An effective leasing strategy requires the right combination of software and business processes.
Roger Heins knows just how chaotic lease management can be. The assistant treasurer for Allegheny Technologies Inc., a Pittsburgh-based manufacturer of stainless steels and other specialty alloys, checks off a list of challenges companies face in this area: Review processes for new leases can take weeks. Individual business units that negotiate their own leasing deals often agree to terms that are completely different from those received by other divisions within the organization. And finance sometimes has no idea what the company is leasing enterprisewide.
"Most companies struggle to manage various assets, and leased assets magnify the challenges," observes Tom Ryan, Chicago-based vice president of value chain research with the Aberdeen Group, an industry analysis and consulting firm.
It's no small issue. According to the U.S. Department of Commerce, nearly one-third of the $883 billion worth of equipment companies acquire annually is obtained through leasing agreements. Over the last decade, the dollar value of corporations' equipment leases has doubled as businesses have sought to enhance operational flexibility; improve liquidity; transfer asset-related risks, such as technology obsolescence; and reap tax benefits by keeping assets off the balance sheet.
When it comes to asset management, Heins believes, it's best to run a tight ship. So in May of this year, Allegheny Technologies implemented a capital expenditure finance management system from Captara (formerly PureMarkets) that enables it to track leases on hundreds of items -- including trucks, phone systems, IT assets and manufacturing equipment -- in the company's facilities throughout the United States. "Today, we know what leased assets we have," Heins reports. "We're in a far better position to make good decisions and manage the resources effectively."
Allegheny Technologies is hardly alone. More and more organizations are discovering that a bit of visibility into leasing agreements goes a long way toward improving financial and operational results. "It's all about managing documents and grabbing control of processes," says Terry Nystrom, senior vice president of San Francisco-based Captara Corp.
Developing a focused leasing strategy is essential. "Without a strategy in place, companies are at financial and legal risk -- particularly in regard to Sarbanes-Oxley," notes Ryan. Businesses that adopt a well-conceived leasing strategy can trim costs, improve service levels and reduce their administrative burden.
While big-ticket items such as vehicles, capital equipment and real estate have long been a part of the leasing picture, companies' use of leasing arrangements has greatly expanded in recent years to encompass a variety of smaller assets such as telephones; computers; gas cylinders; and the bins, baskets and carts used in manufacturing processes.
However, as leasing has flourished, administrative headaches have multiplied. Heins will vouch for that. Before Allegheny Technologies implemented the Captara system, its lawyers, tax experts, insurance specialists and treasury analysts typically required weeks to review and approve a new lease document.
In addition, the business lacked a central mechanism for managing its portfolio of leases holistically, so it sometimes missed opportunities for negotiating the best possible pricing. And it experienced difficulty in monitoring lease expirations; more than a few times, the company found itself at risk of continuing to make payments after a lease had expired.
No longer. The new Web-based system has greatly enhanced visibility into Allegheny Technologies' lease portfolio. When one of the company's seven business units issues an RFP for a leasing arrangement, the software generates standardized documentation for Allegheny Technologies and for the lessor. That improvement has trimmed the review process to a few days.
Plus, the new system enables the company to compare leasing rates among vendors. As a result, Allegheny Technologies has saved between 5 percent and 10 percent on its overall leasing costs, Heins says. That includes about $60,000 that it saved on one capital equipment lease.
The software also helps Allegheny Technologies meet critical Sarbanes-Oxley requirements centering on lease obligations and amortization. It creates a managed, visible process that captures, at the time of origination, all essential information for both balance sheet and non-balance-sheet characterization.
For many large companies, leasing is an essential part of everyday business. The need to respond quickly and effectively to the marketplace's rapidly changing demands mandates a tightly defined asset management strategy.
At Associated Food Stores Inc., a Salt Lake City-based wholesale grocery cooperative distributor, meeting the needs of more than 600 independent supermarkets throughout an eight-state region sometimes stretches resources to the limits. On any given day, the company's 600-plus acre distribution facility in Farr West, Utah, handles hundreds of trucks and trailers. During peak demand times, Associated Food Stores may need to supplement its owned transportation assets by leasing as many as 50 additional trucks.
"If we are unable to track assets and understand demand, it translates directly into an inefficient use of resources," says yard logistics manager Tim Van de Merwe.
Since 2001, the company has used a wireless real-time locating system (RTLS) from WhereNet to locate, track and manage transportation assets and associated equipment, such as refrigeration units, within its distribution center in real time. Owned assets are equipped with permanent radio frequency identification (RFID) tags. Leased assets receive a temporary RFID device while they are at the facility.
Based on the data the RTLS system provides, the company can vary its fleet capacity dynamically by contacting its equipment suppliers, which deliver or pick up leased trucks and trailers within 24 hours. The tool "has transformed the way we do business," says Van de Merwe.
The results are impressive. By managing its resources more effectively, Associated Food Stores has cut its trailer-leasing costs by an average of $800 per month per leased unit, and it has reduced the average number of trucks it leases each month from 92 to 62. Plus, workforce reductions and more efficient use of fuel have saved the company hundreds of thousands of dollars a year. The software investment paid for itself in about six months.
