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Role of asset finance in IT replacement cycles
While the UK as a whole appears to be emerging from the recession, Government departments remain under pressure to update and replace technology.
But now is exactly the time when Government organisations need to take a more strategic view in order to provide stability for the future – not simply cut costs in the short term. Planning for the future, particularly with the ever rapid pace of change in technology is essential to ensure that the Public Sector remains competitive within the wider marketplace and also that it is able to attract quality staff to service the communities in which the sector operates.
It is all too easy to get left behind in the technology stakes and to become less effective in the process. Within the UK as a whole, Lombard has observed that following the recession, many businesses found themselves six years into a four year replacement cycle. However as many have discovered extending replacement cycles, particularly when it comes to technology, can be a misplaced and provide very short-term savings.
Not replacing technology is not simply about the significance of being left behind and the associated reduction in efficiency. There are also clear direct cost implications that result from keeping out-dated IT equipment.
Findings from Wipro’s report, ‘Using Total Cost of Ownership to Determine Optimal PC Refresh Lifecycles’, a study of 106 businesses in the UK, US and Germany, determined that a four year old PC costs 59% more in maintenance than in its first year. And in addition, there are energy efficiency and security implications with older equipment – for example, the cost of removing viruses from a five year old PC is twice that of a year old PC.
The benefits provided by asset finance has, for many, become the solution to this dilemma and the enabler for financing new capital IT equipment. What these organisations have discovered is that asset finance offers a tactical tool that can deliver financial and operational efficiencies. It provides an answer for those juggling reduced budgets with ageing and outdated technology, offering greater operational, strategic and financial benefits than alternative finance options.
Asset finance provides the ability to rent equipment for its useful life rather than purchase at full cost. Added to this it is able to reflect the future re-sale value in lower rentals, it supports regular upgrade cycles which in turn can reduce maintenance costs, and includes WEEE compliant disposal by the asset finance company.
Managing technology assets effectively will be a focus for many Government organisations and Lombard has identified what it sees as the key benefits provided by its asset finance programme.
Minimises ownership risk
We have the ability to take the risk on how much value remains in an asset at the end of the contract, and we also take responsibility for the disposal and management costs associated with ownership (see note on WEEE below)
Releases tied-up cash
Sale and leaseback frees up the value within assets
Available cash may be used to finance other priorities
Opens up additional credit lines
Acts as an extra facility that uses the financial value of assets to complement cash resources and existing bank credit lines, such as overdraft facilities
Delivers funds quickly and efficiently
The security within the asset can result in prompt turnaround of funds
Fixing the rental costs and payable interest for the duration of the contract helps plan for the future by eliminating uncertainty and costly surprises
Cuts wasted spending
The rentals reflect usage of an asset for a portion of its reusable life – this is an important value added benefit where customers are expected to use it for part of the asset life
It allows for funding of almost any IT assets
In addition, as referred to earlier, using asset finance for IT requirements means that the finance provider is responsible for the disposal of returned equipment in accordance with the WEEE (waste electrical and electronic equipment) directive compliant disposal. This includes the re-sale, recycling or disposal of waste material with scrap certification. Lombard will recycle IT equipment in its specialist recycling facility in accordance with the WEEE directive. Less than 5% of equipment is sent to land fill currently, giving customers complete assurance that their redundant assets are managed in a secure and environmentally friendly way.
With such considerable advantages on offer, it is understandable that asset finance continues to grow even in a challenging economic market, and demonstrates that Government organisations can take advantage of new technologies..
This article was wrote by Ian McVicar, Managing Director, Lombard Technical Services
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