Admin Alert: Some Simple Ideas for Getting the Best System i Lease

April 14, 2010 Joe Hertvik

Buying a new Power i machine can be complicated. Not only do you have to correctly size everything for future growth, you also have to purchase the hardware, software, and maintenance at a reasonable price. And if your organization wants to lease its new machine, you may wind up scratching your head wondering just what those leasing numbers mean, or if your organization is being taken advantage of.

This issue, I’ll describe a way to approach a new lease, such that you can put yourself in a better bargaining position and better understand how the leasing company is pricing your monthly payments. I’ll examine a few simple leasing concepts that may provide a better outcome for your next lease, helping you get the best deal possible.

Separating Your Leasing Company from Your Business Partner

Depending on how your IBM Business Partner (BP) works, the BP may have a preferred leasing company that it works with to sell you an upgrade. The BP may also own a leasing company and want you to finance the new machine through them. After quoting new hardware, the BP may bring in his pre-approved leasing company, offering you a monthly leasing rate along with the BP’s best deal.

While one-stop shopping may appeal to some customers, I recommend separating your leasing company from your BP, and shopping the lease to other companies. If your lessor knows the deal is sewed up, you won’t get the best rate and your monthly payments could eat away at the discounts your BP provides. On a Power i machine, your company may wind up paying hundreds of thousands of dollars in payments over the lease term. It’s worth it to put in just as intensive an effort finding your leasing company and monthly payments as you did when specifying your hardware.

While it may work out that the BP is recommending the best leasing company, you will want to avoid a conflict of interest situation. In the worse case, the combined entity could unfairly inflate the machine’s purchase price, such that you overpay on the lease. It may not necessarily happen that way, but the potential for overcharging is there when the two entities work together. Separating your business partner from your leasing company takes these variables out of the mix.

Dragging Leasing Costs Out Into the Light

Which of these two leasing company quotes looks better to you?

A. The lease payments are $14,000 for 36 months. (Added on as a line at the bottom of your upgrade quote without any detail.)

Or:

B. The leasing payment consists of the following components:

Description

Option

Total Sell Price

Rate per $1,000

36 Monthly Payments

Power i
System

$
200,000

$
5,000

Tape library

$
20,000

$
500

Rack

$
5,000

23.31

$
117

DVD

$
2,000

23.31

$ 47

HMC Rack

$
6,000

23.31

$
140

Flat Panel Console

$
3,000

23.31

$ 70

IBM Software

$
35,120

23.31

$
819

IBM Hardware Maintenance

$
63,616

23.31

$
1,483

Software Maintenance

$
57,029

23.31

$
1,329

Buyout

$
100,000

23.31

$
2,331

$
491,765

$
11,835

Estimated tax at 7.0%

$
27,424

24.42

$
670

Total lease payment

$
12,505

Term Cost

$
450,163

Hopefully, you answered quote B. These numbers are totally fictitious, but you get the idea. Quote A came from a leasing company that isn’t working very hard for the customer’s business. They probably asked for the machine’s new configuration and then delivered that quote as a single number, betting that the customer wouldn’t ask what’s inside the figures. Quote B came from another vendor but this vendor provided the following detail, which is much more valuable.

Description for each item.
Sell price–How much the business partner is charging the leasing company and by extension what each item’s leasing rate is based on.
Planning rate per thousand for each item–The actual leasing rate the company is charging per month for every thousand dollars financed over the term of the lease. There are many advantages in asking leasing companies for individual item planning rates. First, it allows you to easily compare vendor rates against each other, evaluating quotes on a level playing field. Second, as your BP upgrades their quote, you can recalculate your monthly payments at will. Just plug in the new value and multiply it by the rate per thousand. Planning rates also allow you to see where the vendor is making its money. With the lump sum pricing in quote A, it’s impossible to tell what the leasing company is charging for each item. With a broken down quote like this, it’s difficult to hide superfluous charges in one big monolithic number. Everything is in the open where the vendor will have to justify each item’s cost.
Option–Here the vendor explains whether each lease item is priced at fair market value (S) or as a dollar buy-out (B). With a dollar buy-out, there is no residual fair market value in the item; you either own or exhaust the item at lease end (a three-year maintenance contract is a leasing item that is exhausted at the end of a lease). When items are quoted at fair market value (S), the leasing company calculates a dollar value that they think the item will be worth when the lease is finished. If the lessor thinks the item will be worth something at lease end (such as a Power 6 i system), they may drop their planning rates, expecting to make money if they take possession of the equipment when the lease runs out and then sell it. Conversely, they may monkey with the rates to get more money out of you and still get a decent fair market value for the equipment at lease end. This is known as taking a residual value in the equipment.
Buyout–This is a single line item for what the leasing company is charging the customer per month for the fair market value of any equipment the customer previously leased and wants to carry over to the new lease. In this example, the leasing company has determined that there is still $100,000 worth of FMV in the equipment the customer is transferring to the new lease, so they are having the customer finance that equipment a second time to make up for the FMV the leasing company calculates it didn’t make on the expiring lease. This can be a contentious number because the leasing company has a chance to make additional money on equipment that it’s already leased. In some situations, the leasing company can even make money on an asset that’s already paid for. By insisting that your leasing companies provide a buyout number for carried over equipment, you may be able to negotiate that number down. If the leasing company only provides a lump sum number such as in quote A, you won’t know what the buyout number is and there’s little room for negotiation.

Making Your Leasing Bids Look Like Quote B

Confusion breeds profit for many leasing companies, but with an itemized quote like quote B, you have knowledge that can be leveraged for better rates. And by getting competing quotes for new equipment, you can compare each quote and get the best deal possible.

The surest way to get broken down numbers is to just ask for them. After your BP provides your sell prices, give each company a spreadsheet similar to the one in this article and have them fill in the rates per thousand and monthly payment columns. Tell the competing companies you’re putting the lease out for bid. Competition is the great equalizer in reducing prices.

Another way that you can encourage lessors to provide B-type quotes is to ask for a competing quote from IBM Global Financing (IGF). IGF breaks their quotes down like B, and you not only get a useable quote, you can use it as leverage to get broken down quotes from other lessors (but just tell them you only want them to price the lease like IBM; don’t ever show IBM’s or any other company’s leasing quotes to other vendors as that is a breach of trust and could even produce a legal issue).

Three Simple Techniques for a Better Lease

Getting a better deal on leasing quotes isn’t magic; it’s knowledge. Follow these guidelines to get better leasing quotes from your vendors:

Don’t get your milk where you get your bread–Stop your BP from controlling your lease quote. Let your BP do what they’re best at: configuring and obtaining the best purchase price. Avoid any conflicts of interest that may drive the monthly lease rate up.
Introduce competition–Get competitive quotes no matter how long you’ve dealt with your leasing company. Familiarity can breed contempt and your existing leasing company may be taking you for granted or worse. Get at least two and preferably three or more leasing companies to bid on your quote. The competition will keep everyone honest.
Know what you’re leasing and break down the quote–Don’t settle for a lump sum quote. Make your competing leasing companies break down their quotes so you know what you’re paying for. If you don’t understand what they’re offering, keep asking questions. Bad practices can’t survive the light of day. The best way to know if you’re getting a great deal is to make your leasing vendor justify it.

Your chances of reducing your lease rates will significantly improve if you follow these three guidelines and ask lots of questions. A bad deal can cost your organization tens of thousands of dollars (or more) so it’s worth approaching your lease with the same gusto that you approach your upgrade.

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