IT Manager's Handbook: Getting Your New Job Done (42 page)

For items that are capitalized, you will see the cost for each year of the item's useful life charged to your budget (usually in a category called “depreciation”). The Accounting department has software called a “
fixed assets
application” to track the cost and depreciation of capitalized items.

The example given earlier said that a $25 cable wouldn't be capitalized because the cost was too low, even though it had a long useful life. If you place an order for 1000 cables, you still wouldn't capitalize the cables (even though the order totaled $25,000) because
individually
they cost so little. However, some companies still choose to look at the total order so that it can be capitalized.

6.3 Lease Versus Buy: Which One is Better?

One of the discussions you're likely to have about acquiring hardware is “lease versus buy.” Leasing computer equipment carries with it essentially the same pros and cons as leasing a car (see
Table 6.1
).

Table 6.1.
Pros and Cons of Leasing

When you lease something, you're essentially renting it for a specified period of time. In general, you make arrangements to purchase a piece of hardware, but the leasing company makes the actual purchase. The leasing company is then the owner and they lease it to you. Over the period of the lease, the total lease payments will be higher than the purchase cost. This difference is a result of the rate charged by the leasing company (essentially interest).

During the term of the lease, which is generally several years, you're responsible for the hardware, its maintenance, upkeep, and so on—just as if you owned it. You will make monthly or quarterly lease payments. It's important to note that lease payments are generally treated as an expense item, not as a capital asset. The reason is simple: you don't own the leased equipment. However, it is also possibly for a lease to be treated as capital—see the sidebar on
page
169
about Operating versus Capital leases
.

At the end of the lease, you usually have several choices:

•
Terminate the lease by sending the equipment back to the leasing company.

•
Extend the lease (although you should be careful that the new lease payments are based on the unit's current market value, not the original purchase price).

•
Buy the equipment. Often you can do this for a very low cost ($1.00) or for its current market value.

Keep in mind that you generally have to inform the leasing company of your plans 90 days prior to the end of the lease.

Operating versus
Capital Lease

Some leases are essentially rentals, whereas others are really purchases that happen over a long term. For example, if you rent office space for a year, the space is worth nearly as much at the end of the year as when you started; you're simply using it for a period of time. This is an
operating lease
. If you lease a server for five years, at the end of the lease the computer is worth a lot less than it was when the lease started. The leasing company doesn't want the unit back at the end of the lease because it's highly unlikely to find a customer that will be interested in a five-year-old piece of computer equipment. The company you leased it from has to account for this and charges you a payment that will recover all of the lease's costs, along with their margin for profit. At the end of the lease, ownership of the unit transfers to you. This type of lease is referred to as a capital lease and is really a purchase with a built-in loan. According to Financial Accounting Standards Board (
FASB
) Statement 13, a lease is considered a capital lease if it meets any one of the following criteria:

• The lease transfers ownership of the property to the lessee by the end of the lease term.

• The lease contains an option to purchase the leased property at a bargain price.

• The lease term is equal to or greater than 75 percent of the estimated life of the leased property (e.g., the lease term is six years and the estimated life is eight years).

• The present value of rental and other minimum lease payments equals or exceeds 90 percent of the fair value of the leased property less any investment tax credit retained by the lessor.

Leasing

Should you lease an item or buy it? As
Table 6.1
shows, there are pros and cons to each choice.

Who Makes This Decision?

Lease versus buy isn't a decision that IT should make alone. In fact, it's a decision usually made by the financial departments with input from IT. Very often, the decision will be based on whether the company can better accommodate the costs as a capital expense or an operational expense.

6.4 Other Budgeting Factors to Consider

There are a number of key factors that you should consider when budgeting:

•
Growth of your department's workload

•
Technological change

•
Staff

•
Software maintenance

•
Hardware maintenance

Growth of Your Department's Workload

In general, the IT workload grows each year. Even if the company's growth is flat and the general cost of technology continues to decline, in most companies, the need for IT resources continues to grow exponentially. This growth includes items such as faster line speeds, more powerful corporate smart phones and other mobile equipment, additional applications, more server horsepower, greater redundancies, and more disk space. (Even with the recent trend of companies “outsourcing” IT work to data centers, IT departments within corporations continue to grow. As you know,
someone
has to make all this stuff work together.)

