Spend Management for Leased Equipment

Spend Management for Leased Equipment

Popular Equipment Leasing Categories

Aircraft Trucks Autos

ComputerMaterial handling

equipmentLaboratory

R&D equipment

Industrialmanufacturing equipment

Networking& telecom equipment

$1 Trillion of CapEx Financed in 2016

• 72% of use some form of financing

• Equipment leasing growing 8-‐10% annually recently

U.S. Equipment Finance by End-‐User Industry in 2011, $Billions

Trade, trans., & utilities

Manufacturing

Professional & business services

Information

Education & health services

Finance, insur., & real estate

Agriculture, forestry, fishing

Construction

Natural resources & mining

Other services

Leisure & hospitality

128.7

107.3

76.5

75.3

75.3

59.3

43.7

36.0

33.3

15.0

13.6

Source:IHS

CapEx – Highly Variable by Industry

Why Leased Equipment is Poorly Managed?

Fleet Materialhandling

Lab equipment

Office equipment

Procurement Treasury AccountingShared Services

Because No One Owns It

No Lease Versus Buy

Asset cost

IBR

WACC

Lease term

Lease NPV

Break even analysis

Net cash flows

Tax deduction

LEASE VERSUS BUY ANALYSIS

Improper Sourcing of Leases

Traditional bundled approach

Optimizedunbundled approach

Asset

LeaseAsset Lease

Equipment supplier & captive finance org

Equipment supplier Most competitive lessor

Not Tracked Well to End of Term

Emails Spreadsheets File Cabinets Post It Notes

Lease term Evergreen

Decision

Return Buyout Renew

Net Result is Spend Leakage (Cost Savings)

1. Lack of spend transparency2. Lack of demand management3. Lack of aggregation

6. Often has been optimized, subject 7. to data/organizational constraints

9. Process inefficiencies10. Accounting and

compliance issues

4. Inconsistent application5. Sub-‐optimized working capital

7. Given to captives, cot competitively sourced

8. MLAs not standardized; terms sub-‐optimized

11. EOT overruns12. The 14-‐year lease!

Understand Equipment Spend

Standardize Lease Vs. Buy

Equipment Sourcing

Lease Sourcing

Automate and Control Processes

Manage to End of Term

Repeat Process (with Data and Policies)

Analyze, Aggregate, Centralize Spend

Case Study

• Fortune 500 Manufacturer• Expected 2200 Leases,

Found 7400 in 44 countries• Consolidated, integrated in

LeaseAccelerator, Oracle and Ariba

• Increased size of material handling bids into one large event saving $700k

BEST PRACTICE #1Many independent leases for material

handling equipment

Aggregated lease for material handling equipment

Unbundle Equipment Financing & Bid Out

BEST PRACTICE #2

CompetitiveBiddingProcess

Banks

Captives

Independents

Traditional Bundled Approach

Asset

Lease

Equipment supplier & captive finance org

Optimized Unbundled Approach

Asset Lease

Equipment supplier

Most competitive lessor

Savings from Equipment Lease Sourcing

Case Study

• Eaton Corporation• $2.2 Million savings

on just $12 million in spend

• Standardized terms and conditions

• Willing global bidding community

Competitive Bidding More Funding Sources

Proposal Generation Financing Rates

7 25%

80% 7%

Bids from different financial institutions are required to ensure

optimal competition

Less time spent cultivating and maintaining relationships for capital

sourcing from using ELM

Less time spent preparing financing requests and evaluating proposals from

using ELM

Reduction in the average cost of financing equipment using ELM

End of Term Management

Case Study

• Same Fortune 500 Manufacturer

• 7400 leases pruned to 3500 from returns and buyouts

• Evergreen payments as a percentage of total annual payments (excluding termination fees) dropped from 18% to 8.5%

Most Companies Have

9-‐12Months of evergreen (for 20% of

their equipment leases)36 Months Original Term 12 Months

Evergreen Rent

End of Term Options

11%Savings from better end of term management from using ELM

BEST PRACTICE #3

Seven Step Strategic Sourcing Process(Applied to Equipment Lease Management)

1 2 3 4 5 6 7

Understand Equipment Spend

StandardizeLease Versus Buy Analysis

Develop And Execute

Equipment Sourcing

Conduct Competitive Exercise With Lessor Market

Automate/control Contract And Accounting

Costs

Manage Portfolio ToEnd Of Term

Repeat Process

• Data Collection and Analysis

• Analyze Leakage and Establish Rio

• Align Treasurer, CPO. Controller

• Build Lease Versus Buy Financial Model

• Distribute to Organization

• Aggregate Spend

• Typical Cap, Equipment Strategy

• Execute Supply Market Exercise

• Create Lessor Selection Criteria

• Conduct LessorAnalysis

• Bid Standard Rfp/mla to captive cndindependents

• Establish Portfolio Management System

• Establish Financial Reporting

• Integrate To Erp/procurement

• Standardize: Return Buy, Renew, Refresh Decision

• Stakeholder Scorecards

• Escalation For Non-‐performance

• Begin process again, but with data!!

