Lease spend is a hidden category worth millions in savings, strategic value for business

procurement

In most businesses, their millions of dollars in leasing spend represent a hidden opportunity for procurement and finance departments to find savings and create strategic value.

With every department in a business juggling leasing terms, financing and renewals for things like warehouses, offices, computers, supplies, furniture and fleets, it’s a daunting task to think any single department could manage it all. These are some reasons why lease spend isn’t managed well. But technology has developed to the point that it would be unthinkable to leave all of that spend unmanaged.

So it's clear that lease spend should be its own category, but why is that becoming apparent now?

This year, public companies had to adopt new accounting standards that required all financial data about leases to move from the footnotes of their financial reports onto balance sheets. Private companies as well as state, local and federal government agencies will eventually have to adopt these same accounting rules.

It's an arduous task for procurement to help find all of that lease information, but it’s in the best position to do so. However, companies shouldn’t be satisfied with just getting those numbers on a financial report and leaving them there. With all the data on lease spend centralized into a single system, businesses have a ton of valuable information to analyze.

This gives procurement actionable data to fulfill two key goals: finding cost-savings as well as taking on a broader strategic role with other departments and creating value across the business with C-level stakeholders.

But procurement will need updated technology and expert leasing insights to do this.

Modern Technology, Modern Processes

According to a report for the solution provider LeaseAccelerator, five areas using modern technology and processes need to be addressed:

1. Analyze, aggregate and access centralized lease information.

Procurement and other stakeholders need to know the lease terms, finance rates, renewal deadlines and which employees manage the lease. Once you’ve found all that, build a database and have an easy-to-use enterprise lease management (ELM) app that connects the database to users — whether those budget owners are in the office or working remotely around the world.

Aggregate the spend two ways: group the capital equipment purchases to improve sourcing of initial prices and aggregate across the portfolio of leases. “Lessors, like equipment vendors, prefer larger financing deals given the relatively fixed cost of terms negotiation and transaction processing,” the report says.

According to a case study in the report, a Fortune 500 manufacturer did this process thinking it had 2,200 leases — but it found 7,400 leases from 44 countries. Once it categorized the loans, it saw that things like forklifts were leased differently from several vendors. That led it to hold one large, competitive bid for its forklift needs — saving about $700,000 on just that one type of equipment lease.

2. Have a digital lease-vs-buy tool.

The decision to lease something versus just buying it involves a complex set of financial analyses. And not everyone who is leasing things for your company has the financial acumen to compare cash flows, tax rates and breakeven timelines. Most companies rely on users filling out lease-vs-buy spreadsheets and then emailing them to procurement for review. But spreadsheets need to be updated regularly to reflect the latest market rates and the financial variables. The process is too cumbersome for most companies to manage successfully with email and spreadsheets. An alternative is to use a digital tool that automatically keeps financial variables up to date and standardizes workflows to ensure a centralized review process.

“Using automated workflow, this type of tool provides a visible funnel through which accounting, treasury and procurement can see equipment lease demand before decisions are made,” the report says.

With one of its clients, LeaseAccelerator found that a manufacturer’s treasury department estimated that 3% of the firm’s capital expenditures (CapEx) had inaccurate lease-versus-buy analysis being performed. The cost to the company was estimated to be 2% of total CapEx. The new, automated process resulted in a 200% increase in the number of proper leasing forms being submitted and lease-vs-buy tests being generated. By automating the process for all stakeholders, treasury estimated a savings of three hours per lease-vs-buy tests across the company. And treasury saved $675,000 or more each year.

3. Unbundle finance from the equipment purchase deal.

While most companies with an investment-grade credit rating have no problem securing financing, they may not always obtain the most favorable rates and contract terms. Think of buying a car and accepting all of the dealer’s terms and add-on offers without shopping around for a better rate or talking with your insurance agent for better terms. You wouldn’t do that.

Leasing companies often bundle equipment financing services into packages that include the cost of the lease along with maintenance and repair services, resupply contracts and other value-added services. Bundling a mix of products and services into a single line-item price enables the leasing company to hide the true financing rates from the buyer.

A best practice that many companies follow is to unbundle the sourcing process for the financing from the purchase decision. The report offers this assessment: “Buyers should bid the lease competitively in the global market of providers. In a fair market value (FMV) lease, savings is driven not only by a lower interest rate but also a larger equity investment by the lessor. The easiest way to measure the savings is by comparing the present value (PV) of the lease payments of all the bids. As with most competitive sourcing techniques, even a simple sealed bid technique can yield consistent savings of 7-12%. These are highly quantifiable, hard-cost negotiated savings that you can take to your CFO.”

In one example from the report, Eaton Corporation saved $2.2 million on just $12 million in leasing volume.

4. Control the lease cycle and compliance costs

There are specialized business processes for leases that are different than for assets that companies own. Leases have specialized tax, accounting and financial reporting requirements. There are unique contractual considerations and critical decision dates (think renewal options) that must be monitored throughout the term. Even accounts payable processes are different. Lease invoices are complex with variable rents, incentives, allowances and other fees that need require unique validations before payments can be made.

Software can help reduce the complexities of managing unique business processes with automation. Use your database/ERP system app (the ELM) to track equipment from cradle to grave; automate lease, invoice and payment transactions; and integrate a lease accounting sub-ledger to the general ledger.

“The application becomes the auditable ‘system of record’ for all of a company’s leased equipment,” the report says. “With an automated, centralized system and straight-through processing (STP) all relevant stakeholders have visibility to the lease portfolio. Users trust the data quality and can collaborate through customized workflow. Monthly and quarterly closes and reconciliation become quick and painless.”

5. Automate end-of-term management

With leases, there is opportunity for spend leakage throughout the lifecycle — especially at the end of term. When a lease is coming to an end, you don’t want to miss contractual notification deadlines to notify the leasing company about your plans to renew, buy out the equipment or properly return it.

These processes should be automated with an enterprise lease management app so you’re not counting on manual processes that rely on people’s memory of key dates and terms for each contract. If the end of a lease term isn’t managed well, you may end up with a contract automatically renewing year-over-year — meaning you’re paying for old equipment and forking out more for that forklift than if you bought it new.

From the example above where the client found 7,400 contracts lurking in the business, about 3,000 of them had missed deadlines yet were still active and being paid. The ELM app was able to identify all of those lapsed leases, allowing the business to properly end those bad deals and set the business on a more financially responsible path.

The Big Picture

Leasing spend should be thought of as its own category and should be tamed following a traditional strategic sourcing process, as shown here.

Spend Matters Founder Jason Busch recently posted a two-part series about this hidden spend category and how important it is to gain visibility into a company’s total lease outlay. He also encouraged procurement and finance leaders to get to work on lease spend to maximize the positive impact it can have on a business.

“You’re sitting on found sourcing and category management money here,” he said. “So target it!”

In the next article in this series, we’ll speak with an expert — LeaseAccelerator’s VP Ingemar Lanevi — who has seen lease spend mismanaged but who believes it can be developed as a spend category that’s full of savings and insights for businesses.

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