Lease Myth Busting – Myth #5 –- Most companies return 100% of leased equipment on time:

Not only is this myth both ubiquitous and wrong, it exposes a key difference in the way lessors and lessees understand the economics of leasing.  Lessors count and plan on receiving some version of extension payments from most IT equipment lease transactions – it is core to their business model.   IF LESSEES RETURN ALL RAPIDLY-DEPRECIATING (Technology) EQUIPMENT ON TIME TO THEIR LESSORS THEN THE LESSORS WOULD STRUGGLE TO EARN ANY PROFIT AT ALL.  Please read that sentence again.   However if you talk to the lease manager at most companies a version of the following will almost certainly be the description of the program.  “We used to have some issues with leasing – especially at end of lease – but we changed vendors or contracts with the existing vendor, and now we have no problems at all – the program is running smoothly.  We return almost 100% on time with no additional charges and the lessor is very flexible and works with us to maintain that level of performance.”

Here are a couple of interpretations of what that statement almost always actually means:

“We return 100% of the equipment we can return. We then re-lease the equipment we cannot return under new leases at reduced rental amounts usually combined with new equipment.  When these new leases come to conclusion the process repeats.  Nobody ever notices because we get the new equipment and the relative budget impact is small.”

“We return what we can and we extend some leases as we complete the return.  After having paid extensions for a long period of time the lessor sells us the equipment at a nominal price.  As a result while it looks like we return 100% of our equipment and bring leases to conclusion without any costs beyond the monthly rentals – it’s actually more expensive than that.  The numbers work within our budget and I have not found it necessary to talk with the folks in treasury about these additional costs.”

Below is an analysis of a lease portfolio which was described as working perfectly – returning 99.7% of equipment on time with no additional cost.  The analysis showed the company had committed to pay $62 million for $50 million worth of gear through extensions and “rolled” leases AND THE COMPANY STILL DOES NOT OWN THE EQUIPMENT when the currently active leases end.  If most companies returned 100% of the leased equipment on time, leasing would not be such a highly profitable business

Conclusion: Your lease portfolio is almost certainly not performing as you initially planned (or you are being told) – even if your budget has not been affected.  Flexibility in the relationship with a lease vendor is valuable – but the cost of this flexibility should be measured.  The best way to do this is to evaluate the all-in cost of the lease program with each vendor.