Leasing Gradually Gains Momentum in Government

Leasing Gradually Gains Momentum in Government<@VM>Been There, Done That<@VM>Vance AFB Buys Into Leasing Concept

Harry Martin

By Nick Wakeman

Leasing information technology products, which broke onto the federal procurement scene in 1997, has not attracted much attention beyond a handful of companies and contract vehicles.

The General Services Administration's tally for leasing PCs, servers and other computer equipment on its schedules was $20 million for fiscal year 1997. That number stayed the same in fiscal 1998, which ended Sept. 30.

"Leasing has been a disappointment," said James Bowdren, deputy director of GSA's information technology acquisition center. "But we expect it will increase in the future."

In fact, the pace has picked up in fiscal 1999, with about $12 million in leasing business done in the first quarter, which ended Dec. 31, according to GSA. And the concept will catch on as agency officials get better acquainted with leasing's benefits, industry officials said.

The use of leasing marks an attempt to bring more commercial practices to the government market through procurement reform. Leasing can be an especially good tool for agencies that face a budget crunch and are trying to get a handle on the costs of maintaining desktop computers, industry officials said. Leasing also allows for quicker deployment of new systems, because the agency does not have to pay full price upfront for the equipment, they said.

"It is an efficient way to stay on top of technology," said Harry Martin, president of Intelligent Decisions of Chantilly, Va., a reseller and PC manufacturer. Too often, he said, agencies must use an incremental approach over several years to field a new system.

"Leasing allows you to do it all at once and keep everyone on one platform," Martin said.

Leasing also can be a tool for agencies that only want to outsource parts of their desktop services. For example, if an agency is satisfied with its in-house help desk and network services but wants to turn over maintenance of the computers to a contractor, it can do that with leasing.

"Leasing can be a trimmed down seat management option," Martin said.

Today, GSA has 28 vendors on the IT schedule that can offer leasing. Among the busiest are Dell Computer Corp., Force 3, IBM Corp., Intelligent Decisions and Unisys Corp., although GSA would not release leasing figures for those companies.

Electronic Data Systems Corp. holds a GSA leasing schedule but is planning on dropping it, said Stephanie Ambrose, account manager of governmentwide acquisition contracts for EDS.

"We just didn't see much interest in it," she said. If EDS needs a leasing component as part of a solution, it will add a partner that can provide a leasing capability, she said.

Nearly all new government contracts allow for some form of leasing, government and industry officials said, even if agencies do not use the option.

Leasing is being offered through both Army Leasing 1, a $50 million contract awarded in September 1997, and the Transportation Department's recently awarded $10 billion Information Technology Omnibus Procurement 2.

While numbers for the overall leasing business on GSA may be unimpressive, the amount of business done to date by Dell surprised company officials.

"It has become more important than we expected," said Robert McFarland, vice president and general manager of Dell Federal in Austin, Texas. "We have done three times the amount of business we thought we would."

Although McFarland declined to break out the company's revenues from leasing, he said the number of PCs leased since 1997 has been more than 10,000 — far more than the thousands officials envisioned.

Dell often gets approached about leasing, but "nine times out of 10 the customer decides to purchase," he said.

One reason for leasing's slow start is the lack of knowledge about what it means and how it can be used, said Alan Bechara, vice president and chief operating officer of Comark Federal Systems, a reseller in Chantilly, Va. About $9 million of Comark's $53 million in 1998 revenue came from leasing, he said.

"We've done pretty good, but compared to what I'm hearing in the market, we may be the exception," he said.

Most of Comark's leasing business has been through contracts with the Census Bureau and the Department of Housing and Urban Development. Comark also had a head start on its competitors because it won a leasing deal in 1996 before leasing was available on the GSA schedule, Bechara said.

But while Comark's leasing program has been successful, how much it will grow is an unknown, he said.

"I don't know whether it will continue to grow beyond the 17 percent" of Comark's business, he said.

Short-term projects that need their own computers and networks, such as aiding with the census, seem to be the most common use of leasing, said Robert Dornan, senior vice president of market research firm Federal Sources Inc. of McLean, Va.

