Letters to the Editor

Lease or buy: Another view In the Oct. 20 issue of Federal Computer Week in "A Legal View " Carl Peckinpaugh responded to a question from a company executive regarding how to know when the government should lease or buy an item. Digital would like to offer some additional information for your readers. The question of whether it is preferable to lease or buy an item particularly information technology is a bit more complex than presented in the article. In fact the Brooks Act and the Federal Information Resources Management Regulation never directly prohibited leases or even discouraged them. The Brooks Act did require a proper lease-vs.-buy analysis to determine the more favorable approach.

First some background information may be helpful. Leasing computers was very common in the early to mid-1980s. In those days computers of all types had very high prices and were expected to be useful for many years. Computers were frequently used without major upgrades for periods of five years and longer.

Also it was common to enter into three-year leases and then simply extend them for another two or three years beyond that. Interest costs became very high due in part to high market interest rates but due more to the combined original and extended lease terms. Leasing was often used without a clear comprehensive cost-of-ownership analysis which should include a lease-vs.-buy analysis.

Today's environment is different in many ways. Information technology has a much more frequent technology turnover rate than in the past. In addition computer users are able to acquire processing power many times greater in performance at a fraction of the price physical size and environmental requirements of systems acquired in the 1980s. This has increased the pressures on agency chief information officers to keep up with technology improvements and not be tied to obsolete equipment.

There is some guidance available from the Office of Management and Budget including OMB circulars A-11 (Preparation and Submission of Budget Estimates) and A-94 (Guidelines and Discount Rates for Benefit-Cost Analysis of Federal Programs). OMB's Office of Information and Regulatory Affairs published guidance in March 1992 titled "Budget Examining Techniques for Evaluating Information Technology Investments " which also may be helpful. OMB also can provide direct assistance to finance officers contracting officers and CIOs in understanding where a lease might be useful. Digital and others capable of providing leasing services can assist in evaluating when it is better to lease than to buy.

A comprehensive cost-of-ownership analysis incorporating a thorough lease-vs.-buy analysis must consider the time value of money - that is to say a "present value" comparison. It should also consider the recurring operation and maintenance costs associated with the maintenance of obsolete equipment as well as the gains in productivity from the implementation of new equipment. Also a good analysis should include consideration of the opportunity costs of being unable to move to more efficient technologies due to the lack of capital funds.

Leasing is not a panacea nor an answer for all information technology problems. Not all information technology should be leased not all should be purchased. Circumstances specific to the use of the equipment should help shape which method of acquisition is best. Each situation requires good systems management processes to evaluate the planned use of the equipment its expected useful life for its assigned task possible shifts in equipment use etc.

Leasing is not an inefficient use of government funds in our view. To be sure interest expense is included in any lease. Leasing however enables the use of information technology for the period of time required without the burdens of ownership. Leasing is not always more expensive than an outright purchase if all costs are considered. Typically shorter terms of use favor leases while longer terms (greater than three years) tend to favor outright purchases. Which method of acquisition is more efficient depends on the circumstances of the need for that equipment. Alex N. Barenblitt Federal Leasing Manager Digital Equipment Corp.


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