SIG dispatch: Leasing Spend — The Hidden Double Digit (millions) Category Savings Opportunity! (Part 2)

contract

I wanted to continue my SIG post from the other day that looked at lease spend and why it’s gaining importance. In recent years, lease spending has come under the microscope because accounting rules now require publicly held companies to disclose their lease spend on their balance sheets. Private companies and government agencies will have to do the same eventually.

The foundational piece of effective leasing spend management is assembling all that data to enable the proper accounting treatment for leases. This also paves the foundation for better visibility and control of leasing spend as well (to learn more about the basics, a recent Spend Matters’ article looked at why lease spend is poorly managed).

But visibility is different from impact. Once procurement has helped finance properly account for new financial reporting requirements, there’s an opportunity to drive lease savings as well.

So let’s look at where the value and savings can come from.

For large public companies, leases on average represent 10% of balance sheet debt — but the money leaking out of these leases and the opportunities being wasted by businesses are astounding, said LeaseAccelerator’s Steve Keifer, VP of Marketing, who recently led two standout sessions at SIG’s Global Executive Summit in California, along with Ingemar Lanevi, LeaseAccelerator’s VP of Global Lease Sourcing Solutions.

As an aside before we get to the savings impact, LeaseAccelerator suggests that we pay close attention to “embedded leases because assets embedded in outsourcing and service arrangements may be considered leases for accounting purposes.” Specifically, they suggest “looking for the embedded-lease problem in contract manufacturing, third-party logistics, data center outsourcing, power purchase agreements and advertising signage.”

Lease savings often starts with driving down the interest rate and negotiated terms. But it can also come from the better management of the asset and leasing lifecycle, such as managing the end of a lease’s term to avoid paying penalties and thwarting the added costs of “evergreen” contracts, which can lead to spending substantially more than the cost of buying the equipment outright (high interest rates included!).

Let’s consider the savings that are possible by looking at two case studies that LeaseAccelerator highlighted at SIG.

First, an industrial manufacturer strategically addressed the lease category with the right technology, data and processes (i.e., “category management and sourcing in a box” for leasing), and the firm was able to drive millions in savings.

This came from:

  • Implementing 8% savings from competitive bidding of equipment financing
  • Cutting half of the unplanned and unwanted evergreen fees
  • Driving a 50% reduction in the size of lease portfolio from retiring contracts

Second, LeaseAccerlator highlighted a cloud computing provider that was able to target leasing strategically to scale the program and improve its free cash flow metrics (its top priority). As an example of lease equipment in this area, Steve and Ingemar shared the example of Oracle’s Exadata Database machine, which cost $1.86 million (financed cost). The total savings from competitively bidding the lease for the Oracle hardware was $188,000 (or 10.9%) — with eight bids received in a leasing sourcing event (based on requesting bids for a 36 month FMV structure).

Spend Matters will explore LeaseAccelerator in greater detail in a PRO Vendor Snapshot in the months to come, including the impact that its programs (and technology) can have on procurement.

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