As competition forces financiers to continue cutting costs, equipment lessors are debating the benefits of acquiring new lease management systems versus retaining their legacy systems. The irony of the situation has not gone unnoticed. New, asset-based lease management systems can better track and manage hard assets, such as construction and transportation equipment, thereby increasing back-office efficiencies and, potentially, profits. Yet, ongoing pressure to cut costs is forcing many companies to delay or downgrade IT strategies that would generate significant savings in the long run because they may create new costs in the short run.

One might wonder why firms whose raison d’être is to lease and finance equipment cannot find fiscally acceptable ways to acquire new IT systems of their own. But the issue is not that simple. Protectionism among IT staff and disagreement between management and IT departments over choice of vendor and approach are just a few of the obstacles that can complicate what at first seems a black and white issue.

Recently, these struggles have produced a logjam in which some companies are doing little to nothing, fearing cost overruns on new implementations while hoping their existing systems will function well enough to meet the demands of new accounting regulations and other changes to doing business. This article examines some of the pros and cons of each approach and seeks to provide readers with guidance for making an informed decision.

Advantages of Contract-Based Legacy Systems
The primary benefit of a legacy system is that it is already in place. Staff members have been trained to use most or all of its features, and are either doing so correctly or have developed workarounds that may not be efficient, but get the tasks done. And in fairness, those who complain that the system cannot meet today’s performance demands for detailed reporting and asset tracking may not be familiar enough with the system’s capabilities to know unequivocally that these tasks cannot be done.

Secondly, a legacy system has organizational roots. Company procedures and processes have been created to dovetail with its applications, and IT personnel are usually proficient at maintaining operations. As a result, the system may experience little downtime and be perceived by the majority of staff as reliable and adequate.

Thirdly, legacy systems are adequate in most cases, particularly for those leasing firms whose primary business is conditional sales agreements or 10% buyout deals. In the absence of such adjustments as equipment upgrades, asset splits and partial returns, for example, most contract-based legacy systems can handle all back-end processes and meet current accounting and reporting requirements.

Advantages of Asset-Based Lease Management Systems
But recent shifts in basic accounting practices, such as the move to fair-value accounting and enactment of Sarbanes-Oxley (SOX), have provided substantial motivation for those firms with an active, residual-based business to acquire asset-based systems. The temporary reprieve from FAS 157 notwithstanding, these lessors must still track their assets both prospectively and historically to properly value residuals under SOX and the new fair-value rules. Many older systems cannot achieve this level of accounting detail.

Another consideration is that asset-based management systems can be customized to work in tandem with a particular business model. These modifications can result in the elimination of certain institutional processes, such as workarounds, and the addition of others, such as residual-setting tools and an LKE capability, both of which can heighten back-end efficiency by saving staff time that could be redirected to other tasks.

In toto, asset-based systems provide or support new features and capabilities that contract-based management systems were not designed to possess. In place of these capabilities, leasing firms develop workarounds that increase audit risk, use other applications that may be poorly integrated or un-integrated, or rely on outsourcing.

Outsourcing as an Alternative
Outsourcing, in fact, can be a viable option for firms unwilling or unable to invest in new lease management systems. An outside application service provider (ASP) may be able to perform noncore functions, such as system maintenance, support and troubleshooting at a lower cost, thereby freeing up headcount and allowing internal IT staff to focus on strategic initiatives. ASPs also may be able to handle and integrate multiple aspects of the lease process, either online or offline, removing the burden from the existing system and expediting credit review, documentation, funding and other processes that potentially lengthen turnaround time.

Several disadvantages to outsourcing are always mentioned, although most are more perceived than real. The most problematic of these is the supposed loss of control over customer data. Another concern is data integrity. If an outside source is given access to your database, for instance, and extracts, manipulates and reinserts specific data, there is a risk that portions of your data may be lost or changed inadvertently. Most of these concerns, however, can be allayed by rigorous analysis and vetting of the ASP, its safeguards and reputation.

Outsourcing also can affect your firm’s privacy policies and, barring this, jeopardize SOX compliance. Although quite small in most cases, the risk of compromising customer confidence and thus, relationships, is increased.

Challenges Accompanying New Platforms
Perhaps the most daunting exercise accompanying the acquisition of a new platform is distilling the plethora of systems and products available into a manageable collection of practicable solutions. After all, asset-based applications range from off-the-shelf, integratable add-ons to full-service IT solutions. And your firm’s revised IT strategy could involve keeping your legacy system while working with a vendor to create a fully integrated, front-end workflow and information path, starting with the company’s vendors and sales reps, and continuing through credit, pricing, equipment management, funding and servicing. Lessors are examining new front- and back-end systems to find those that align with their business models, operate more efficiently, and are scalable to accommodate future company growth.

Any time your firm invests in, or even considers a new lease management system, you should review current procedures and processes — not only to take advantage of new efficiencies and capabilities offered, but also to incorporate industry best practices. Although this may mean creating a new procedure manual, the productivity gains achieved through such a process are well worth the effort. To that end, all employees will require intensive training to ensure that processes are handled uniformly. It’s also wise to monitor system activity to prevent new workarounds from arising due to poor understanding of the new processes or simply a wish to avoid change.

Challenges Accompanying Legacy Systems
In addition to the risks already discussed, the most common problem that plagues legacy systems is defenestration of system capabilities. In this situation, employees who know the system best either leave the company, forcing remaining staff to cope by adopting shortcuts or alternative data paths; or, well-trained employees may train new employees only partially, resulting in the same compromises to system functionality.

Even when a legacy system continues to handle changing processes adequately, there is always the chance that new accounting standards or legislation will levy new requirements that the old system cannot meet. Although months or even years of notice may be given before the new requirements are enacted, leasing companies will still be forced to abandon legacy systems and the enormous investments in strategy and implementation that accompany them.

Conclusion
In addition to the specific risks associated with maintaining a legacy system or moving to a new lease management platform, both options face the risk of vendor viability. Firms must perform considerable due diligence on the prospective vendor, since the chance exists that the vendor will go out of business, discontinue its services, or be purchased by another firm that may take either of these actions. All one has to do is look at the recent acquisition and ownership activity in the industry to bring this point home.

Lastly, any legacy system in operation today will eventually fall short of company needs and regulatory reporting and/or accounting requirements. On the other hand, any new lease management platform must be painstakingly vetted to ensure that it will support the company’s business goals and produce the required return on investment. Acquiring any new system before performing all due diligence necessary will only heighten the risks that:

Adopting an IT strategy that considers the company’s future business requirements while addressing all current service and reporting needs as efficiently as possible helps ensure that your firm can remain a strong competitor as markets — and the accounting practices and principles they adhere to — evolve.