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Background
Wide range of equipment leases:
- Aircraft
- Trucks
- Autos & vans
- Computers
- Material handling equipment
- Laboratory & test equipment
- Industrial & manufacturing equipment
- Networking gear
Cummins Inc. is a global power leader that designs, manufactures, distributes, and services diesel and natural gas engines as well as related technologies. The company supplies the horsepower to PACCAR, Volvo Trucks, Daimler Trucks, Ford, and MAN in North America.
In 2010, Cummins was emerging from the recession with a relentless focus on growth and profitability. At the same time, the company’s finance executives were also methodically improving their processes in pursuit of operational excellence and financial reporting compliance. That’s when the CFO and Treasurer began to scrutinize equipment leasing.
“No other competitor was able to provide even a fraction of the options available through LeaseAccelerator.”
Blake Wolffis
Lease Accounting Manager at Salesforce
Situation
Cummins was losing money in two ways. First, too much was being paid for lease capital on the front end. Second, far more expenses than originally planned were being incurred on each lease when they expired.
Although Procurement had a mature process for comparing equipment vendors to secure a competitive price, insufficient bidding ultimately drove costs back up. The company’s relationships with captive lessors were too tight, making a truly competitive lease quote difficult.
Cummins also was making many evergreen payments because there was no process to manage leases approaching the end-of-term. In many cases, Cummins was forced to buy out the equipment because they could not return it on time.
In summary, the leasing process was broken and the company was losing a lot of money.
Challenges with equipment leasing
The company did not have a single source of truth for their equipment leasing portfolio. On top of this, the company had a complex and fragmented enterprise software environment that did not support equipment leasing. Ariba was used for Procurement, Oracle for financial reporting, and several other ERP platforms for various other business functions. It was clear that manual data manipulation between the major systems would be required. At the time, Cummins was using Microsoft Excel spreadsheets and a defunct software product to manage leases. The company lacked visibility into their global leasing portfolio. Leasing was an orphaned process, cutting across several departments and global in scope but without a real owner. Equipment leasing at Cummins was also highly decentralized. Local budget owners had to decide whether to lease or buy. Although Treasury had built a lease vs. buy spreadsheet, it was neither used consistently nor were the rates updated frequently: stakeholders continued to make poor economic decisions. Furthermore, the company could not measure the economic performance of the portfolio.
Losing money two ways
Cummins was losing money in two ways. First, too much was being paid for lease capital on the front end. Second, far more expenses than originally planned were being incurred on each lease when they expired.
Although Procurement had a mature process for comparing equipment vendors to secure a competitive price, insufficient bidding ultimately drove costs back up. The company’s relationships with captive lessors were too tight, making a truly competitive lease quote difficult.
Cummins also was making many evergreen payments because there was no process to manage leases approaching the end-of-term. In many cases, Cummins was forced to buy out the equipment because they could not return it on time.
In summary, the leasing process was broken and the company was losing a lot of money
Solution
The CFO initiated a project to drive savings and fix the process. Cummins needed a single, global, scalable leasing process. The ability to track leases, assets, stakeholders, and lessors across the leasing lifecycle around the world was needed. The company needed a software system that enabled decentralized decision- making while enforcing centrally administered controls. Critical to success was the need to maintain a complete, accurate, and centralized leasing database.
The CFO initiated a project to drive savings and fix the process. Cummins needed a single, global, scalable leasing process. The ability to track leases, assets, stakeholders, and lessors across the leasing lifecycle around the world was needed. The company needed a software system that enabled decentralized decision- making while enforcing centrally administered controls. Critical to success was the need to maintain a complete, accurate, and centralized leasing database.
Treasury was the corporate sponsor for the initiative. However, Treasury collaborated with IT, Shared Services, and Procurement to consider, find, and implement a solution.
Cummins ultimately selected LeaseAccelerator for its Equipment Lease Management program. Using the Software-as-a- Service model, the application went live several weeks after the contract was signed. LeaseAccelerator’s application was configured to reflect Cummins’ corporate hierarchy and General Ledger code structure. Key variables including Internal Borrowing Rate, Cost of Debt and Weighted Average Cost of Capital were defined in the system. The most complex part of the implementation was the collection and loading of the leasing documents.
