Leasing IT's Mainframe Future -- With an Option to Buy

Many mainframe customers -- perhaps as many as 80 percent -- lease their Big Iron hardware. How will economic uncertainty affect them?

By all accounts, IBM Corp.'s mainframe marketing strategy is a rip-roaring success. After a downturn late last year -- occasioned, IBM officials argued, by pent-up anticipation for Big Blue's then-forthcoming System z10 mainframe -- Big Iron sales surged back in the first and second quarters of this year.

Make that mainframe sales and leasing. The focus on outright sales of mainframe systems -- i.e., customers either buying Big Iron hardware upfront, or more often financing a purchase through the IBM or another lender -- tends to obscure another important kind of mainframe adoption: leasing. In today's climate of economic uncertainty, there are anecdotal accounts that leasing -- with automotive leasing as a bellwether -- is on the wane. Companies suddenly prefer to own their assets outright. Will a similar preference take hold in a red hot mainframe sales segment, and if it does, will this hamper mainframe growth?

Mainframe sales (a category that includes both outright purchases and system leases) are sizzling. "Revenues for System z increased 25 percent [in Q3 of 2008] compared with the year-ago period, where -- admittedly -- we had a bit of a downturn, mostly because of pent-up demand for z10 [which IBM introduced in January of 2008]. But [in Q3 2008] we posted double-digit growth in all geographies," says Karl Freund, vice president of global strategy and with IBM's System z unit.

"System z has seen quite a renaissance as customers realize the benefit of larger-scale consolidations and as they realize the benefits of putting applications and data closer together -- putting them on the same systems. These two things are driving demand."

Freund also talks up IBM's ability to meet that demand, courtesy of IBM Global Finance (IGF), which -- through January of 2009 -- is offering customers a no-money-down, interest-free entrée into Big Iron country.

No money down is nice, but consider this: no money down, no payments, and no interest until January of 2009, all with a comparatively small monthly payment. It's called leasing, and -- given the high (or comparatively high) -- initial acquisition cost of mainframe hardware and services, it's a hugely popular alternative, especially for Big Iron shops.

Industry watcher Charles King, a principal with consultancy Pund-IT, calls leasing the "most common form [of acquisition] in traditional mainframe shops." John Webster, a principal IT advisor with consultancy Illuminata, suggests that as many as 80 percent of Big Iron systems are leased.

With traction like that, it isn't surprising that -- after gobbling up the mainframe leasing practices of independent players such as Comdisco (an acquisition which took place nearly a decade ago) -- IGF is now the 800-pound gorilla of the technology leasing segment.

Leasing has a couple of big drawbacks. You don't ever actually "own" your hardware (although you can lease to own), and you're paying a premium relative to purchasing your mainframe system outright. Leasing also packs a bevy of perks, too. Think of it in terms of automotive leasing: many people who lease their cars don't have to pay for oil changes, and some don't even have to pay for scheduled maintenance. Customers who buy from IGF enjoy unrivaled selection in terms of extras -- including bonus (or low-cost) storage, software, or even services.

"They have some really interesting lease agreements that make them pretty attractive. It's somewhat similar to an automobile lease, where, as part of the lease agreement, a customer will typically get service and updating features included in that, where on the other hand these might have to be purchased extra if the system was bought outright," notes industry veteran Charles King. "IBM Global Financing also offers some really interesting features. For example, at the point where the system is ready to be retired, at no further cost they will come out and pick the system up and take it into a recycling center."

Illuminata's Webster thinks that IBM's mainframe marketing -- which (by hyping benefits such as an MSU "technology dividend") tends to emphasize the ROI or TCO advantages of owning Big Iron systems -- is missing the mark (see http://esj.com/enterprise/article.aspx?EditorialsID=2483). "Eighty percent of mainframes are leased, not bought, and [IBM] sell[s] the mainframe from an 'own it' perspective. That invites ROI comparisons to open systems, where the majority of systems are owned," wrote Webster, in a recent blog post.

Simply put, Webster argues, leasing is the approach that's most consistent with the mainframe's can't-miss value proposition -- i.e., as an IT services platform. "The essential financial statement that leasing makes is that you don't have to own the platform to benefit from its services," he continues.

Big Blue's emphasis on owning mainframe hardware, Webster adds, paradoxically plays to the strengths of the distributed systems model. "The reason that open systems servers are less-often leased is that they are smaller, more distributed, and less costly on a per platform acquisition cost basis. That kind of acquisition environment is not as good a fit with leasing, or for that matter a services model," he argues

Webster also points out that "the current financial climate is not one in which CFOs will like to continually add lots of small things to the capital acquisition budget. In fact, conservation of capital will be the dominant best practice for the foreseeable future. Indeed, one independent computer leasing firm I spoke to last week is seeing a huge uptick in potential business."

At first glance, an growth of mainframe leasing seems to fly in the face of a projected downturn in the leasing of durable assets -- such as cars. That, King points out, is an apples-to-oranges comparison. After all, there's really no analog to Moore's Law in the automotive leasing segment.

Furthermore, although demand for greater fuel efficiency can be a source of considerable market pressure, no manufacturer can credibly claim to double its fleet-wide fuel efficiency every 18 months. Each new generation of IBM's mainframe systems, on the other hand, is significantly more powerful -- and demonstrably more scalable -- than its predecessors. For some customers, that's all that matters, King says.

"For certain kinds of customers, [leasing] makes a great deal of sense. The type of customer where a lease would be particularly attractive is the sort who is maintaining as up-to-date or current a system as possible," he comments. Once again -- apples and oranges notwithstanding -- the car analogy might be most apposite: "If you're the sort of person who wants a new car every two to three years, then a lease agreement makes a lot of sense. If you're the sort of person who buys a car and drives it into the ground, it's not so great a deal."