. Detailed information by schedule, lease start and
end dates, notice periods, and locations are invaluable in managing a leased
infrastructure.
Disposal capability. Clear options for the disposal of equipment, in an
environmentally safe manner, should be presented by the lessor. Additionally, options
that provide secure data erasure or destruction should be contracted for at lease
inception rather than considered when equipment is being returned.
The preceding points represent the major areas that must be considered prior to
entering into a business relationship with any new financing source or when
considering leasing for a new technology not previously deployed.
The lessor should be
prepared to finance all
aspects of these
solutions – including
hardware, software,
implementation, and
infrastructure.

7. ©2007 IDC #207113 7
I G F AS A L E AS E P AR T N E R
When the financial, operational, and technology issues surrounding the financing of
technology assets all point to a lease, why should IGF be selected as the lessor?
Financial strength. As one of the largest financing organizations in the world, IGF
has the capability to provide competitive rates either in an international currency such
as the dollar or euro or in local currencies if required. With an investment-grade credit
rating, IGF obtains funds below market rates, which results in lower lease rates for
the user.
Worldwide scope. IGF offers direct leasing services in over 42 countries around the
world and several financing products for multinational customers. Some of these
services include:
! An International Lease and Finance Agreement (ILFA) is available for larger
customers that require a single set of terms and conditions. (These would cover
the basic conditions that are found in the Term Lease Master Agreement or
TLMA.)
! Asset management solutions are available in Europe, Asia/Pacific, and North
America that enable customers to centrally manage their global leasing portfolios
on a country, regional, or global basis.
Additionally, IGF financial sales executives, who cover multinational corporations'
headquarters, act as the coordination point for multinationals with centralized
operations.
Contract flexibility. IGF offers a variety of lease structures and payment terms that
can be tailored to any situation. Payments may be structured on a monthly or
quarterly basis, and they can be either level or stepped in a manner to match
anticipated revenues. Each line item on a lease schedule can be handled separately
at the end of the lease — renewed, purchased, or returned — eliminating the
inflexibility of the all-or-nothing approach. In addition to FMV leases, IGF offers $1
buyout options as well as special financing for IBM's On Demand offerings. Finally,
IGF's standard master agreement includes casualty insurance in the lease payment,
eliminating an additional complexity for the lessee.
Administrative capability. IGF offers lessees the opportunity to manage their
portfolios online using the IGF Customer Centre lease management tool. This
On Demand business tool supports clients managing their leased asset portfolio from
origination to end of lease. It is available in select regions, with 24 x 7 access using
common Web browser software. The Customer Centre provides access to a
database of leased assets and includes a complete repository of information for each
schedule under lease. In some instances, equipment schedules can be originated,
installation acceptances are generated, and end-of-lease options are finalized online.
IGF offers direct
leasing services in
over 42 countries
around the world and
several financing
products for
multinational
customers.

8. 8 #207113 ©2007 IDC
Special programs. IGF provides a wide variety of options across a broad range of
hardware, software, and services offerings. Predetermined upgrade/expansion costs,
short-term capacity increases, midlease flexibility, and special low-rate financing
offers are just a few of the options. Recent offerings have included deferred payment
options and zero-percent financing. Specialized desktop offerings are also available
that provide per-seat pricing and can include a wide variety of specialized support and
asset disposition services.
Portfolio expertise. With an extensive portfolio of IBM and other vendors' equipment,
IGF has unique remarketing capabilities that maximize the value of returned
equipment — benefiting the lessee through lower lease rates. These capabilities
include the ability to offer refurbished equipment to users and IBM Business Partners
desiring a more cost-efficient solution. IGF can also offer hybrid systems (a mix of
new upgrades on remarketed basis), field upgrades, and spare parts with equal
proficiency.
Asset recovery. Through its Global Asset Recovery Services (GARS), IGF offers the
lessee the option to transfer the burden of complying with environmental and
regulatory issues surrounding the disposal of obsolete computer equipment. Available
in select geographies, GARS manages a world-class reverse logistics operation that
optimizes the resale, dismantling, and reduction of IT equipment to its basic
commodities for recycling. Anything of value, from components such as disk drives to
resources such as precious metals, is removed to be sold. The remainder is disposed
of in compliance with state, local, and regional environmental guidelines, such as
those of the Environmental Protection Agency (EPA) in the United States or the
European Community WEEE Directive.
C H AL L E N G E S
Although the potential benefits of leasing are many — conservation of capital,
payment and term flexibility, and the flexibility to obtain the benefits of new technology
on a regular basis — there are issues that could negate some or all of the benefits.
IDC feels special attention should be given to the following:
Unanticipated end-of-lease costs are caused by missing a termination notice, lost
or damaged (incomplete) assets, and so forth. In some cases, these costs are
incurred because the lessee misses the notice period (often six months prior to the
termination date) or because the lessee is required to renew unwanted items because
of their placement on a particular lease schedule. IDC believes that many of the
issues outlined earlier can be mitigated or eliminated by a more in-depth analysis of a
lessor's administrative capabilities. The lessee's ability to monitor and manage its
lease portfolio with lessor-provided tools — such as Customer Centre — should be a
prerequisite to entering into a new relationship. Where possible, provisions should be
included to address the lessee's operational inability to return an asset.
Through its Global
Asset Recovery
Services (GARS), IGF
offers the lessee the
option to transfer the
burden of complying
with environmental
and regulatory issues
surrounding the
disposal of obsolete
computer equipment.

9. ©2007 IDC #207113 9
Poorly negotiated terms and conditions may result in unacceptable operational or
financial consequences, either during the lease or when an unanticipated change is
required. Some potential problem areas include the financial consequences of an
early termination, change of lessor management control, or higher-than-projected
upgrade costs. These issues are often intentionally left vague by both parties, with
disappointing financial results.
As a lessor, IGF has worked to mitigate these risks by providing the following in the
normal course of business:
! Line-item termination, renewal, or purchase options at the end of the lease,
combined with a 30-day notification period
! Assured upgrade pricing and availability
! A 14-day grace period at lease end, providing the lessee with additional
operational flexibility in managing an asset's return
As with any major business decision, a thorough understanding of the risks and their
potential costs is most valuable when undertaken during the negotiation phase of an
acquisition rather than in crisis mode.
C O N C L U S I O N
Nonfinancial issues — such as mitigation of technological obsolescence and disposal
of assets in an environmentally friendly manner — must be considered at the same
time as the more traditional lease versus buy financial calculation is made. Leasing
provides additional operational flexibility and an easier migration path to new
technologies and can eliminate asset disposition issues — while freeing up capital for
other critical business investments. Leasing all or portions of a complex deployment
can be the solution when there is a business need for rapid technological change —
to grow, remain competitive, or restructure.
Organizations of all sizes can benefit from leasing because it makes new technology
more affordable on a limited monthly budget. Fast-growing companies that do not
have extensive credit histories may be able to acquire equipment quickly by utilizing a
lease. With the continued emphasis on operational efficiency and improved
productivity, leasing offers companies of all sizes a solution for acquiring new
technology at minimum operating costs.
Although not the ideal solution for every acquisition, leasing should be considered
during any major application implementation review, operational review, or new
technology assessment.
C o p y r i g h t N o t i c e
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