Equipment leasing is a well-known, strategic financial tool, especially when interest rates are rising. Nearly 80% of US companies use some form of financing when acquiring equipment (Source: 2022 Equipment Leasing & Finance Industry Horizon Report, ELFA). Fortune 500 manufacturing and transportation companies typically spend $100 million or more annually on equipment leases while some spend up to $500 million. Finance teams have been focused on compliance with the lease accounting standards, but managing equipment leases effectively requires a full lifecycle perspective and multiple stakeholders across the organization. Equipment lease sourcing, often a decentralized side-task, is a critical element of a high-performing lease management strategy in helping optimize decisions, reduce emissions and improve cash flow.
Even at the levels above, few organizations manage equipment leasing the way they manage other spend categories, leading to some important and potentially expensive challenges. Let’s walk through some of them.
Decentralized decision-making – Often, each business unit or location makes their own lease vs. buy decisions, and they’re not all using the same criteria. To make matters worse, by making these decisions locally or independently for each business unit, the organization loses the opportunity to aggregate purchases for cost or contractual advantages. This is poor demand management with respect to leasing.
Combining purchasing and financing – It’s not always a good idea to get financing from the manufacturer. There’s a reason why it’s called captive financing – it’s rarely the best offer. Unbundling the initial buy from the financing part of the transaction needs to be considered.
Poor lease lifecycle management – In the 2022 Global Lease Accounting Survey, 40% of respondents said that they return less than 70% of their leases on time. A critical element in realizing the cost savings from the original business case of an equipment lease is to ensure that the assets are returned on time. Automating end-of-term management and workflow can improve this statistic. There’s a big gap between negotiated saving and realized savings if you cannot manage your contract at the end-of-life of the lease!
Lack of visibility – Equipment leases are usually scattered throughout an organization and can be in just about any department or city. Understanding what’s going on requires a centralized database and the right tools to stay on top of changes and provide auditable data.
Lack of ownership – Decentralized processes mean there are many stakeholders with minimal overall leadership. CPOs are increasingly taking ownership for equipment leasing as a category. Some procurement leaders are dedicating a specialist for leasing given the size and importance of this spend category.
How to use leasing for long-term savings
In contrast, there are many successful organizations that are using equipment leasing to drive long-term savings – lowering costs, lowering emissions and using fewer resources. Here are some best practices to get started.
Aggregate spend and source competitively – Looking for ways to combine lease lines creates savings opportunities as well as management and process benefits. These include faster time to value with standardized terms and gaining access to a network of lessors as many lessors prefer larger transactions.
Standardize lease vs. buy – As interest rates shift, it is critical that every team uses the same Treasury-provided criteria in their lease vs. buy analyses. Using a centralized tool and governance process ensure the right decisions and the best use of capital.
Unbundle purchasing from financing – Most sourcing teams want to go out for bid to get the best value. Rather than just choosing vendor financing as a default, equipment leasing can be managed the same way the sourcing team handles other spend categories — using competitive bidding and standardized contracts.
Take control – Leasing means entering contracts with recurring transactions, important end-of-term decisions and significant accounting treatment implications. These realities drive the need for process automation. Choose a solution that will support this process over the long term.
Improve savings – Close the gap between negotiated savings and realized savings with end-of-term management. With centralized data and automated processes, it’s much easier to keep ahead of returns and planned asset refreshes.
Conclusion
To sourcing and procurement professionals, these best practices for managing leased equipment spend are nothing new. It’s critical to apply them to this large spend category just like all the other categories in the organization.
Making changes in the equipment leasing process can drive real savings. The largest opportunities are in unbundling purchases from financing and end-of-term management. As a result, these two programs are often the starting point for organizations seeking to justify investment in a lease lifecycle management solution.
To find out how to drive cost savings with equipment leasing, join this webinar from LeaseAccelerator on optimizing equipment lease sourcing, taking place April 6, 2023 at 2pm ET.