For organizations with an extensive portfolio of leases, effective contract management is a major challenge. It's not unusual for a large enterprise to have anywhere from 10,000 to 50,000 contracts in effect at any given time. Asset managers sometimes find themselves sifting through multiple versions of the same contract -- and discovering that nobody knows which version to use for future agreements. Fueling the frustration, piles of paper and documents get passed back and forth between departments, further bogging down contract management activities and ratcheting up costs.
Peggy Biddison, vice president of marketing for Accruent, a Santa Monica, Calif.-based provider of contract management software, describes the problem as "death by a thousand paper cuts." She notes that "a few hundred dollars here and there doesn't seem like a lot, but across an enterprise it adds up to tens of thousands, even hundreds of thousands, of dollars each month."
Contract management applications integrate with an organization's systems and databases to provide a strategic view of its lease portfolio. These tools also enable finance executives and asset managers to drill down into their contract data in order to view critical terms, contractual commitments and lease expiration dates, giving the enterprise much greater visibility into the costs and benefits of its leasing program.
Contract management is a core concern for The Coffee Bean & Tea Leaf, the largest and oldest privately held chain of specialty coffee and tea stores in the United States. The Los Angeles-based company, which has 275 retail operations worldwide, leases much of the equipment in its stores. And it must maintain tight control over its real estate leases. Without effective monitoring, "we're in a position to miss critical deadlines and expiration dates," says Paul Goldman, vice president of real estate and construction.
The company recently implemented cmSuite, a contract management system from Accruent that enables it to view key lease information through a Web browser. Among the data the software can track: expiration dates, contract renewal option dates and prices.
When a lease expiration date approaches, the system delivers an e-mail alert to assigned managers, who can then ensure that the retailer is negotiating optimal terms with its lessors. "About 99 percent of the work is done up front," Goldman explains, "so we are able to concentrate more heavily on strategic issues and avoid the anxiety of manually tracking leasing information and deadlines."
Plus, the new system integrates with The Coffee Bean & Tea Leaf's enterprise resource planning (ERP) suite, so managers can combine lease information with operational data to generate detailed analyses and reports. The company plans to add support for its capital equipment and vehicle leases within the next year or so.
Successful lease management initiatives start with the CFO, according to Rod Hurd, managing director of Montgomery Street Financial Services LLC, an asset management services provider in San Francisco. He emphasizes the need for a partnership between the finance side of the business and the operational side. "There is a tendency for both these groups to operate independently of one another," he notes. "Once the CFO finds out that operations has already pulled the strings on an acquisition, it is too late to manage a lease optimally. Too often, the silo phenomenon undermines a company's leasing strategy."
Yet CFOs aren't always familiar with the intricacies of leasing, Hurd cautions. "They may have experience with the financing side but not with the asset side of the process. What at first looks like an attractive agreement might prove to be a problem, depending on how quickly the lessee needs to swap out the equipment and [on whether] unique needs exist."
For CFOs tackling lease management issues for the first time, the learning curve may be steep. But the potential gains justify the effort. When finance executives know how many leases their organization holds and the specific terms of those contracts, they can achieve greater insight into this often-neglected area of asset management. They can more easily weigh the factors that enter into buying and leasing decisions, and they can help the enterprise to use its cash and credit to maximum advantage. Plus, they can ensure that the business avoids noncompliance with Sarbanes-Oxley.
"If companies are looking for truth in numbers, they must put effective solutions in place," says the Aberdeen Group's Ryan. "Excellent documentation translates into sound financial practices."
5 Steps to Better Lease ManagementHere's how to get the most out of your leasing strategy: 1. Consolidate your view. Without a holistic view of all of the leases that your organization's business units and departments have signed, you can't ensure that your company is negotiating the best terms or taking advantage of volume pricing. Consider using lease management or contract management software and capital expenditure finance management systems that provide a companywide snapshot of leasing activity. 2. Focus on contract management. No other aspect of leasing presents challenges as vexing as those that arise from attempts to manage hundreds or thousands of contracts. Contract management systems help companies abstract and index their leases, greatly enhancing visibility into critical terms and conditions. In addition, these tools enable a company to pull data from current agreements and use it as a boilerplate for future deals, saving time and money. 3. Tie lease management systems into enterprise software. Companies can realize significant gains by integrating their lease management systems with their enterprise resource planning (ERP), credit management and cash management tools. With the appropriate software connections, it's much easier to monitor constantly changing enterprise needs. 4. Create guidelines -- but don't micromanage. It's important to balance the cash and credit requirements of the organization with the practical realities of running a business. CFOs should play a key role in setting policy and analyzing deals, but they shouldn't dictate every leasing decision. As Rod Hurd, managing director at Montgomery Street Financial Services LLC, points out: "There might be operational issues that make leasing an unattractive option." 5. Emphasize documentation. It's always wise to keep comprehensive records of leasing transactions for business purposes, but the accounting scandals of recent years -- particularly those revolving around off-balance-sheet financing -- and the passage of Sarbanes-Oxley have made accurate recordkeeping an absolute necessity. |