Labour Saving Devices

Very occasionally an IT project will be producing something totally new and innovative which hasn't existed before. But the vast majority of IT change is all about improving business efficiency. The business case for the projects will have the costs of the projects which are offset by the benefits of reducing costs – most of which will be likely to be salaries.

In the new world economics you will need to go back and reassess any savings and benefits because there are some fundamental changes and major discontinuities in the economics that have come in to play.

In the old world order:

• your business volumes were growing at a healthy rate of, perhaps, ten percent. So your project efficiency gains will easily pay for the project costs. You simply don't have to recruit extra people to support the extra volume. You also save the additional HR costs including the recruitment fees and training costs.
  
• If you have very dramatic performance improvements then the headcount savings can be increased by normal staff turnover. When someone leaves you don't replace them. Again you save on the cost of on-boarding new staff.
  

Now the whole balance changes:

• As general unemployment increases then staff turnover suddenly stops. No-one will give up a job with several years of accumulated benefits for the uncertainties of a new job with the risk of "first in – first out". The goodwill of employees for a projects objectives will, not surprisingly, evaporate as benefits become threats to their personal livelihood.
  
• Any saving in employee costs completely change if the company has to make compulsory redundancies, with the costs and compensation that have to be made. These may well come on top of other redundancies that the organisation has hade to make because of drops in business volumes.
  
• And leaving the sensitive subject of job cuts – do the ecomomics of your project still stand if business volumes have dropped by ten percent?
  

I hate to see irony in such a black situation, where real people's livelihoods are at stake. Believe me: I've been there myself. But it is "funny" that as the need to make efficiency savings increases then it actually becomes harder to make those savings.

See if you go for the lease option..

"It's inexplicable, but the low-cost system I sold you seems woefully underpowered. You could replace it with another vendor's system, thus showing everybody you made a mistake. Or you can pay my outrageous upgrade fees." says Catbert to Pointy Haired Boss.
Pointy Haired Boss replies: "How big a fool do you think I am?"
Catbert: "I won't know until I see if you go for the lease option"

There aren't many jokes about leasing. I have been looking for over 20 years. There is however that one Dilbert cartoon in 1995!
Technology leasing , particularly software leasing, has been in the news lately:

• Microsoft cut its rates for leasing software by 26% (although it looks as if it will recover some of that through insisting you take out software assurance maintenance.)
• IT software leasing is set to become “more important” as costs increase, according to German lessors attending CeBIT (well they would say that wouldn't they?)

Leasing isnt going to totally transform the business case for your project. However used wisely it can overcome issues, particularly with the cashflow. It can avoid the upfront capital cost (particularly if the capex wasn't in this years budget) and match the cashflows to the timing of benefits - even seasonal (like farmers paying more for their tractors during harvest times).

Just watch out for a few pitfalls:

• Lease rates: the rentals seem lower than the repayments on an equivalent loan. but include all cashflows in your comparison, including the value of the asset at the end of the lease.
• Discounts: if the lease rates are lower (often trumpeted as 0% finance) that may be achieved by a subsidy from the supplier - which you might have got as a discount off the price instead.
• End of lease term: Check what happens at the end of the lease. Most likely if you don't return the equipment you will carry on paying rentals at the same rate which quickly changes the costs of your project. (although if you do need to carry on using the equipment, negotiate with the finance company. They will still make more money from a reduced rental than if you send back the equipment)
• Are you allowed to lease? UK public sector organisations will not be able to lease (as it counts as PSBR unless it comes under the private finance initiative). Check with your CFO on their policy to leasing as early as possible.
• It's not SAAS: Most importantly once the lease has started you have accepted the asset. If you have a dispute with the supplier, you can't stop paying the rentals - as they are due to the finance company. If you don't need the asset any more you can't just return it, unless you settle with the finance company.

1. Don't sign that finance agreement until you have reviewed it with a financial and legal adviser.
2. As with any project you can work out the NPV /IRR of the lease vs buying.
3. As with any project assess the risks and you can easily model the cost impact of the risks - if you need to terminate early or carry on using the equipment.

As I said there aren't many jokes about leasing. Just make sure that you analyse the full costs, benefits and risks, or else the joke will be on you.