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To lease or not to lease
The steadily improving price and performance of storage as well as the widespread adoption of three-year warranties have dramatically changed the storage leasing equation. Leasing traditionally saved money because companies ended up paying only for the value of the equipment they actually used. The difference between what they ended up paying and the full price of the product is the residual value that remains at the end of the lease. Today, the residual value of a piece of storage at the end of a typical three-year lease is effectively zero. Says Gartner's Krischer: "There is no longer any financial value in leasing."
In his report, Krischer explains: "The standard lease scheme is far from being suitable for a situation of frequent upgrades and short equipment life cycles ... This worked in an environment of 10% to 15% improvement of price and performance per year, but this no longer exists for most storage subsystems." Today, storage systems experience 40% price and performance gains per year, according to Gartner.
Still, many companies continue to lease their storage. "We realized that there is no residual value left after a three-year lease, but we didn't want to be stuck with something we'd only have to try to sell ourselves," says Michael Sink, IT operation manager at Kichler Lighting, Cleveland. The company acquired a new Clariion CX600 from EMC Corp. on a three-year lease. Sink negotiated the price based on what he felt was fair for three years worth of business value. "At the end of the lease, we're free to look at the possibility of doing new things."
TSYS also leases its storage. The company currently operates 250TB of mainframe storage, primarily from Hitachi Data Systems Inc. (HDS). "We don't worry about the residual value. We'll even do lease extensions," says Rogers. However, he makes sure the three-year warranty runs coterminus with the lease.
Even if the classic residual value-based rationale for leasing no longer applies, there may be other valid reasons to lease storage, adds Kerns, such as simply not having to spend the cash upfront.
Six smart negotiating guidelines
With your storage plan in hand and the knowledge of how your company will pay for the new gear--be it leasing or outright purchasing--the fun starts: the negotiation. Pay attention to the timing, use multiple vendors, leverage second-tier vendors, avoid vendor lock-in, negotiate software separately and take advantage of new pricing and licensing models where appropriate. There's no secret formula that works for every organization, so the following strategies should only be used as guidelines.
No. 1: Timing is important. As described earlier, some vendors--particularly public companies--are susceptible to pressure as they scramble to meet end-of-quarter and end-of-fiscal-year sales goals. Buyers who can time their purchases to hit the last week of a quarter or fiscal year may cut an unusually good deal.
However, some caveats should be noted. First, the purchase must be large enough to impact the vendor's financials, or at least the sales representative's quota. A $200,000 order isn't likely to cause even a ripple in a multibillion-dollar storage company. On the other hand, a small vendor or startup may bend over backward for an order that size.
Second, it's not easy to hit the timing on the button. Even with a multiyear storage plan, procedural delays may skew the timing. The window is small, and if for instance, approval is delayed just one week, the opportunity may be lost.
"I try to keep the vendors' fiscal calendars in mind, but you have capacity needs, so you can't always wait," says TSYS' Rogers. Still, "I've gotten my best deals from Hitachi just before March. For IBM, it's the end of the year."
Kichler Lighting purchased its new EMC system at the end of the year, which may have helped it get a good deal. "But it was just a coincidence. We had an immediate need," Sink admits.
"We're too small to play the end-of-the-quarter or end-of-the-year game," says Richard Simon, senior system administrator at Giant Killer Robots, an Academy Award-winning visual effects boutique based in San Francisco. The company recently purchased a 4TB network-attached storage (NAS) device from BlueArc Corp., San Jose, CA.
"We played off the recession--everyone was cutting their prices to sell us a box," Simon reports. After talking with EMC and Network Appliance Inc. (NetApp), the company bought the storage from BlueArc, priced considerably lower than the other two companies. Despite all the talk of an economic recovery, it seems buyers can still count on a recession hangover to drive a better deal.
This was first published in March 2004