The Leasing Loophole

Most companies have looser requirements for leasing equipment than for purchasing equipment – and vendors exploit this loophole.

My skepticism of leasing capital equipment is very strong (see The Leasing Illusion). I realized that this bias might cloud my judgment so a fresh look was in order.

In a valiant attempt to be open-minded, I signed up for a “Best Practices In Leasing” seminar. The event sponsors brought in a highly regarded leasing consultant from the east coast – the expert you’re supposed to call when considering and negotiating major lease contracts.

While hovering around the pastry table before the presentation started I found myself talking to the speaker. He asked why I was attending so I confessed to my skepticism of many leasing justifications and mentioned the most ridiculous: circumventing proper analysis.

The Path of “Leased” Resistance
In many companies, leasing decisions undergo less analysis and senior executive approval than would purchasing those same assets. Vendors and leasing firms pitch this to your project teams as a benefit.

Let’s see… choose leasing so we don’t have to face all the tough questions. That’s a sound business reason to lease versus buy???

Sure, this sounds great if I’m a project leader who assumes I “know” what’s right. I can do an end run around that bureaucratic capital process and avoid justifying myself in front of the CEO!

But to any business leader, doesn’t that sound like a stupid (if not unethical) reason to opt for leasing – shortcut the analysis and keep senior executives out of the loop?

First Think “Purchase”
The typical rationale for a more relaxed process for lease approvals is that leases do not bring the same long-term commitment as a purchase. But these “short-term” commitments are often extended through renewals and upgrades. In the end, we may expend even more dollars with far less (and often woefully flawed) analysis.

In every project, first evaluate options as if all assets are purchased. Only after projects are justified under that level of scrutiny should we ask whether leasing further enhances value. If the project fails under purchase but not under leasing, the analysis is usually flawed (again, see The Leasing Illusion).

Oh, and that leasing seminar? Sure enough, in the PowerPoint’s list of leasing benefits was: “Avoid Capital Approval Processes” … awkward! The expert bypassed the point without mention and avoided eye contact through the rest of the presentation.

© 2012 Verax Point Consulting, LLC

About Dave Wittenberg

I am all about equipping business teams to enjoy greater payoffs on their biggest bets. I bring a unique combination of evaluation expertise and behavioral insights developed over the course of more than 300 major strategic initiatives. Applying a highly effective, disciplined framework, teams unleash their full capabilities to generate better solutions, wring out hidden waste, and deliver superior returns. Specialties: Investment Evaluation, Decision Excellence, Strategic Analysis, Mergers and Acquisitions, Investor Relations, Leadership Development, Education & Training
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