Given the cost and complexity associated with implementing an end-to-end lease management system, leasing companies are reluctant to pull the plug on old legacy systems, even if an upgrade to newer technology is long overdue. This is an even bigger challenge for those companies with highly customized legacy applications, naturally making them gun-shy about interrupting day-to-day operations to put new systems in place and retool key business processes.

To the extent that the legacy applications are truly getting the job done, there is probably not much of a business case to be made for replacement. But at what point are legacy applications no longer suitable for the business? One key barometer is the amount of work being done within the legacy applications, in comparison to the amount of work being done outside the system.

Often times, the existing legacy system never had certain functionality, was limiting in what the business required, or the business model and its requirements might have changed over time necessitating adjustments to how the leasing system was used in a given business process. An unfriendly interface that is too time consuming to utilize might have required other forms of workaround, especially if the “front end” and “back end” are stand-alone systems and are not seamlessly integrated. In any case, for many leasing companies with older legacy systems, devising workarounds or how to do something outside the system is a normal part of everyday business. In fact, some of the most valuable resources in the company are those people expert at designing workarounds. These enterprising individuals — when unable to perform a process or obtain needed data from existing systems — compensate by creating idiosyncratic solutions to overcome the obstacles placed in front of them. Every time we undertake a new conversion we find many interesting workarounds requiring automation.

In one recent example, due to the inability of their existing lease management system to track amortization of non-recourse notes associated with the lease transactions, users were forced to track the amortization of each non-recourse loan in an Excel spreadsheet. Obviously this meant that they were managing this process outside of their core system. Users, therefore, had to manually book journal entries every month to reflect the proper interest accrual and expense in the general ledger. Additionally, from a servicing standpoint, invoices sent to the customer were required to have different “remit to” details for the portion of the lease payment due to the lessor and the respective non-recourse debt holder. Since the system could not automatically generate an invoice with two remittance addresses, the users had to manually create invoices every month for every one of these transactions.

Another example of a tedious and time-consuming workaround occurred because the existing lease management system was not capable of handling the partial sale or disposition of assets for leases that had multiple assets on the same schedule. Because the existing systems did not track asset-level details such as equipment descriptions, payments, taxes, net income and depreciation, partial terminations required calculations to be performed outside the system. This workaround also caused additional workarounds downstream. The existing system automatically created journal entries, which were exported to the general ledger system; however, due to the complexities of asset management, journal entries were often incorrect. Either the business users had to enlist IT department personnel to intercept exported files in order to make manual adjusting entries before the import began, or go into the general ledger to manually fix the errors.

Yet another example involved managing lines of credit. Because the front end and back end were on separate databases, users could not be certain of the customer’s total exposure and had to track the available balance on the line outside of the lease management system. As equipment was delivered, users manually updated the available balance in an Excel spreadsheet prior to approving payment. If the credit approval and pricing limited the investment in soft costs or certain types of assets, this also had to be tracked in a spreadsheet outside the system.

In addition, the calculation of interim rent was not automated. Every time an asset was delivered, another set of spreadsheets was required to track the days between funding and lease commencement and to manually create invoices. Like many workarounds, all of this was a manageable process initially, but had now become a huge effort as business increased and the number of un-commenced leases grew over time, with some individual schedules housing hundreds or even thousands of assets.

By definition, workarounds are inefficiencies that have been created as part of the day-to-day operation of a business; and it is not uncommon for them to become an ingrained part of how things are done. Often, workarounds are intended to be short term in nature. But in practice, users often find themselves living with workarounds for very long periods of time. This translates into serious consequences for the business such as additional costs to hire and maintain extra headcount, critical business issues that are missed or fall through the cracks, as well as information that may be inaccurate or not available to the entire staff because important data is being housed in spreadsheets or alternative databases stored locally on various employees’ machines. Not to mention other issues for the business such as the negative impact on employee morale and job satisfaction. The initial creative thrill of developing a workaround and meeting the goals of the business wear off quickly. Employees inevitably become frustrated performing repetitive tasks that could obviously be automated with the proper analysis and investment.

What is the real cost of workarounds? To the extent that a workaround is devised to support a specific task or project that only needs to be performed once, the cost may be minimal and justifiable. But what if the workaround is required to support a task or process performed on a recurring basis? In addition to the cost to devise the workaround, we now have to factor in the additional cost of the incremental time to actually perform the task using the workaround (versus an automated solution), plus the incremental cost resulting from downstream processes negatively impacted, multiplied by the number of times the task is performed.

Of course, that calculation assumes that the workaround generates results with the same level of accuracy as an automated solution produced by a software application. Otherwise, we have to factor in the cost of each error that needs to be corrected. It also assumes that the workaround generates results in a timely and predictable manner. If not, we have to factor in the impact to the organization for workarounds that negatively impact service level agreements or the ability of the organization to react quickly to an impending risk, or have the most accurate data on which to base a crucial business decision.

In difficult economic times it may be reasonable and necessary to reduce or eliminate capital expenditures and rely on users to develop workarounds to compensate for the inefficiencies of existing systems. If the staff has the ingenuity to develop creative workarounds in order to meet the goals of the business, they are to be commended. But in the long run, workarounds are a costly alternative to a robust and flexible end-to-end lease management system. Assuming that there is a real opportunity cost — that employees could indeed be doing something of equal or greater value in lieu of workarounds — it certainly behooves the business to question itself. It just may start to make sense to identify all the workarounds that have been devised over time and invest in the automation of as many of these tasks as possible.

With too many competitors chasing too few deals and with less appetite to go back down the risk curve, it seems obvious that leasing companies will be under increasing pressure to identify new markets and products and find more efficient ways of doing business in order to increase the bottom line. Today’s business climate demands that leasing companies operate in the most efficient manner possible. For many leasing companies, the reluctance to let go of legacy applications may no longer be an option.

Jim Humphrey is vice president of Sales and Marketing for Odessa Technologies, Inc., a global provider of lease management software technologies. Prior to joining Odessa, he worked for GE Capital for over 18 years; for Genpact, a global business process outsourcing firm originally started by GE; and co-founded a software company that created one of the mostly widely used front end systems in the leasing industry today. Humphrey graduated with a Bachelor’s of Science in Finance from the University of Connecticut.

Madhu Natarajan is the chief executive officer of Odessa Technologies, Inc. Natarajan has been with Odessa since 1998 and brings extensive experience in software technologies, lease management and lease accounting. He has spoken on a wide range of leasing topics at various national and international forums. Natarajan graduated magna cum laude from Monmouth College with a degree in Computer Science and minors in Business Administration and Accounting.