It's hard to determine an exact figure for each year's growth. Often it's no more than a best guess. Before making your guess, however, you should examine how the IT workload has grown in the past and learn about upcoming activities and projects that the company has planned that might impact the demand on IT.

Technological Change

Technology changes fast. This is a fact of life in the computer world that makes this industry so fascinating and frustrating at the same time. When you buy a new piece of equipment (e.g., a server), it's safe to say that you'll need to upgrade it over time to get more out of it as growth demands. You'll need to add memory, disk space, and perhaps additional processors. Eventually, there will come a time when it really doesn't pay to invest more money into this device, either because the technology has changed (e.g., new generations of processors) or because the cost of new equipment is relatively inexpensive.

Regardless of the specific reason, you need to anticipate this fact. While technology does change quickly, you need to be able to forecast the need to upgrade it and its eventual obsolescence and replacement. As equipment gets replaced, you're likely to be questioned for the need of the replacement. Be prepared to explain to users who have little understanding of technology why you're buying a new piece of equipment to do the same job as the piece of equipment you bought three years ago.

Staff

Growth of staff salaries (annual merit increases, promotions, bonuses, etc.) should be routinely factored into each year's budget. A more significant budget factor is staff turnover.

The turnover rates of IT personnel vary tremendously. Those individuals that enjoy always working with the latest and greatest technologies may not last more than a year or two before they're off to greener pastures. PC technicians may also last a short time as they seek to find opportunities beyond the Help Desk. Your company, salary, and benefits, each employee's goals and objectives, and their overall happiness with the company—and with you as their manager—are all factors that will influence your staff members' decisions to stay with the company.

Even though your staff may seem quite content, you should assume that there will be some turnover. You may not be able to predict who and when, but you can probably estimate the number of people that will leave. As you try to best guess the turnover, you need to estimate what it will cost to recruit their replacements: headhunters, Web postings, and so on. And when you're thinking that some employees may actually leave, you might want to also throw some money into your consulting budget to provide for interim staffing while you recruit new employees. Finally, the new staff may need some training to bring them up to speed on some of the technology solutions you're using. As a manager it's always best to remember that it is generally less expensive to train staff than to recruit them.

Software Maintenance

No one knows everything there is to know about technology, and that's why vendors offer maintenance agreements. This can be a significant factor for software—annual fees of 20 percent of the purchase price are fairly common. Some packages are so critical to your environment that you can't even consider forgoing support. Other packages may not be as important.

Keep in mind that sometimes software vendors differentiate between
maintenance
and
support
. Maintenance may be limited to your ability to get upgrades for the product. Support, however, generally refers to your ability to get assistance (phone, Web-based, etc.) when you have a problem or question regarding use of the software. Make sure you understand what your vendor means by maintenance and support. Also, for some vendors, maintenance only covers interim releases and patches, while major upgrades have to be paid for separately.

Hardware Maintenance

Like software, some critical hardware (e.g., a production server) may have very high levels of formal maintenance arrangements, whereas other devices (e.g., a printer) may go without formal support for a variety of reasons (it may be just as easy, or inexpensive enough, to simply keep a spare around). You may choose a hybrid solution by having formal service arrangements for your more vital devices and using less expensive coverage (or no coverage) for less critical components.

While software support and maintenance are often only provided by the original manufacturer, there are numerous sources for hardware maintenance. Factors to consider when looking at maintenance agreements for hardware include:

•
Days and hours of coverage required (9–5, Monday–Friday; 24/7/365; etc.)

•
Response time guarantees (keep in mind that frequently the response time refers to how long before the vendor calls you back, not how long it takes for a technician to arrive on site and certainly not how long it takes to repair the device)

•
Plans for spare parts (some vendors you contract with may offer to keep a locked cabinet of parts in your computer room so that they are always available to them)

•
Whether the vendor and/or its technicians are certified

•
Pricing: standard versus premium for extended coverage, or escalated response times

•
Consequences or remedies if the vendor fails to meet promised service levels

Time-and-Material (T&M)
Contracts

Alternatives to maintenance contracts are Time-and-Material (T&M) arrangements. With these arrangements, when you place a service call for a piece of hardware, the vendor will bill you for the technician's time and the parts that are needed—similar to a repair on your car after the warranty expires. Because of the high degree of reliability of today's technology, it's entirely possible you'll save money by forgoing hardware maintenance contracts and rolling the dice on T&M.

Risks with T&M

There are two risks associated with T&M: