Why Consider Competitive Sourcing of Equipment Financing?
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. The lessor supply market can, and should, be brought to bear by your sourcing and procurement professionals, if you will let them.
The supply market of lessors is distinct from the supply market for equipment. It is all too easy just to accept lease terms provided by the “captive” finance arm of the equipment manufacturer. However, these captives, independents, and banks will readily finance multi-vendor packages and also prefer larger transactions. Buyers should leverage competitive sourcing of equipment financing to tap into the global market of leasing providers.
How to Save with Competitive Sourcing of Equipment Financing
In a fair market value (FMV) lease, savings are driven not only by a lower interest rate, but also a larger equity investment by the lessor. The easiest way to measure the savings is by comparing the present value (PV) of the lease payments of all the bids. As with most competitive sourcing techniques, even a simple sealed bid technique can yield consistent savings of 7%. These are highly quantifiable, negotiated savings that you can take to your CFO.
Seven percent savings on $100 Million in total annual equipment leasing spend equates to $7 Million in savings spread out over the term of the leases. For simplicity, let’s assume that all the leases that make up the $100 Million in total spend each year have an average initial term of 36 months. That’s $2.3M per year of upfront “negotiated savings” from competition.
Here’s the formula:
(($100,000,000 x .07)*12/36 = $2,300,000
or, expressed generically:
((Total Spend x 7%)*(12/Average Initial Term) = Competition Savings Opportunity in Year One
The $2.3M of savings will continue to roll-in each year until all the bundled and “un-competed” leases in your portfolio roll off and are refreshed with a low-cost competed one. The implementation of this program will save $21M in the first 5 years with an additional $2.3 and $4.7M in years 4 and 5, respectively, if you continue the program. Better yet, this program continues to achieve run-rate savings of $7M per year vs today’s spend as long as you keep the program going.