Leasing: Still a tough sell in federal market

A year ago, observers saw leasing as the next wave that would sweep through federal procurement, providing a relatively painless way for cash-strapped agencies to get their hands on the latest technology. By this fiscal year's fourth-quarter rush, many people assumed that leasing would be taking up a significant portion of agency information technology dollars.

It is not working out that way. Concerns over committing to multiple-year deals and confusion over contract lease options have put a damper on hopes for a fast ramp-up in the use of leasing, industry and government sources said.

Leasing appears to be an attractive option because it allows agencies to make monthly payments on computer equipment over a set time frame rather than to buy it outright. That makes is possible for agencies to trade in computers for more up-to-date technology. Or agencies might lease with an option to buy.

Leasing will happen, observers believe, but hopes are now pinned on such catalysts as the General Services Administration's push on seat management, in which agencies will be able to turn over ownership and management of desktop operations to contractors.

"It has taken longer than we thought it would," said Joel Lipkin, vice president of business development for Government Technology Services Inc. "The government overall is still in the try-it-out stage."

Basically, he said, agencies are weighing the cost benefit of leasing vs. buying and finding that, if it were not for such things as seat management and technology refreshment, leasing does not make much sense. Also, the early comparisons between the government and the commercial market, where leasing has become an essential part of the way companies manage their IT investments, were overblown.

"In the commercial world, the time value of leasing for such things as available money and tax benefits don't play in the government world," Lipkin said. "The government looks more [toward] such things as overall life-cycle costs and seat management."

It also might be a case of people listening too much to their own hype, said Tricia Renau, director of marketing for Vanstar Government Systems. There had been a lot of elevated talk within industry and government about the latest trends in procurement and leasing, she said, but no one paid much attention to what was actually happening.

"We've been seeing a lot of talk but little action," she said. "When you get down to it, agencies just don't want to mess around with the two- or three-year money they would have to commit to a lease. They prefer to focus on just the current year."

That is certainly the reason the Census Bureau gave for its resistance to leasing. On figures alone, Census is one of the agency leaders in leasing, with a four-year, $50 million deal to lease more than 20,000 laptops. But those laptops will be used by agency interviewers during the 2000 census, then returned at the end of the census. For the long term, leasing is not so attractive.

"We are leery about committing to leasing for long-term needs because of what's happened in the past," said Karen Gregory, the Census Bureau's chief information officer, "Some years we would receive a lot of funding [from Congress], and in other years things would be pretty lean."

That is not to say there is no leasing going on or that there are no optimistic views. Comark Federal Systems Inc., for example, has already inked several multiple-year deals with Census and, through Lockheed Martin Corp., with the Department of Housing and Urban Development. And Comark is pinning a lot of hope on the use of leasing on the GSA schedules.

"When GSA put leasing on the schedules [last year], we placed a bet that around $200 million of IT leasing would be done with the GSA program in fiscal 1998 and that we would do some 10 percent of that," said Alan Bechara, vice president and general manager of Comark. "We're still holding to that. We are expecting to do between $15 million and $20 million worth of leasing through the GSA."

If that prediction turns out to be accurate, it will mean a big boost over the next few months in leasing activity on the GSA schedule. For the current fiscal year to date, according to Jim Bowdren, deputy director at the IT acquisition center of the GSA's Federal Supply Service, only $20 million worth of leasing has been done through the schedules.

It is tough to say what the eventual leasing business will be this year, he said, but GSA is still seeing a lot of inquiries coming in from agencies, "so we expect demand will pick up," Bowdren said.

The addition of leasing to the GSA schedules— and the increasing use of leasing options in such influential contracts as the National Institutes of Health's Electronic Computer Store II and the Chief Information Officer Solutions and Partners— is drawing the interest of vendors.

For example, Tech Data Corp., a Clearwater, Fla.-based IT distributor, sees enough opportunity in the government market to begin a tailor-made leasing program to support federal resellers and integrators. Called LeaseOne, it will offer nine lease options.

Emerging players such as OEM and reseller Intelligent Decisions Inc., Chantilly, Va., also are putting a lot of faith in the future market for leasing. Intelligent Decisions recently was awarded a three-year leasing contract by the General Accounting Office for 650 Compaq Computer Corp. Deskpro workstations, but it sees typical deals over the next year or two averaging in the range of 2,000 to 3,000 units.

"There is a good population of stand-alone facilities of that size that are amenable to leasing, particularly in the military," said Lawrence Hamm, vice president for marketing and contracts at Intelligent Decisions. "We expect that leasing will be 15 percent of our total business over the next six months and that that [percentage] will double next year. We are gearing up for that."

Many vendors are looking to the seat management programs that are being pushed by GSA and agencies such as NASA to be the next major driver for federal leasing. These programs, which are being examined closely by many agencies as a focus of their future IT strategies, take a wholesale approach in which leasing is an integral part of the per-seat cost evaluation.

"A seat management contract is the granddaddy of all leasing contracts," said Gary Newgaard, director of federal sales and marketing for Compaq. "It provides a solutions-oriented business case to government managers for them to consider leasing vs. just the leasing of desktop computers alone."

This fits with an increasing interest by agencies in outsourcing IT services, said Nancy Lamberton, sales vice president with the Government Solutions Group at Lucent Technologies Inc. Leasing is a natural part of this when married to the package of items such as technology refreshment, maintenance and financing that goes with outsourced solutions.

However, Hamm warned, it would be a mistake to pin too much on this. Seat management programs "are so large and could prove to be very cumbersome," he said. Instead, he sees a series of various kinds of leasing contracts taking hold in government, including large, agencywide programs, such as seat management, as well as those aimed at the specialized needs of smaller departments within agencies.

For now though, taking leasing to federal users "is definitely more of a push than a pull" situation, Vanstar's Renau said. Although users are aware of the options for leasing, not many understand the details that make leasing a good choice for them. That comes down to education on the part of lease providers, Comark's Bechara said, "and so far, none of us have done a good job on that."

Robinson is a free-lance journalist based in Portland, Ore. He can be reached at [email protected]


Status: Leasing has been available on the GSA schedule for about a year, but vendors find agencies still appear to be leery of this new procurement option.

Issues: In general, agencies are not yet comfortable with the concept of leasing. And some federal procurement shops anticipate problems having dependable funding for leases that stretch out over several years.

Outlook: Uncertain. Although numerous vendors expect leasing business to increase, many agencies may be waiting to combine leasing with larger seat management programs. Meanwhile, leasing appears to be a strong option primarily in special cases rather than standard procurements.

June 8, 1998

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