"If you need 50,000 PCs for one year, it maybe makes sense to lease them rather than buy them," he said. "I really think there is just a marginal application for leasing in the government."

But supporters of leasing remain unbowed.

Educating customers continues to be an important element in selling the concept to the government, said Kevin Adams, senior director of governmentwide acquisition contract programs at Government Technology Services Inc. of Chantilly, Va., a reseller and systems integrator that had about $486 million in sales in 1997.

"A lot of people don't understand how leasing works: when you should buy and when you should lease," he said. "But it is an important tool for us because it is another way for us to reach customers and tailor solutions for them."

Adams said GTSI's leasing business has grown, but he declined to release any figures. It began offering leasing in 1997 on the GSA schedule and the Army Leasing 1 contract. Its major leasing customers include the Army, the Education Department and the Neighborhood Reinvestment Corp., a non-profit corporation formed by Congress in 1978 to revitalized older, distressed communities.

The year 2000 date code problem has been the motivation for the Education Department, which has leased 2,000 PCs for three years, he said.

"Leasing hasn't been a silver bullet, but it is another tool customers can take advantage of," said Intelligent Decisions' Martin, who declined to release figures on his company's leasing business.

Intelligent Decisions' overall business in manufacturing its own PCs and reselling other manufacturers computers rose from about $62 million in 1997 to $131 million in total 1998 revenue, he said. Its leasing customers include the General Accounting Office and the Marine Corps.

Contractors involved in seat management projects, where agencies outsource the maintenance and management of their desktop computers, must have some sort of leasing capability either in-house or through a partner, said Edwin Smith, program manager for Science Applications International Corp.'s seat management business, based in San Diego.

Under a typical seat management contract, the agency turns over to the contractor control of its desktop computers as well as the back-end services, such as help desks, network support and peripherals. The agency then will pay a monthly fee for a level of service. For the contractor to guarantee that service, it must have control of the desktop computers, Smith said. By leasing the computers to the government, the contractor has control over system and desktop configuration, which helps it maintain levels of service, he said.

Relatively little leasing was done under the Transportation Department's ITOP 1 contract because of its 25 percent ceiling on product sales. However, the new contract contains no ceiling, government officials said. The ITOP 2 contract, awarded Jan. 14 to 25 companies, thus has greater flexibility for leasing.

"I think there is a definite possibility for a growth of leasing under ITOP 2," said Dell Berry, manager of the ITOP special project office. But there is still question over how big the leasing market will get, he said. "A lot of IT problems just aren't leasing problems," he said.The 71st Flying Training Wing at Vance Air Force Base in Enid, Okla., is a convert to leasing, replacing all of its desktop computers and its networking backbone with leased equipment.

"This was a complete paradigm shift for us," said Capt. Mitchel Butikofer, communications squadron commander for the training wing.

"When we started looking at it, I didn't think it would work," said Butikofer, whose wing provides flight training for the Air Force and Navy.

Since September 1998, the training wing has leased about 180 desktop computers from Dell Computer Corp., Round Rock, Texas. It is adding about 30 computers a month, with plans for more than 400. By the end of 1999, the training wing will also be leasing the routers and hubs for its networking backbone, he said.

Air Force officials are talking to vendors such as Micron Technology, Boise, Idaho; Gateway, North Sioux City, S.D.; Compaq Computer Corp., Houston; Hewlett-Packard Co., Palo Alto, Calif.; and Cisco Systems Inc., San Jose, Calif., about leasing PCs, workstations, servers and networking equipment, he said.

Cost was a deciding factor in turning to leasing, Butikofer said. Over a year ago, he began working on a plan to update the wing's computer system, he said.

"We had too many islands of haves and have nots," he said. But to buy a new standardized system for the entire wing would cost too much, so leasing became the only viable alternative.

Leasing also is helping the wing address year 2000 concerns by bringing on new computers quickly, Butikofer said. He declined to say how much the service is spending to lease the computers, but said the wing will save about $500,000 in the first year for the first three years.

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