GOVERNMENT TECHNOLOGY/Spreading out costs
Local government chief financial officers (CFO) and information technology (IT) executives who decide to invest in technology should consider financing, rather than making their purchases with cash. If used properly, financing can help reduce costs, quickly respond to market demands, simplify budgeting and administration, and plan for upgrades and asset disposition.
Financing — including fair market value and full payout leases, as well as installment payment agreements — can simplify how an organization pays for a new IT system. A financing plan can encompass the total cost of ownership — hardware, software, professional services, maintenance, upgrades, training and business continuity/disaster recovery — in fixed monthly fees spread over the project’s duration. That predictable payment improves the organization’s ability to plan and forecast budgets, eliminates unanticipated budget variances, and could even reduce or remove barriers to replacing an IT system.
When considering financing, planners need to estimate the life of an IT project and accurately value the project over its life cycle, factoring in all the relevant costs. They also need to estimate a reasonable return on investment (ROI) payback period and implement ways to measure and document the sources and performance of the project benefits, such as accelerated revenues, cost savings or cost avoidance. Because the most significant IT costs typically occur early in the project, the IT and CFO staffs often are asked by their management to show an ROI quickly rather than over the system’s life cycle. That short-term pressure can lead to purchasing less-than-ideal systems.
A longer-term financing strategy allows the system’s costs and benefits to be amortized over the equipment’s life. That minimizes the impact of buying expensive components and better aligns the costs with the benefits by timing the payments to the realized benefits.
Financing also can provide the flexibility to support peaks and valleys in demand, such as when an e-government application has an e-commerce component. Spikes or dips in transaction volumes may occur and require varying capacity — such as more or less equipment — as a result. Using flexible financing, users can pay only for the capacity used and avoid renegotiations on more equipment.
Financing allows local governments to benefit from innovations in technology without incurring the full cost of purchasing the equipment outright. Also, if the agency is replacing existing equipment, the organization financing the upgrades can even help sell it, which may, in turn, lower the overall costs for the new IT system.
When government officials begin to analyze the strategies to fund new IT purchases, some will find that the benefits of financing often outweigh the option of paying in full with scarce capital resources. In either case, the costs of owning IT can add up quickly, not only initially, but later in the equipment’s life cycle, when maintenance and support costs increase. At the end of the system’s useful life, the agency also may face the cost of disposing equipment. Considering those cumulative costs, the savings and risk reduction by financing IT purchases can be substantial.
The author is the general manager of global financing for Armonk, N.Y.-based IBM.