% fortune -ae paul murphy

A recommendation on leasing new equipment

You'd think that investing in new equipment just when we might very well be entering the second great depression would be suicidal - but I think getting other people to invest in new gear on our behalf may well be the right thing for many of us to do.

Specifically, it's time to look at your capital spending plans for the next year or two and ask which bits of it you could sensibly acquire on a leased basis today or tomorrow.

The reasons for doing this are compounded from the following:

1. leasing provides a great hedge against inflation - and if you don't think inflation is about to become a big issue, consider this graph from a PowerLine discussion of the federal deficit.

   All that cash has to come from somewhere, and simply printing a few trillion American dollars is going to appeal to the weathermen setting up this disaster.

   The inflation hedge here is that if you take a five year lease on new gear now and are still in business in 2012, you'll be paying today's rates in 2012 dollars - and every time inflation lets you raise your prices, your real infrastructure costs will go down.

2. Some of that cash will, however, come from greatly increased taxes - and, in most countries, payments against a carefully structured lease are deductible from income.

   The tax hedge here is simple: better to spend money on infrastructure you can use than on bureaucrats whose net effect on you is negative.

3. Most new equipment is more efficient, particularly with respect to power and space use, than old equipment and usually comes with significant warranty coverage. The leased gear should, in other words, directly reduce existing infrastructure maintenance and support costs.

   The "Moore's hedge" here is that technology has been getting better - but Intel's Nahelem plays catch-up with AMD and if IBM's takeover of Sun turns out to be real that puts SPARC out of business, and so the marginal gains available from buying next year's product will likely be considerably less than those available from buying this year's products.

One of the less obvious ideas in this compound is that the new gear you lease should be grossly over specified for your current needs, be obtained on a long term lease, and use a technology likely to survive years of neglect - because, if the recession deepens and extends into depression, you will not be able to afford the staff needed to keep things current - and even if it doesn't, you'll still find yourself competing with the government for IT staff: pitting whatever you can offer against a secure, inflation proof, government benefits package.

Specifically what to lease is a different issue - as usual, I'd suggest taking a close look at Sun's stuff because their gear, from modular data center down to the single T5200 box, is likely to continue working whether or not IBM gets to destroy the company.

The negative on this strategy is that you're throwing away some residual value in what you have and trapping yourself into hardware/software configuration that works today and is configured for tomorrow, but will force you to live with hopelessly obsolete gear in the last year, or years, of the lease. The operative word here, however, is "live" because the real bottom line is that if things go further downhill, then early and effective implementation of this strategy could save your company significant downstream monies - and if a miracle happens? Well, you can always buy out your leases just as you would any other financial hedge.

Starting Monday I'll be taking a break on blogging - and plan to file commentaries only on Saturdays until September. Why? Well, did you look at that graph above...?