Public Report
To:
Finance Committee
From:
Stephanie Sinnott, Executive Director Finance Services/
Treasurer,
City Manager's Office
Report Number:
FIN-15-94
Date of Report:
October 16, 2015
Date of Meeting:
October 29, 2015
Subject:
Computer Own versus Lease Strategy
File:
C-4380
1.0
Purpose
The purpose of this report is to outline the quantitative and qualitative risks associated with
leases as compared to buying City assets and to recommend a computer hardware
strategy for future acquisitions. It is the City’s current practice to buy all equipment with the
exception of computer hardware which is leased.
2.0
Recommendation
That the Finance Committee recommends to City Council:
1. That staff create an IT equipment acquisition reserve that will accumulate funds
over the next five years sufficient to allow the City’s commencement of a
computer acquisition program, replacing the existing computer leasing practice,
as detailed in Report FIN-15-94, dated October 16, 2015.
2. That the Manager, Purchasing Services be authorized to issue and award a
request for proposal for leasing services, as approved by Council on an annual
basis, for up to three years, until such time the reserve is sufficient to implement
the buying strategy.
3.0
Executive Summary
Historical practice of the City has been to lease its computer and computer related
hardware over a three-year period as the cost benefits of leasing outweighed the
advantages of owning.
Further evaluation would indicate that the longer the term, the greater advantage to owning
computer hardware than leasing. The analysis indicates that over a three-year period, the
quantitative advantage of leasing exceeds owning but when extended to four years, the
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Report to Finance Committee
Meeting Date: October 29, 2015
Item: FIN-15-94
Page 2
reverse is evident. Although, with computer technology the qualitative advantages to
owning versus leasing also requires serious consideration. Buying versus leasing would
give the City much greater flexibility with its computer hardware replacement program.
The recommendation to own versus lease is also in alignment with the philosophy adopted
by the Region of Durham. The Region currently owns computer hardware with a four-year
rollover. Additionally the Region has been able to achieve favourable pricing with
alignment to the Provincial computer contracts.
The City has previously explored the Provincial option but the contract timing was not inline with the City’s technology replacement schedule. This option could be explored again
in the future in conjunction with a RFP process.
The City will need to build the reserve over the next five years to cover the capital outlay
funding required for the initial purchase, therefore leasing will be the preferred method as
the reserve builds. In 2018, the City would switch from leasing to purchasing the
equipment.
4.0
•
•
5.0
Input From Other Sources
The Director of Information Technology Services has reviewed this report and
concurs with the recommendations
The Regional Municipality of Durham
Analysis
Periodically the City analyzes the cost benefits of owing versus leasing over a period of
three to four years. Finance Services has undertaken a detailed review to assess the
quantitative and qualitative options to determine the optimal savings point.
5.1 Own Versus Lease Quantitative Comparison
The following chart is a comparison of owing versus leasing computer hardware over a
term of three and four years. The data below only represents the pricing for one year of
replacement cost.
Own
Lease
3 year
4 year
Equipment Acquisition Cost
$456,050
$472,550
Loss of investment income
$14,588
$20,260
$470,638
$492,810
Total Acquisition Cost
Total Leasing Costs
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3 year
4 year
$440,977
$493,725
Report to Finance Committee
Meeting Date: October 29, 2015
Item: FIN-15-94
Page 3
The following chart outlines the resulting savings / (deficit).
Savings / (Deficit) variance own versus lease over
each leasing cycle
Percentage residual necessary for break-even
3 year
4 year
($29,661)
$915
6.5%
-0.19%
Chart Notes and Assumptions:
•
•
•
•
•
•
Equipment acquisition costs is based upon 2014 pricing data
Equipment is based upon a “standard” equipment level and has not been upgraded
to support a fourth year
Four year equipment costs includes a one year extended warranty
Loss of investment income is calculated using 1.05% (based upon current market
rates for High Interest Savings Accounts
Net HST is included in all calculations
No residual costs have been included
The financial analysis does not indicate a material risk to the organization when comparing
lease versus own and three versus four years.
5.2 Own Versus Lease Qualitative Comparison
In addition to the quantitative analysis, a qualitative comparison of owning versus leasing
is equally important, especially in dealing with computer equipment and the speed at which
technology advances.
Advantages of Owning:
•
•
Flexibility – Owning creates flexibility in retaining the equipment for longer than the
duration expected. For example, the City could acquire equipment with the
intention of retaining three years but can reassess at the end of the third year and
extend the equipment for an additional year (based upon technological advances).
Ease of owning – Leasing can be complicated and cost the organization more in
the long run, if not negotiated and time frames defined properly.
Disadvantages to Owning:
•
•
The initial investment outlay may be too much for the City – a cash outlay will
be required to own versus a “streamed” method of payment with leasing.
Equipment obsolescence – if the equipment becomes outdated before the refresh
date then the City must try and dispose of the equipment at a residual value that
does not create a loss, which may be difficult.
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Report to Finance Committee
Meeting Date: October 29, 2015
Item: FIN-15-94
Page 4
Advantages of Leasing:
•
•
•
Leasing keeps equipment updated – based upon technology advances it may be
beneficial to lease rather than own.
Predictable monthly costs – with leasing the costs are structured for the term of
the lease and no additional investment is required.
No upfront costs – with leasing there are generally no upfront costs.
Disadvantages of Leasing:
•
•
Not cost effective in the longer-term – leasing generally becomes more
expensive than owing in the longer term.
Locked in – generally a lease is locked-in for the duration of the lease. Cancelling
the lease may cause severe financial penalties.
5.3 Risk Analysis
Based upon the qualitative analysis buying over a three year period can create a $29,661
risk to the organization over each leasing cycle. Essentially if the City disposes of the
equipment at the end of three years the disposal (residual) amount must equal $29,661 in
order to break-even (on a own versus lease model). The mitigation to this risk is that the
City has the flexibility to retain the computer equipment for an additional year with no
financial risk.
The technology market advances so quickly that there is a risk of retaining obsolete
equipment for a longer period simply to satisfy the financial requirements. Although, this
risk can be mitigated with acquiring an increased level of computer hardware, the analysis
in this report is based upon a “standard” level of computer equipment.
6.0
Financial Implications
The analysis within this report requires a total capital reserve of $1.250 million to be
created over the next five years to allow for the acquisition strategy to be undertaken.
An annual budget allocation of $250,000 per year over 5 years, in conjunction with a
phased in lease savings would allow the organization to commence a buying strategy in
fiscal 2018. Once the initial investment is accumulated, the program will be self-sustaining
going forward using annual lease payment savings.
The recommendation to switch to owing versus leasing and the associated financial
implications should be reflected in the Financial Strategy with implementation commencing
fiscal 2016.
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Report to Finance Committee
Meeting Date: October 29, 2015
7.0
Item: FIN-15-94
Page 5
Relationship to the Oshawa Strategic Plan
This report meets the Oshawa Strategic Plan objective of Accountable Leadership by
ensuring respect, responsiveness and transparency.
Stephanie Sinnott, Executive Director Finance Services/Treasurer,
City Manager's Office
130