May 11, 2009

VOIP / IP Telephony: Buy or Lease

  • Gary Audin, Delphi, Inc.
Communications technology is following the path of IT. Call servers/managers, phone and trunk gateways and IP phones are not expected to remain in use much beyond five years. Communications technology life has been shortened considerably. The question for the CIO and CFO becomes, "Should we buy or lease the rapidly changing VoIP/IP Telephony (IPT) communications technologies?"

Technologists often respond: "We have the cash, so why lease? It will cost us money to lease that we can save by buying the IT technologies." This can make sense from a technical point of view. But this is not necessarily the view of the CFO.

The CFO has to ensure that there is cash is when needed and is not tied up in a technology purchase that cannot be changed. The CIO/communications manager likewise needs to maintain the flexibility to react to changes in technology and the demands of his or her user group. The CIO may be able to acquire more Unified Communications technology if the first year budget is not too great. Leasing can reduce the first year cost thereby increasing the UC functions implemented at an earlier date.

Avoiding interest and financing charges can be very attractive. Putting money in a bank pays interest to the enterprise, whereas leasing costs the enterprise interest. Cash, however, is not really free money to spend. It is a limited enterprise asset that can be applied to many areas of the enterprise, and thus there is an opportunity cost associated with it. The CFO may have better, more profitable uses for the cash on hand than buying communications technology.

Arranging financing can take time when an enterprise wants to take advantage of a business opportunity or business climate change that requires fast action. No cash on hand, then no opportunity and no flexibility to respond to the changes.

In addition, there can be tax advantages to leasing that are not available when the communications technology is purchased. Leasing is also beneficial because of the residual value of the technology--i.e., what the lessor (the provider) can expect to recover from the sale of the technology at the end of the lease period. The residual value will contribute to a reduced lease cost. Further, the residual value of the communications products will reduce the Total Cost of Ownership (TCO) for the enterprise.

The communications technologist may think that "keeping the technology for four years makes purchase more sensible." Communications technology continues to improve, making earlier systems and devices obsolete sooner. Emerging communications technologies are constantly being offered.

Furthermore, a major shift is occurring in communications towards greener operations. Owning older equipment that consumes more electrical power will result in higher operating costs than the new, more energy-efficient products. Leasing allows the technologist to replace the power hungry equipment with less costly-to-power systems. Replacing the equipment can reduce the power consumption by as mush as 25% according to the "EPA Report to Congress on Server and Data Center Energy Efficiency" released in August, 2007. The energy savings will more than pay the interest charges on the lease.

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