Seeing the Big Picture

How does TCO (Total Cost of Ownership) factor into equipment financing decisions?

When considering leasing your equipment, it's important to keep the big picture in mind.

Key Takeaways
  • The total cost of ownership includes many different parts – with services and maintenance contracts at the forefront and encompasses software updates to oil changes for fleet vehicles.

  • Businesses are figuring out how to better handle technological operational assets and bundling these assets into transactions. The result: offering customers a seamless product complete with leasing and service on the same invoice.



The big picture includes the total cost of a solution, above and beyond the thing itself— services, maintenance contracts, and all those extra pieces that turn the piece of equipment from a dumb box into a smart, connected machine. It also includes understanding the opportunity cost. Will this machine replace a less efficient machine? What happens to my business if I don’t have this equipment? And if I do have it, what other costs are involved with running it?
Larry Signorelli is certainly comfortable with the big picture, coming out of Ernst & Young’s Corporate Finance Consulting practice and ending up as CFO of The Vane Brothers Companies. Vane Brothers is an East Coast firm providing marine transport of petroleum products with its fleet of tugs and barges.
When considering adding vessels, Signorelli says TCO—total cost of ownership—is clearly part of the transaction’s bottom line: “We forecast everything, right down to the bank conveyance. We pretty much know all the costs for the vessel. We know the cost to man it. We know the cost to maintain it, et cetera. We’re forecasting the full P&L, all capital investments we make.”
Jim Schatz, a VP and Relationship Manager with GE Capital, provides an example of how TCO can influence equipment decisions: “A good finance officer will look at two trucks that are five years old, and will say, ‘Our maintenance costs last year on these trucks was $10,000, and we were averaging 4.5 miles a gallon. If we get a new truck, the warranty will cover the maintenance costs. Therefore, those costs will go away, and we’ll have a payment of $1,900, but we’ll also get 7 miles a gallon versus 4.5 miles a gallon.’” 
But the big picture includes more than just the cost of the asset itself, according to Jim Jones, CFO and COO of the food service equipment supplier Edward Don. Jones puts it this way: “Operational assets are becoming more technology things aspeople are figuring out how to do it better and faster.”
Which means that, these days, maintenance costs are just as likely to include software upgrades as they are to include oil changes. Jones explains, “When somebody says, I’m putting in a million dollars of laptops, I say, Okay, that is great. Now tell me about what software is going on it. What is the software maintenance? What is the help desk support system?”
Tom Moosey, a long-time marketing manager with GE Capital, agrees that technology is changing the face of financing decisions: “Especially with things like copiers, information technology, or medical equipment, software and services are becoming a bigger part of the deals. But there is more software and services within all kinds of equipment. There are the diagnostics that you use to measure performance of your trucks and trailers. There are telemetric devices that you put in your fleets of cars. Even for something as basic as machine tools and printing presses, you are finding front-end systems that run them. People aren’t just standing at the machine and cranking things out anymore. They run it via a control network.”
As a result, Moosey notes, “we now have theability to bundle all of those things into a transaction and offer our customers a seamless product, with leasing and servicing all on the same invoice.” 
In the end, concludes GE Capital’s Schatz, to strike the right balance and figure out what is best for the company over the long term, you’ll find it invaluable to have that broader perspective.

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Next up: What do I need to know to account for lease-vs.-own decisions in my company's financial strategies?

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