Lease collection process
The database collection process began by scouring filing cabinets for active leases. The CFO sent a letter to all business units worldwide mandating that all lease agreements should be collected by the Shared Services organisation. Leases were catalogued and forwarded to LeaseAccelerator. Both schedule level information and asset detail were uploaded. In the first six months, 2,200 leases from 44 countries were captured. Over 1,000 of the leases had to be translated into English first. Although Cummins had originally thought that it had 2,500 leases, the implementation process led to the discovery of several thousand more. In the end over 7400 leases were entered in the database.
Reducing end-of-term costs
With the database established, Cummins began identifying opportunities for cost savings. First, the leases exceeding their original terms were identified. Each of the evergreen leases was resolved systematically. The largest and oldest leases were eliminated first. Through returns and buyouts, Cummins pruned the total active leases down to approximately 3,500 leases. Over 56,000 assets in 31 countries were covered with the same run- rate as today.
Standardizing Lease vs. Buy
Deploying a single, global Six Sigma process for equipment leasing had some unexpected challenges. For example, Treasury required that everyone use LeaseAccelerator’s Lease vs. Buy analysis tools. Lease vs. Buy is the first control point in the leasing process and provided Treasury with the earliest visibility into potential lease transactions. To get the data, the process had to be simple. LeaseAccelerator’s Asset Request Form (ARF) provided the solution. ARF is a simple, lightweight, standardised Microsoft Excel spreadsheet that a user can complete and send by email directly to LeaseAccelerator. A detailed Lease vs. Buy analysis and indicative ASC 840 test are returned in PDF via email to the user within minutes. The location and rates (maintained monthly by Treasury) are automatically determined by the system for the calculations. Since 2010, Cummins processed approximately 8,000 ARFs in 38 countries.
Competitive Sourcing
With the Lease vs. Buy data, Cummins can quickly launch a competitive sourcing event for lease capital. With a few clicks, the buyer can generate distribute an RFP to interested lessors. LeaseAccelerator offers access to a competitive marketplace in which lessors from the Global Lessor Network (GLN) can submit their bids. Then the buyer selects the winner, typically the lowest bidder, and completes the transaction. The winning lessor submits the final documents and data, which are then loaded into LeaseAccelerator and booked. Using LeaseAccelerator, Cummins can control its processes of sourcing capital and booking transactions. Using the notification and attestation capabilities, accounting can track any asset-level changes in location or business coding over the term of the lease. Stakeholders can manage end-of-term events such as buyouts, renewals, and returns. Each business unit’s performance can be tracked centrally. Standardized reports provide equipment managers and their supervisors with scorecards about how much they have saved or lost the company.
Impact
Since inception of the project, Cummins has run approximately 9,000 leases through the global leasing process with an original equipment value approaching $800 million (USD).
Reduced cost of equipment leases
Now, competing lease transactions is a companywide standard practice. Through the automated RFP process, over 73 competitive sourcing events have been completed in 26 countries. The new competitive model yields with an average cost of savings 8% per lease.Better lease portfolio management
Since the new equipment lease management strategy was implemented, performance has improved consistently each year. Negotiated savings have been converted to realized savings, driving bottom-line performance. Evergreen payments as a percentage of total annual payments (excluding termination fees) dropped from 18% at program inception to an average of 8.5% in subsequent years. The “unplanned/unintended” portion of spend dropped by more than half.Established policies and controls
Specific policies and controls were put in place throughout the lease lifecycle. This resulted in better operational and financial controls.Ready for new lease accounting standard
The software makes the appropriate calculations for the current standard and the new standard, enabling Cummins to generate multiple sets of books and parallel reporting. Additionally, the company can use the tool on a daily basis to maintain the accuracy and completeness.Competitive edge
Better lease management provides Cummins with an edge over its peers in the Industrial Manufacturing sector. Cummins is in the process of acquiring its North American distributors. LeaseAccelerator has made the merger integration process smoother, loading the distributor lease portfolios into the application and then converting the units into the global leasing process.Increased visibility
All stakeholders have visibility into the lease portfolio and the leasing lifecycle. The visibility was achieved using the Lease vs. Buy process, automated notifications, and online reporting tools.Goals, metrics, and best practices
Cummins achieved the CFO’s goal of fixing the process as well as the Treasurer’s goal of cost savings The company now has well-defined processes and controls. There is still opportunity to further reduce costs at the end-of-term. However, Cummins equipment lease management processes are now based on best practices.
“We save thousands of hours per year having LeaseAccelerator manage our monthly accounting activity across our large and extremely complex lease portfolio.”
Blake Wolffis
Lease Accounting Manager at Salesforce