Equipment leases are multi-year contracts with a very important financial decision at the end of the term. At the end of a lease, lessees must decide if they want to renew, buy out, or return the leased equipment. On one lease, you may have a partial renewal, partial buyout, and partial return.
Most companies with procurement organizations source their capital equipment fairly well, but most also fail to engage strategic sourcing professionals and their best practices on the financing (or lease) portion of the transaction. Financing is a completely distinct procurement – or should be. Unbundling these two “buys” is a classic strategy that is too often overlooked.
There are two main ways that cloud-based technology businesses can acquire technology assets such as servers, switches, routers, storage devices, and data center racks. Cloud companies can purchase them or lease them. Purchasing assets outright (or CAPEX) is fairly simple. Companies buy the assets out of the retained earnings of the business. On the leasing side, cloud-based technology companies can choose from two different kinds of leases: capital or operating.
Today’s large cloud-based technology corporations that reside in the digital realm — think Facebook, eBay and Google — use billions of dollars’ worth of equipment and assets in building the infrastructure and data centers that are necessary to serve their customers. Given this, it’s surprising how little strategic planning sometimes goes into how these corporations acquire their equipment and assets.