By Jacques de Klerk, Managing Executive at Rentworks
As someone who has spent years looking at the way companies manage their IT needs, I can promise you that financially, IT rental is a no brainer. In terms of accessing, maintaining and disposing of actual technology and equipment, IT rental is also a no brainer. Why then, I ask myself, have more companies not jumped to rent their IT equipment rather than buying it? After all, they rent telephones and photocopiers, but many don’t see the sense in renting IT equipment.
I believe that in the past, there was good reason for this. Technology directors shied away from IT rental arrangements because of the nightmare of trying to maintain asset registers and because of the lack of viable asset-tracking options available. The fear of losing control of the company’s IT assets was very relevant, and despite the financial benefits that rental agreements offered over cash purchases (with rental coming in at up to 20% less expensive), many reasoned that it just wasn’t worth the headache.
Things have changed, however. With the advent of tracking technologies, it’s now far easier to know exactly where your assets are at any given time, from procurement to disposal. This allows for more intelligent asset management, which has a positive effect on a company’s asset register, staff productivity and even insurance.
Furthermore, there are now other incentives to rent rather than buy. For example, new legislation around e-waste means that companies are now held liable for the responsible disposal of their IT equipment. By outsourcing this function to an IT rental company as part of the total rental package, businesses can avoid the bother of undertaking the e-waste disposal process at the end of every replacement cycle.
The fact is that IT equipment depreciates in value. With new technologies coming to market at a faster rate than ever, it doesn’t make sense to sink capital into IT equipment. With rental systems, however, there’s no lump sum to be paid up front, which frees up capital that can be used elsewhere to generate profit. Because most rental payments are fixed for the term of the contract, businesses who rent can also better manage cash-flow through having fixed expenditures on a periodic basis, rather than having to spend incredibly large sums every three or four years.
Extending the rental agreement once the contract is at an end also usually results in drastically reduced rates, should a company want to hang onto the rented assets for a longer period.
That said; gone are the days when you could sweat an IT asset for 10 years. Companies are realising that technology is a competitive advantage. A three-year rental agreement will give you access to the latest and greatest equipment at a fraction of the price you would pay for it cash, and at the end of the contract, you can either opt to upgrade on a new contract, or to hang onto the assets and pay a reduced market value rate on a contract extension.
I firmly believe that the benefits of rental, particularly in the current business environment, explain the current trend towards IT rental by major companies in the mining and retail sectors, as well as the financial and insurance industries. For example, in the retail sector, South African retail chains are gearing up to compete with new international market entrants like Walmart. Instead of ploughing money into equipment, retailers are choosing to rent and rather spend their capital on core functions. Government is also beginning to realise the benefit of rental versus cash purchase in seeking to address outdated systems.
The focus today is on leaner business processes, and IT rental makes sense in that regard. If one looks at total cost of ownership (TCO) models, which are designed to calculate the lifetime costs of acquiring, storing, operating and maintaining assets, it becomes apparent that there’s a massive difference between the cash cost of IT equipment and its long-term cost. In fact, with the incredible pace of technology development, it has become more expensive to maintain outdated IT equipment than to purchase the newer equivalent. If your DVD player broke, for instance, it would probably cost you less to replace it than to have it repaired.
It’s estimated that the five-year TCO for major computing systems can be between five and eight times the hardware and software acquisition costs. The logical deduction, then, is that you can sweat an asset to a certain point, but beyond that point, it becomes more worthwhile to replace it. As an example, many people will hang onto their vehicles for the duration of their motor plan and until the cost of servicing the car and maintaining it outweighs the cost of a new vehicle. Then they trade it in and buy a new car.
The trick for South African businesses now is to analyse the case for IT rental versus cash purchase and weigh the pros and cons. I’m confident that rental comes out on top in most situations, but companies then need to take that critical last step: getting over the emotional side of the decision – the human nature that tends towards ownership – and making the best call for the business.
RentWorks is South Africa’s leading asset finance and management company. Specialising in asset intelligence, RentWorks helps forward-thinking organisations gain competitive advantage by combining responsive lifecycle management with flexible rental financing.
For more information, visit www.rentworks.co.za.