BENEFITS OF SOFTWARE LEASING

THE IMPORTANCE OF SOFTWARE

Leasing often (but not always) provides substantial benefits to users, vendors and sales representatives - because it solves business problems and satisfies company and individual needs. Software leasing often provides these benefits in spades because institutional policies and individual perceptions often lag in realizing that the primary driver of the communication and computer industries is software. Our apologies to hardware manufacturers, Andy Grove, and George Gilder ("Microcosm"), but that's what we think. For some support for our position, see Don Tapscott and Art Caston ("Paradigm Shift") and Geoffrey A. Moore ("Crossing the Chasm" and "Inside the Tornado"), among others.

The computer hardware industry has grown exponentially since the 1950's - and so did the computer hardware leasing industry. Which helped cause the other? One thing is sure - leasing was a big contributor to the growth of the computer hardware industry. Leasing will contribute to the growth of the software industry and the software companies that use leasing. And leasing will accelerate users' benefits of the software.

Information technology expenditures in 1994 were split roughly evenly between computer hardware on the one hand and software and services on the other. One would expect that equal amounts of hardware and software would be leased. However, computer hardware was more than 20% of the cost of assets acquired through leasing in 1994, while software was only 1.5%! Something is out of whack!

IS SOFTWARE THAT DIFFERENT FROM HARDWARE?

Yes, software is different -it's intangible, but an intangible can have value (like a book or movie) and it can have a long useful life (like a Beethoven symphony or a word processing or database program).

Yes, a lot of people, both at the user and vendor level, are not aware it's leasable.

And yes, a lot of people at many leasing companies and banks do not appreciate the fact that software has value, even from a lending point of view.

But, no, software is not that different - it's something that is useful and can have a long useful life, so it should be leasable.

And no, it's being leased now, but it's only in the Early Adaptor phase of the leasing product lifecycle.

So although software is in some respects different from tangible computer hardware, the difference should be meaningless from a leasing perspective. In addition, software leasing provides some additional benefits not found in the more mundane leasing transaction. You might want to take a look at Benefits of Leasing for a detailed explanation of the general benefits of leasing. Then come back here; or just keep reading and go to Benefits of Leasing when it's more convenient.

SOFTWARE LEASING FROM THE USER'S PERSPECTIVE
WHAT IS SOFTWARE LEASING

From the viewpoint of the user, it is just about the same as equipment leasing, except it's for an intangible, the software and the software license. It is a method of paying for software over time instead of a single upfront payment and the functional equivalent of a loan from the leasing company or the software developer. It is normally structured as a capital lease rather than an operating lease. However, it is often accounted for as an operating lease.

WHAT ARE THE SPECIAL BENEFITS FOR A USER

  1. Obtain all the licenses that are needed now to supply all users.
    You have funds allocated in your budget for only some of the licenses you need. You can arrange a lease for all the licenses you need and still be within your annual budget requirements.

  2. Include consulting, hardware, customization, and training costs in the lease.
    Bundling the individual components of a project in one lease is normally simpler and tends to result in level expensing rather than having some components expensed upfront before benefits are realized.

  3. Include internal implementation costs in the lease where appropriate.
    You're doing some of the work, like data conversion. These costs also be included in the lease.

  4. You can own the license at the end of the lease without additional payment.
    In fact, unless you clearly have only a short-term need for the software, you should only execute a finance lease where there are no additional payments at the end of the lease. We think the value of software at the end of the lease is in most cases close to, if not greater, than the value at the beginning. Thus, an operating lease with an option to purchase at fair market value option at the end of the lease will in almost all cases turn out to an expensive proposition.

  5. Correct the failure of many accounting systems to recognize the long-term benefits of software and related costs.
    A lease will in most cases permit you to better match software expenses with the period of benefit.

WHEN IS SOFTWARE LEASING AVAILABLE TO A USER

  • If the software vendor offers financing
  • If the user knows a leasing company which offers software leasing
  • If the software cost is greater than $25,000
  • If the user's credit standing is relatively high
  • If the user has leased hardware

If all or most of the "if statements" are true, software leasing is probably available. And it may be available even if most are not true.

SOFTWARE LEASING FROM THE VENDOR'S PERSPECTIVE
WHAT IS SOFTWARE LEASING

From the viewpoint of the software developer, software leasing is a sales and marketing tool which provides users with a lease financing alternative to an upfront cash payment. Leasing often results in an increase in revenues, a decrease in sales time, and an increase in user satisfaction levels.

WHAT ARE THE SPECIAL BENEFITS FOR A VENDOR

  1. Include hardware, training, installation, and customization in the lease.
    Bundling the individual components of a project provides your customer with one-stop shopping and avoids expensing some items upfront before benefits are realized.

  2. Obtain a strategic competitive advantage over competitors which do not offer leasing alternatives to your customers.

  3. Neutralize the strategic competitive advantage of competitors which offer leasing alternatives to your customers.

  4. Offer leasing options to your affiliates; your resellers and VARs.
    You probably have multiple channels of distribution. Leasing programs can be expanded beyond your direct sales force.

  5. Realize the potential for additional licenses for additional users, licenses for related products, and additional charges for installation, training and customization that customers require.

  6. A master lease agreement with one-page add-on leases allows you to offer users additional products with minimal financing effort by the user.

WHEN WILL A SOFTWARE LEASING PROGRAM BENEFIT A VENDOR

  • If your average sale is greater than $25,000
  • If your annual sales are greater than $2,500,000
  • If you sell direct to the user or through VAR's
  • If some of your competitors offer leasing
  • If most of your customers are of relatively high credit quality
  • If some of your customers have budget limitations
  • If some of your customers have financing limitations
  • If some of your customers normally lease hardware

If most of the answers are "yes", leasing software may well benefit you and your customers.

Software leasing is the leasing product of the 90's - and beyond. Used correctly, it can solve problems, satisfy needs, and result in a win/win solution for everyone.

© LPI Software Funding Group, Inc.  

593 Cricket Lane, Suite 200     Wayne, PA 19087  

610.687.4434      610.341.6100   sales@lpilease.com
                         March 7, 2006