How to Reduce Evergreen Fees
Is your company paying unplanned or unwanted evergreen fees to leasing companies for equipment you have kept past the end of term? We have found that most Fortune 500 companies are paying evergreen fees on 20% of their leases, typically for six to twelve months. By automating your lease administration processes and establishing a workflow for end of term decisions, you can systematically reduce the amount of evergreen fees you are paying for leased computers, forklifts, trucks, and other equipment.
Lease administration software notifies equipment users when a contractual notification deadline is pending. The user must decide whether to return, renew, or buy out the equipment. If no action is taken, then an automated escalation workflow can be configured to notify senior leaders in the business. Once a decision is made, it is communicated electronically to the leasing company and recorded appropriately in internal systems.
We have found that companies can save between 10-12% on their annual equipment leasing costs by automating end of term management to reduce evergreen fees.
How to Calculate the Savings from Reducing Evergreen Fees
Assume that you have $100 Million of leased equipment spend. To estimate the end-of-term losses your company might be experiencing, you need to conduct the following exercise:
Analyze 40-60 equipment leases from around the world that were put in place more than three years ago to determine:
- The average initial term of the leases in your portfolio
- The average hold period beyond the initial lease term
For example, a laptop lease might have an initial term of 36 months. If you keep an IT lease for 48 months, then your hold period for that lease is 12 months. In general, we see an average hold period of 9-12 months beyond original term in companies with 1000 equipment leases or more.
If you lease $100 Million annually over an average initial term of 36 months, you will pay roughly $33 Million per year in payments. If your average hold period is 48 months — one year beyond the initial term — then you lose $33 Million each year. That’s the opportunity to generate end-of-term savings in year one.
Here is the formula:
($100,000,000/(36/12)) x (12/12) = $33,000,000
or, expressed generically
(Total Spend/(Average Initial Term/12)) x (Average Hold Period/12) = End-of-Term Savings Opportunity in Year One
As a rule of thumb, we’ve found that companies can capture about 10-12% of their end-of-term savings opportunity in year one.
Let’s assume you have $100 Million of leased equipment spend. If so, you could save roughly $3.9 Million of in year one, which is 12% of $33 Million. You can generate that same savings on average for the next 3-4 years until you have achieved about a 70-80% return rate which seems to be the natural limit for large companies. Once again, you must manage and control the business process and adopt best practices across the equipment leasing lifecycle to make it happen.