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Issue of March 2006 

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Leased networks vs. managed services

Gautam Munish

Gautam Munish, Country Head, Cisco Capital, talks to Sneha Khanna about leasing network equipment and services

How does the lease model for network deployment work?

In a lease model, the networking vendor works with a financing company to provide convenient, flexible financing options for network equipment and services. The process of network deployment remains the same with the networking vendor working with its channel partners to deploy the network equipment at the customer site.

The financing company works with the prospective customer in designing a leasing option that best suits the requirements of the particular company. They work with the vendor’s product development, sales, services and support teams to enable the deployment.

What are the benefits of this model?

Leasing programmes enable customers to implement a solution quickly and easily, while protecting the network from technological obsolescence. The key benefits of the lease model include:

Leasing entails the provider taking a “residual” position in the equipment. This shifts the risk of technology obsolescence and the burden of end-of-life equipment disposal away from the customer to the financing company, thus minimising the customer’s total cost of keeping up with technology

Mitigating the risk of technology obsolescence. The network is a strategic business asset for companies to help them stay competitive. With the dynamic technology landscape and new ways of doing business, corporations run the risk of making huge technology investments expecting them to last, despite the rate of the technological innovation. The lease model takes a “residual” position in the equipment. This shifts the risk of technology obsolescence and the burden of end-of-life equipment disposal away from the customer to the financing company, thus minimising the customer’s total cost of keeping up with the technology.

Option to renew, buy or return. Customers have the option to buy at the end of lease, as per the changed business and network needs. Customers therefore could renew the lease if the current equipment is still fulfilling their business needs; buy the equipment at its fair market value or return the equipment with no further obligation.

Planned and timely migration onto new technology. If customers find the equipment obsolete, they can plan and take timely decisions to migrate to new technology. With increased awareness among corporations on the importance of their IT equipment as a productivity tool, more corporations are using leasing as an integral part in their IT system planning.

‘Expensing’ versus ‘capitalising’ IT investment. Since networking investments are considerable, they are considered as capital expenditure. By opting for a leasing program, customers may account for their lease payments as operating expense rather than capitalising the equipment depending on the local accounting standards.

Smoothen technology investments. Since the financing company helps customers migrate onto new technology by returning the obsolete equipment, leasing avoids large up-front out-of-pocket expenditures as investments are spread in the form of rentals over the period of usage.

What is the cost saving in deploying the networking lease model as compared to an outright purchase?

The cost savings vary depending on the programme opted for and the customer’s network equipment needs. Also, the lease is strictly seen as an operating expense and not capital expenditure so it is not included as an item on the balance sheet.

How are things like SLAs and QoS taken care of in the networking lease model? What is the average lifecycle of each component before replacement?

SLAs, QoS and lifecycle are parts of the technology strategic planning, which customers need to discuss and agree on with equipment/solution vendors. Leasing simply offers an alternative source of funding that enables purchase of products and services.

Are there any drawbacks of this model because of being managed by an external entity?

The financing company gives facilities in a lease model to its customers for network equipment. The customer can opt to manage and maintain the network equipment in-house or outsource the services to an external provider. The leasing model therefore differs from the managed service model.

There are therefore no drawbacks as such in a lease model. The leasing model differs and is independent from the managed service model as it relates to the financing of the solution being deployed while the latter relates to the management thereof.

All other aspects and issues related to network deployment remain the same. Today’s businesses rely on network technology more than ever before. However, network equipment does not have to be a drain for an organisation’s financial resources. Leasing is a valuable tool for financing network investments by spreading the cost of new technology over time, allowing organisations to better manage cash flow and conserve capital budgets. Because of the benefits, a large majority of enterprises worldwide now use leasing as an integral part of their business strategy.

The leased model has been in existence for a while in the case of end user clients and servers. Can you detail how this scheme has evolved to the present stage where network equipment is also being leased out?

The leased model for network equipment and the lease model for IT equipment are quite similar in structure. The financing company offers a combination of financing options for organisations of all sizes, allowing implementation of technologies needed to compete and thrive without a large capital investment.

For example, Cisco Capital’s leasing programmes offer leases for each aspect of the network: foundation technologies—routing and switching which form the core of any network; advanced technologies—security, voice, IP-based communications and wireless, and services offered by Cisco Systems. In addition, the organisations can lease through Cisco Capital the entire networking solution, including installation, services and all technology components of network deployment.

How does an organisation select a vendor for the leased model? What are the parameters to consider?

While choosing the vendor of a lease model, companies should take care of the following points:

  • Look carefully at the terms and conditions and check if there are hidden fees.
  • Look at the offers made by the company about flexibility during and at end of term.

What are the enclosures required, when applying for the financing options?

While applying for financing options, companies generally need to furnish the following information:

  • Credit application and legal name of the company
  • Location of company headquarters
  • Complete bill of material for equipment to be financed
  • Prior year’s financial statements (audited is preferred)
  • Any interim financial statements for the current fiscal year.

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