I love my mom. But she's not always the smartest when it comes to making financial decisions. Case in point: Just last week, and without telling me, she leased a new Honda Civic.
I wish I had known she was going to do this, because if I did I would have strongly advised her otherwise. Leasing a car is rarely a smart financial move.
To get the deal done, she had to cough up a few thousand dollars in up-front fees (and got a ridiculously low trade-in on her 2006 Mini Cooper with less than 30,000 miles on it). She's now paying a monthly fee. She's still responsible for all the maintenance. And when the term ends in three years, she'll have to turn the car in. Leasing a car never makes good financial sense, particularly when you're buying Hondas, which last a long time and have a great resale value. She could've just as well bought the car and financed it with a low-interest bank loan. Then she would have been able to drive it forever. Ask any financial professional: This was not a great decision.
So why aren't we applying the same logic when it comes to our technology? I've written about this before. So here's another angle.
Say you're running an established business with 20 employees. Your server, which houses your primary business applications, is showing its age. You don't want to replace your applications -- they're satisfactory and the cost of migration is too much. So do you buy a new server or "lease" one in the cloud? There are plenty of options nowadays: Amazon's EC2, Rackspace, Microsoft's Azure, Dell Cloud Services or one of the myriad of cloud hosting companies. Many smart people in the IT field will tell you that it's a better long-term decision to move your data to the cloud. They generally give three big reasons:
• It's scalable. "The cloud offers enterprise redundancy at SMB prices," said Dave Sobel, director of partner community at Level Platforms (an AVG company). "Cloud solutions are built around the idea of robust, fully redundant, highly scalable environments, and then offered as a service. This kind of environment is expensive to build for an SMB, but available just on demand based on what is needed. Buying servers requires building a system that has the capacity for multiple years and all potential growth. Using a cloud system allows you to just purchase what you need."
• It's better protection. "With technology as it is today (mobile devices, wireless connectivity and industry/policy changes), it's a big challenge for a small business to keep up with all of the major issues associated with security, virus and data protection, and compliance/policy changes," Preston James, director of sales and business operations for the Dell Center for Entrepreneurs, told me. "Without being proactive with these key areas, a small business is likely to end up closing its doors or will have a very difficult recovery if something catastrophic were to happen to the business. You have to have the right people (specialists) and they have to be readily accessible to serve you today and also tomorrow as you continue to grow."
• The costs are known. "With the cloud, you will have a stable capital expense model, allowing you to manage your finances with complete transparency, which is a boon for small businesses," James also said. "The cost in the early stages will be very affordable, and as the business grows, the costs will likely scale with the business, and can be in alignment with the business growth, so it's not taking out a major chunk of the operating expenses to run the business."
It's all good. It's all true. Forbes contributor Louis Columbus did a great job rounding up all the recent cloud computing forecasts and the general consensus is: Cloud usage among SMBs is significantly growing. And no one's denying that cloud-based services are the future. I get it.
But still ... does it make financial sense this year to replace that old server by moving to the cloud? Isn't this similar to leasing that new car instead of buying? For most of my clients this year, I'm seeing the opposite trend. Like buying a new car, many of them are finding it's just plain cheaper to buy another server! Sure, there are all the valid reasons tech people give for going to the cloud. The dollars-and-sense reality to many small-business owners I know is that moving their business to the cloud makes about as much sense as leasing a car. Here's why. Buying a new server costs about $3,000-$5,000. Having a tech guy visit once or twice a month to apply updates, do maintenance and fix problems will cost another $5,000-$7,000 per year. Compare that to renting a server for about $100 per month per user (which is the typical cost of doing this today) for a 20-person company. That's $24,000 per year! And you still need the tech guy to monkey with your people's devices, troubleshoot connection issues, replace routers and address local security issues. Most small-business owners I know have been operating this way for years and (knock wood) don't run into major problems. The smarter ones, at the very least, make sure they've got a good redundant backup process going using both onsite media and inexpensive cloud-based backup services like Carbonite and Mozy (psst ... the really smart ones actually test their backup services at least monthly too!).
You may be a startup. You may have few IT resources. Your workforce may be spread out around the world. You may be scrapping your existing systems and migrating to a fully cloud-based application because of its features. Your operating model may be one that depends on outsourcing any process that's not mission-critical. You may not be able to qualify for financing. In these cases, a fully cloud-based system may be the best answer for you. The arguments made by Sobel and James make a lot of sense. But for many others, this may not be the case.
Because remember: The tech industry wants you to rent. For the same reason that the auto industry wants you to lease. As long as you're willing to take ownership of a server or a new car, then buying and owning means less money for them (and more for you) over the long term. Leasing a car may be easy and sexy but is usually not a good financial move over the same period of time. My mom doesn't get this, but I'll give her a pass because she's just a little old lady. How about you?
Gene Marks, CPA, is the owner of the Marks Group, which sells customer relationship, service, and financial management tools to small and midsized businesses.
Register or login for access to this item and much more
All Accounting Today content is archived after seven days.
Community members receive:
- All recent and archived articles
- Conference offers and updates
- A full menu of enewsletter options
- Web seminars, white papers, ebooks
Already have an account? Log In
Don't have an account? Register for Free Unlimited Access