New lease on life

Alternative financing returns as option for cash-poor agencies

In an effort to appeal to agency officials laboring under tight budgets, GTSI officials have created a new subsidiary company to handle financing for government purchases. GTSI Financial Services specializes in leasing and also offers technology life-cycle management and asset management services.

Resellers such as GTSI usually offer financing options to agency buyers, but many handle it with an internal office and an array of third-party lending partners.

Jack Helmly, who had been director of the company’s financial services division and is now president of GTSI Financial Services, said officials spun the division out of the company to allow it to function more independently. With the GTSI subsidiary, agency officials can choose to sign a lease-to-own agreement or retain the option of purchasing the leased assets at the end of the contract term.

Agency officials at all levels of government are looking for ways to do more with less money. Leasing, lease-to-own and other options provide attractive alternatives in some cases, but officials should be cautious, said David Drabkin, deputy associate administrator for acquisition policy at the General Services Administration.

“As a general rule, the government is required to have all of the funds necessary to complete a contract at the time it awards the contract,” he said. “That’s a general rule. There are a lot of exceptions.”

Leasing offers agencies a way to try technology without having to buy it, Helmly said. Such an arrangement also makes it easier to replace aging hardware.

“Technology does become obsolete,” Helmly said. “If you’d like to stick with your car for an extra year, it works. It runs.” Computer equipment, in contrast, may become unusable as newer, incompatible technologies emerge.

The key question is whether an agency really needs to own the equipment it uses. “Let’s challenge the bias of ownership,” Helmly said. “Let’s look instead at a paradigm of control.”

Some analysts take a dimmer view. Leasing rarely costs less than simply purchasing the equipment unless the lease term is six months or less, said Chip Mather, senior vice president of Acquisition Solutions. In addition, the Office of Management and Budget requires agency officials to justify a decision to lease equipment.

“If you’re leasing capital equipment, you’ve got to fund it,” he said. “If you’ve got to have the funds, you might as well buy it.”

Drabkin said agency officials should not enter into leasing arrangements lightly. Layers of rules and accountability apply.

“There are occasions where it’s permitted and occasions where it’s not,” he said.

In addition to the required business-case analysis and justification, agency officials must consider the impression they make. Some critics “look at lease-purchase as a way to get around congressional oversight of what is being spent,” Drabkin said.

Agency officials who use leases must be cautious about onerous terms and conditions, said Robert Guerra, a partner with Guerra, Kiviat, Flyzik and Associates. In particular, he said, agency officials should be sure they can end the lease early if they need to.

“There are all kinds of financing options available,” he said. “I think the government can’t continue to try to buy everything it needs on a capital expenditure basis. The government, if it really wants to meet its mission needs in the near term without obligating capital dollars, they can do that and they can do that through financing options.”

Agencies have other alternatives, of course. Share-in-savings contracts allow them to enter into long-term deals without having the full value of the contract available upfront.

Like share-in-savings, “leasing is just a tool,” Helmly said, adding that agency officials benefit from having a range of options.

“The vendors want the cash,” Helmly said. “The agencies want discounts for large purchases. The vendors say, ‘Show me the money.’ ” And that’s where GTSI’s financial services come in handy, he added.

GTSI is among a number of companies that offer leasing and other financial options. Leasing is an essential component of any reseller’s business, whether the reseller handles it directly or simply makes it easier for buyers and outside financial firms to connect with one another.

“You’ve got a variety of options,” said Alan Bechara, president of PC Mall Gov, which offers financing options through outside companies. “Leasing is going to have its applicability, depending on the customer situation or customer environment.”

Bechara said officials at state and local government agencies are more likely to use leasing options than their federal counterparts, but officials at all levels of government are interested.

With leasing, “you get asset management,” he said. “The title is still held by the financing organization, which wants to have closer reins on where the equipment is.”

However, in many cases, it’s not a viable route, Bechara said. “In an era where security is a concern, you have equipment that at the end of the lease is accessible to a third party” when it’s returned to the company, he said. “Leasing is another tool that we provide to our customers. I think it has its place, but it’s not a one-size-fits-all” solution.

Like share-in-savings and other unconventional approaches to contracting, leasing requires caution.

“It’s going to be a last resort,” Bechara said. “Leasing has to be demystified. Over the years, I’ve seen companies get a little better at streamlining the process and taking the mystery out of it.”

Helmly said leasing is an option that government officials choose only about 5 percent of the time. Often they skip over leasing and move from owning assets to contracting for managed services, he added.

CDW Government offers a range of leasing options, said Kevin Adams, the company’s vice president of program management.

The interest from agencies ebbs and flows depending on the federal budget, he said. “In the late 1990s, you didn’t see leasing at all,” he said. “When the government was flush with cash, they bought.” Now that money is more scarce, however, they’re looking for other avenues.

CDW-G uses outside companies to provide funding but takes an active role in managing the offerings, Adams said. “We may broker it out to try to get better rates,” he said. “With funding sources, a lot of it’s timing. It’s always good to have multiple funding sources in your quiver.”

GTSI’s new venture doesn’t pose any real competitive threat to CDW-G or other resellers, Adams said. “We had an affiliate company called CDW Leasing back in the late ’90s,” he said. “We got out of [the financing business] because we found that as long as you have access to capital, it really doesn’t matter whether you do it internally or externally.”

GTSI draws on lines of credit to get the capital for its financing services, Helmly said, adding that the key is knowing how to assess risks. The government’s credit is good, he said, and early termination of contracts is the main risk factor.

Short-term leases ease anxiety

A typical information technology lease spans three years. Then IT managers start to get anxious about upgrading their equipment, said Alan Bechara, president of PC Mall Gov.

Short-term leases can be a good choice for agency officials faced with projects they can’t plan carefully, Bechara said. For example, if the Federal Emergency Management Agency needs to set up emergency response centers, short-term leases can provide a source of equipment that they won’t need for a long time, he said.

“Like in any business or discipline, there are lots of nuances and risk associated with leasing,” Bechara said.

Typical contract provisions add an extra element of uncertainty to the financial picture.

One provision is a non-appropriation clause, which allows agencies to drop contracts if Congress doesn’t appropriate the needed funds.

— Michael Hardy

NASA relies on funding alternatives

NASA officials are using principles of life cycle management, including the leasing of information technology hardware, to support the services that will eventually take people back to the moon, to Mars and beyond.

Ken Griffey, chief enterprise architect for NASA’s Marshall Space Flight Center in Huntsville, Ala., said agency officials can adopt many business practices, even though their organizations are not profit-and-loss centers.

“We’re trying to adapt some of those principles,” he said. “Applications and technologies are just the underpinnings for services.”

Griffey divides technology into four groups: legacy, current, emerging and leading edge. He said agencies should not buy untested technologies.

“If you go buy a bunch of emerging technologies and [a different] standard emerges two years later, you end up with just a bunch of boat anchors,” he said.

Agency officials find it difficult to adopt emerging technologies because of the lengthy planning and purchasing cycles they face, he said. Leasing allows agencies to gain access to emerging technologies while they are still new, because the approach demands less commitment.

It’s also difficult to find a market in which to sell used technologies once they fall out of use, especially if agency officials initially bought only small quantities.

“You don’t have enough volume to have an effective sell on the aftermarket,” Griffey said. “You can be successful if you have a whole bunch of them.”

— Michael Hardy

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