When Bob Parmenter became Eaton’s treasurer nine years ago and assumed oversight of leasing, he found that the company had inadvertently renewed some leases again and again. In effect, it was paying for the same equipment many times over. “There was an enormous amount of cost leakage as a result of renewing on a month-to-month basis,” he says. “We could have acquired the equipment for as little as 2 months’ payments, and we found some leases going on for 8, 10, 12 months.”
Know Thyself — and Thy Lessor
From their companies’ problems, Almquist and Parmenter learned they must understand both how lessors make money and how they as lessees manage their leased equipment in the real world. Did their companies tend to use computers for 48 months rather than 36 months, making a 36-month lease inefficient, for example?
Such risks must be factored into a company’s analysis not only in determining favorable lease terms, but in making the calculation about the relative merits of leasing versus buying.
“Some companies are very diligent about looking at rates, but fail to go back and test the performance of leases,” says American River’s Franklin. They figure that “as long as they’re staying within budget, there’s nothing glaringly wrong.” Costs can be reduced in two main ways: by negotiating contracts that are not full of traps and by improving the management of company leasing internally, so that the chances of missed notification deadlines are reduced and equipment is returned promptly as scheduled.
Experienced lessees and consultants cite a number of clauses they have included in contracts that they now consider indispensable. For example, Dave Huber, vice president of financial planning and analysis at Horizon Blue Cross Blue Shield of New Jersey, found that his company had repeatedly renewed lease contracts for servers and PCs. The American River client was able to negotiate terms of a new server contract that reduced lease payments that were to have been made beyond the end of a lease term. Huber now tries to negotiate up-front a potential buyout price that is a percentage of the original cost of the equipment. He also seeks short notification periods and specifically disallows interim rent to minimize unexpected additional costs.
At Papa Gino’s, Almquist now lives by lessons he learned for negotiating leases. He won’t enter into an agreement unless there is a provision for arbitration for negotiating the fair market value for a buyout, for example. When Papa Gino’s was faced with stalling by lessors of credit-card swipe machines, PCs, and other equipment, Almquist unstuck the negotiations by getting tough — threatening to cut lessors out of a $5 million deal unless they softened.
“What I learned in this case is how wide open ‘fair market value’ is,” he says. “It’s a matter of interpretation as opposed to hard facts.”
Linda Corman is a freelance writer based in New York.
Path of Lease Resistance