15 Critical Success Factors for Your Equipment Leasing Program
Equipment leasing, if managed effectively, can offer a number of strategic financial and competitive benefits to your business. Leasing enables better use of cash flow and offers more budget flexibility. Additionally, leasing can provide a competitive advantage through faster refresh of technology.
But equipment leasing programs are inherently challenging to manage. Companies lease a wide range of equipment from furniture to the networking gear in data centers. The assets are used by a wide variety of business units from logistics to corporate IT. The decentralized nature of equipment leasing programs leads to decisions being managed by hundreds if not thousands of people around the world. With the introduction of the new lease accounting standards there is now significant compliance risk associated with managing your equipment leasing program as well.
Through our work with some of the world’s largest companies, LeaseAccelerator has identified a set of 15 critical success factors that best-in-class companies use to manage their equipment leasing program.
1) Conduct a Lease versus Buy Analysis
You should conduct a lease versus buy analysis for every equipment asset. If you have a large leasing portfolio and multiple business units requesting assets, this can be difficult. Consider offering a tool for non-financial stakeholders to conduct their own lease v buy analyses.
2) Source Leases Competitively
Generate an RFP with requirements, including the lease term, currency, and end-of-term options. You can distribute the RFP to either your preferred lessors or to a competitive marketplace.
3) Standardize Contracts
Standardizing your lease terms ensures that you don’t end up with unfavorable end-of-term buyout prices or renewal terms. Ensure you have flexibility with your terms, so that they’re not “all or nothing.”
4) Manage End of Term
Aside from negotiating favorable terms for the end-of-lease, you should also make sure you’re not continuing to pay for and use the asset after the end of term. Continuing payments are called evergreen fees and eliminate the advantages of leasing.
5) Define a Leasing Strategy
Leasing offers another source of credit by expanding free cash flow and lowering cost of ownership. Leasing also provides faster access to new technology among other benefits. Define your strategy to maximize the value you get out of leasing.
6) Appoint an Executive Sponsor
The executive sponsor is responsible for championing the value of the equipment leasing program and for the program’s financial performance. An executive from Treasury, Procurement, Finance, or Accounting would be a good choice for the role.
7) Enforce Policies and Controls
Your equipment leasing program should have well-established processes, policies, and controls. For example, you can set approval thresholds for assets above a certain dollar value and put controls around who is authorized to execute lease contracts.
8) Invest in Talent
The employees managing the equipment leasing portfolio need to be experts in both the operational challenges of leasing and the financial considerations. Lease accounting talent will be in high demand over the next few years due to the new lease accounting standards, so start hiring now.
9) “Gain-Share” with Business Units
Large, multinational companies may find it difficult to inspire the type of change needed to fix their equipment leasing programs in the thousands of employees who touch leasing. Consider offering an incentive to encourage the people who use the equipment day-to-day.
10) Build a System of Record
It’s critical to capture all the key terms, options, documentation, and deadlines for your equipment leases in a single, centralized database. Some of the data should also be kept in other applications and regularly synchronized with the lease database.
11) Automate Business Processes
Leasing programs have lots of moving parts. Large companies can have tens of thousands of assets spread all over the world. A successful equipment leasing program needs to be automated to handle all of the different pieces.
12) Track at the Asset Level
Equipment leases normally have multiple asset on them. Assets on one lease can undergo different events. They can be lost, stolen, returned, and more. Asset-level accounting is also required under the new lease accounting standards.
13) Verify Data Periodically
You should verify lease data at least once per year as equipment assets could change location, ownership, or cost center. You can verify some of this information with what the lessors have on file and some with the asset users.
14) Arm Stakeholders with Insights
The stakeholders responsible for making lease decisions should have access to all the information needed to make the most effective decisions. For example, Procurement needs access to historical data so they can negotiate the best deals possible.
15) Measure Leasing KPIs
Determine which KPIs allow you to measure the performance of your equipment leasing program. Consider present value of cost or the percentage of your monthly lease payment that is in evergreen fees.