• Review ETO needs and supply markets

• Quick Wins

Key activities

Deliverables

• Spend Analysis/ Spend Cube

• Category Profiles

• Sourcing Waves

• Lease Versus Buy Model

• Standardized Usage across organization

• Selected vendor & Original Equipment purchase price

• Selected Lessor

• Standardized Lease Agreement

• Complete Portfolio Tracking

• Complete Sox Compliant Accounting Reports

• Automated Transactions

• Improved EtoResults And Costs

• Supplier And Stakeholder Scorecards

• New wave plan

How Much Will You Save?

CompetitiveSourcing

End of TermManagement

$100MLease Portfolio

$500MLease Portfolio

$7MPer Year

$35MPer Year

$10MPer Year

$50MPer Year

Typical Equipment Leasing Cycle

Lease EndLease Start

Decision to Lease

12 24 36 48 60

Original Cost Spread Out Over 48 Months

Challenges with Introducing Competition

Bidding Takes

30-90 Days

Lease versus Buy Analysis

RecruitLessors to Bid

GenerateLeasing RFP

ProposalAnalysis & Ranking

Notify Winners and Losers

Negotiate Terms& Conditions

Start End

YearOne

YearTwo

YearThree

YearFour

YearFive

Lease Sourcing

Time Savings with Equipment Lease SW

Typical CompetitiveBidding Process(30-90 Days)

Automated CompetitiveBidding Process(5-10 Days)

Plug In to the Global Lessor Network

500 Banks, Vendor Captives and

Independent Lessors

Material Handling Equipment

globalthelessor network

In order to take advantage of economies of scale, and to remove the inefficiencies of multiple “one-‐off” RFP events for this consistent flow of equipment, this industrial manufacturer consolidated 24 months of multi-‐vendor Material Handling leasing volume into a single, large successful competitive event. By aggregating transactions into a lease line, this lessee was able to attract more lessors and drive down capital costs. Stakeholders have the flexibility to take down transactions over the term whenever they want.

Amount Financed: $8,345,000

Term/Structure: 48 Month Operating Lease

Proposals Received: 11

Max Average Award Min Savings % Saved

Annual Payments, Initial Term $ 2,078,340 $ 1,923,573 $ 1,790,913 $ 1,764,380 $ 132,660 6.9%

Total Payments, Initial Term $ 8,313,374 $ 7,694,292 $ 7,163,652 $ 7,057,520 $ 530,640 6.9%

Present Value, Initial Term 94.1% 87.4% 81.0% 79.8%

© LeaseAccelerator Inc. 2015. All rights Reserved. Not for Distribution.

Dell Supercomputer


A Fortune 200 IT organization needed a leasing solution quickly, given a demanding implementation timetable and impending return date on existing equipment. Using Lease Accelerator and The GLN, they went to market quickly and obtained aggressive rates on an accelerated timetable, which has resulted in a savings of over $87,000 over the lease term compared to the incumbent lessor.


Term/Structure:36 Month Operating Lease

Proposals: 10


Annual Payments, Initial Term $ 814,092 $ 765,898 $ 711,168 $ 711,168 $ 54,730 7.1%



Incumbent’s PV = 91.4%


Telephony System


Secured financing for an Avaya Telecom system with a new lessor from the Global Lessor Network. The competitive financing process delivered an IRR not-‐to exceed 3.36% for the likely end-‐of-‐term purchase scenario, substantially less than the incremental borrowing rate for the entity.


Term/Structure: 60 Month Operating Lease withFMV Buyout Caps

Proposals Received: 18


Annual Payments, Initial Term $ 452,124 $ 399,396 $ 358,332 $ 358,332 $ 41,064 10.2%



IRR, Initial Term + FMV Buyout Cap 11.8% 7.7% 3.4% 3.4%


Next Steps -‐ Get an Executive Briefing

• How to separate equipment from financing

• How to aggregate, analyze and consolidate spend

• How to standardize lease versus buy analysis

• How to minimize end of term leakage

Business

Spend Management for Leased Equipment