Stephanie Sinnott, Executive Director Finance Services/ Treasurer, City Manager's Office

Transcription

1 Public Report To: From: Report Number: Finance Committee Stephanie Sinnott, Executive Director Finance Services/ Treasurer, City Manager's Office FIN Date of Report: October 16, 2015 Date of Meeting: October 29, 2015 Subject: Computer Own versus Lease Strategy File: C Purpose The purpose of this report is to outline the quantitative and qualitative risks associated with leases as compared to buying City assets and to recommend a computer hardware strategy for future acquisitions. It is the City s current practice to buy all equipment with the exception of computer hardware which is leased. 2.0 Recommendation That the Finance Committee recommends to City Council: 1. That staff create an IT equipment acquisition reserve that will accumulate funds over the next five years sufficient to allow the City s commencement of a computer acquisition program, replacing the existing computer leasing practice, as detailed in Report FIN-15-94, dated October 16, That the Manager, Purchasing Services be authorized to issue and award a request for proposal for leasing services, as approved by Council on an annual basis, for up to three years, until such time the reserve is sufficient to implement the buying strategy. 3.0 Executive Summary Historical practice of the City has been to lease its computer and computer related hardware over a three-year period as the cost benefits of leasing outweighed the advantages of owning. Further evaluation would indicate that the longer the term, the greater advantage to owning computer hardware than leasing. The analysis indicates that over a three-year period, the quantitative advantage of leasing exceeds owning but when extended to four years, the 126

2 Page 2 reverse is evident. Although, with computer technology the qualitative advantages to owning versus leasing also requires serious consideration. Buying versus leasing would give the City much greater flexibility with its computer hardware replacement program. The recommendation to own versus lease is also in alignment with the philosophy adopted by the Region of Durham. The Region currently owns computer hardware with a four-year rollover. Additionally the Region has been able to achieve favourable pricing with alignment to the Provincial computer contracts. The City has previously explored the Provincial option but the contract timing was not inline with the City s technology replacement schedule. This option could be explored again in the future in conjunction with a RFP process. The City will need to build the reserve over the next five years to cover the capital outlay funding required for the initial purchase, therefore leasing will be the preferred method as the reserve builds. In 2018, the City would switch from leasing to purchasing the equipment. 4.0 Input From Other Sources The Director of Information Technology Services has reviewed this report and concurs with the recommendations The Regional Municipality of Durham 5.0 Analysis Periodically the City analyzes the cost benefits of owing versus leasing over a period of three to four years. Finance Services has undertaken a detailed review to assess the quantitative and qualitative options to determine the optimal savings point. 5.1 Own Versus Lease Quantitative Comparison The following chart is a comparison of owing versus leasing computer hardware over a term of three and four years. The data below only represents the pricing for one year of replacement cost. Own Equipment Acquisition Cost $456,050 $472,550 Loss of investment income $14,588 $20,260 Total Acquisition Cost $470,638 $492,810 Lease 3 year 4 year 3 year 4 year Total Leasing Costs $440,977 $493,

3 Page 3 The following chart outlines the resulting savings / (deficit). 3 year 4 year Savings / (Deficit) variance own versus lease over each leasing cycle ($29,661) $915 Percentage residual necessary for break-even 6.5% -0.19% Chart Notes and Assumptions: Equipment acquisition costs is based upon 2014 pricing data Equipment is based upon a standard equipment level and has not been upgraded to support a fourth year Four year equipment costs includes a one year extended warranty Loss of investment income is calculated using 1.05% (based upon current market rates for High Interest Savings Accounts Net HST is included in all calculations No residual costs have been included The financial analysis does not indicate a material risk to the organization when comparing lease versus own and three versus four years. 5.2 Own Versus Lease Qualitative Comparison In addition to the quantitative analysis, a qualitative comparison of owning versus leasing is equally important, especially in dealing with computer equipment and the speed at which technology advances. Advantages of Owning: Flexibility Owning creates flexibility in retaining the equipment for longer than the duration expected. For example, the City could acquire equipment with the intention of retaining three years but can reassess at the end of the third year and extend the equipment for an additional year (based upon technological advances). Ease of owning Leasing can be complicated and cost the organization more in the long run, if not negotiated and time frames defined properly. Disadvantages to Owning: The initial investment outlay may be too much for the City a cash outlay will be required to own versus a streamed method of payment with leasing. Equipment obsolescence if the equipment becomes outdated before the refresh date then the City must try and dispose of the equipment at a residual value that does not create a loss, which may be difficult. 128

4 Page 4 Advantages of Leasing: Leasing keeps equipment updated based upon technology advances it may be beneficial to lease rather than own. Predictable monthly costs with leasing the costs are structured for the term of the lease and no additional investment is required. No upfront costs with leasing there are generally no upfront costs. Disadvantages of Leasing: Not cost effective in the longer-term leasing generally becomes more expensive than owing in the longer term. Locked in generally a lease is locked-in for the duration of the lease. Cancelling the lease may cause severe financial penalties. 5.3 Risk Analysis Based upon the qualitative analysis buying over a three year period can create a $29,661 risk to the organization over each leasing cycle. Essentially if the City disposes of the equipment at the end of three years the disposal (residual) amount must equal $29,661 in order to break-even (on a own versus lease model). The mitigation to this risk is that the City has the flexibility to retain the computer equipment for an additional year with no financial risk. The technology market advances so quickly that there is a risk of retaining obsolete equipment for a longer period simply to satisfy the financial requirements. Although, this risk can be mitigated with acquiring an increased level of computer hardware, the analysis in this report is based upon a standard level of computer equipment. 6.0 Financial Implications The analysis within this report requires a total capital reserve of $1.250 million to be created over the next five years to allow for the acquisition strategy to be undertaken. An annual budget allocation of $250,000 per year over 5 years, in conjunction with a phased in lease savings would allow the organization to commence a buying strategy in fiscal Once the initial investment is accumulated, the program will be self-sustaining going forward using annual lease payment savings. The recommendation to switch to owing versus leasing and the associated financial implications should be reflected in the Financial Strategy with implementation commencing fiscal

5 Page Relationship to the Oshawa Strategic Plan This report meets the Oshawa Strategic Plan objective of Accountable Leadership by ensuring respect, responsiveness and transparency. Stephanie Sinnott, Executive Director Finance Services/Treasurer, City Manager's Office 130