Leases lurk in businesses, leak money: Why lease spend isn’t managed well

Every department in a business has leases — from office printers to office space and routers to forklifts. But not all of this haphazard leasing and its hidden costs goes through the cost-saving negotiation and management provided by a procurement department.

That rogue spend adds up, and businesses are starting to understand the full scope of their leasing spend and why it is so poorly managed. Because businesses don’t have a big-picture view of their leases, they don’t know all of the contract terms, monthly rent payments, end-of-lease obligations and other details. So that means no spend management or analysis of outlays on each office lease — including the rent, maintenance, utilities, HVAC, telecom, custodial, and landscaping services charges.

Companies this year are seeing the full extent of this sprawling lease spend because a new accounting standard required that public companies move leases from the footnotes of their financial reports onto balance sheets. Private companies as well as state, local and federal government agencies will face the same reckoning over the next few years as they adopt these new accounting rules.

Recent efforts by businesses to comply with the new standard are instructive and have shed light on why leasing spend can be a nightmare to manage.

“Public companies in the first quarter of (adopting the new accounting law) are struggling with issues such as proving the accuracy and completeness of their lease population,” said LeaseAccelerator CEO Michael Keeler in an Accounting Today article, adding that seeing your full array of leases is just the start. “Perhaps the greatest challenge, however, is the need to track changes to the lease portfolio. A company with 300 leases will have to track an average of 230 events in a single year as assets come off lease, new leases are signed and changes occur throughout the term.”

The new accounting efforts make clear that businesses don’t fully understand all of the leases that they are contracted for and are obligated to pay. According to a report for LeaseAccelerator, money also is lost in other areas of leasing:

• Failure to split the asset purchase from the finance side of the deal. The buyer may know which forklift is best, but no one sourcing expert is asked to find the best financing terms for these deals. “Bundling the original buy together with the lease is akin to negotiating carefully on the purchase price of a new car and then capitulating on the most expensive dealer warranty without shopping around,” the report says.
• Not managing the leased equipment’s lifecycle. “In procurement terms, leases are multi-year contracts with a very important financial decision at the end of the term,” the report says. “When the lease is over, the lessee must decide whether to return, renew, refresh or buy the equipment. Failure to track equipment properly and proactively manage the end-of-term decision is the most common and costly error made in this spend category.”

The historical root causes are twofold, according to the report:

• No single department is responsible for leasing. Who owns leasing? That’s the problem: All departments spend on leases, but the company loses money when they aren’t managed well. Looking at the complexity of the list above should persuade the C-suite to assign leasing spend to one owner, like procurement.
• No process automation or visibility into all the property that’s leased. Terms for hundreds of leases are often stored in filing cabinets or emails, where they aren’t easily accessible or tracked. Having one computer database with all of the leases in it can help automate lease management and provide visibility. And all the data gleaned from a digital process would fuel procurement technology, like supplier relationship management (SRM), spend analytics, as well as tools to monitor risk and compliance.

But this scary picture is changing quickly. The new accounting standards have forced companies to wrangle all the leasing information across their business and put it into a centralized system in order to perform the necessary financial reporting. The unexpected benefit of this massive accounting compliance effort is that companies are now sitting on a pile of valuable information about their leases, which creates the promise for saving money and improving efficiency.

A recent Spend Matters article focused on the commercial value of contracts, which is what a lease is: “Contracts represent a direct link to suppliers, and that can offer profitable information about supplier activity that can help with contract renewals, a common way to control spend and find savings.”

In the next article in this series, we’ll look at how companies’ procurement departments can leverage technology to tame leasing as its own spend category.