IT: Cost Effective Service or Capital Expense?

This week’s blog is from Keith Fletcher, a serious suit with a lifetime of major corporation experience (talking multinational stuff here!) but a bona fide techie through and through.  For such a button-downed guy, he really has his head in the cloud! Read on as Keith shares some expense control ideas that are worth investigating. FYI – The Creative Coast’s blogspot is Savannah’s sounding board for local thinkers, innovators, wanderers and wonders. Guest bloggers share their thoughts, opinions and creative noodling from all over the map…

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Information technology constantly changes and improves. Without the latest equipment, it’s hard to stay current. While many companies have learned the benefits of renting information technology (IT) equipment, such as photocopiers or PCs, they may not have considered renting their infrastructure, probably because before now, that option has not been available to them.

This was the main inspiration that eventually led Speros to collaborate with our long-time partner ADTRAN, Inc. (NASDAQ:ADTN), a leading global provider of networking and communications equipment.

When my team launched the new infrastructure rental program, we reached out to local organizations first. I contacted Todd Smith, the IT Director at the City of Tybee, and talked him through this new program. Since the industry had never had this option before, I found myself discussing the pros and cons of renting instead of purchasing.

The City of Tybee always strives to make the most out of their tax payers’ dollars. So, of course, they are always looking to cut operating costs when possible and practical. Tybee isn’t alone in this; the majority of established businesses do not have the capital necessary for enterprise grade IT. They need their capital for wages, inventories and overhead.

Let’s consider a fictitious company with 100 employees and the usual office IT infrastructure of a firewall and switches. To buy those would cost roughly $15,000, compared to $500 a month to rent. When you add additional costs for PCs, printers, telephones and paying someone to run your IT department, the capital outlay would be huge compared to pennies on the dollar to rent all of it.

Also, by renting IT equipment, business owners ensure they have up-to-date equipment because it is replaced every two years. Instead of having to buy equipment that depreciates every five years, renting allows entrepreneurs to stay current across the board.

The tax incentives alone are impressive for those who convert their IT models to a service plan.  Here’s an example:

A high-end 24-port enterprise switch will cost about $2,000.

If purchased, it would be depreciated over five years and you get to keep $140 a year (writing off $400 a year at a 35 percent federal tax rate).

Now, if you rent the same switch, the monthly payment will be $70 and you can deduct all of the yearly cost, keeping $294 (35 percent of $840).

Over 24 months, you would spend much less than if you bought the switch. If you consider the extra $140 you’re saving in taxes and apply it to the monthly cost of the switch, bringing the monthly cost down to $58.

If you’re buying equipment, you have to pay for someone to administer, update and keep it current. All of the cloud-based services, such as oversight and management, are included in the rental cost, which is more cost-effective than buying the same services separately. When you rent, your MSP can tailor services that align to your consumption of networking technology.

Imagine using a 4-year-old cell phone for your business needs. It would be inadequate. You have to continually upgrade your technology to stay competitive. This is why renting has become increasingly attractive.

Businesses now have the opportunity to rent all of their IT needs at minimal cost with maximum return on investment, to include carrier-grade switches and other infrastructure, as well as hardware and software components.

Although it is useful for all companies, there is also a benefit for larger, more developed companies. At various points in their growth cycle, this service would focus their energy and resources in other areas instead of having to worry about their technology.

In our area, the City of Tybee Island and the Savannah Board of Realtors have gotten on board with the new program, but I’m truly excited to see who else wants to get in on the action. This program has the potential to reshape the entire IT industry.

Keith

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