To keep pace with technology innovations, evolving project requirements, and new research initiatives, new equipment is constantly being considered to replace existing assets that no longer meet the laboratory’s needs.
This article will explain how organizations can reduce the total cost of ownership (TCO) of their equipment by understanding the costs across the life cycle of the asset and demonstrate how leasing may be a better approach than purchasing when acquiring cutting edge assets with uncertain periods of utilization.
The core strength of cutting edge research companies is their ability to discover and develop novel compounds as quickly as possible and bring them to market. In the highly competitive pharmaceutical industry, seemingly minor improvements in the time to product introduction can mean the difference between a successful or unsuccessful launch and tens of millions of dollars in revenue.
Achieving drug discovery and launch goals largely depends on having a talented and energized scientific staff working with the most productive research tools available. To keep pace with technology innovations, evolving project requirements, and new research initiatives, new instruments are constantly being assessed for their potential suitability and improvement on lab productivity. In turn, new scientific equipment can represent a significant portion of the research capital budget.
The Hidden Costs of Keeping Underutilized Assets
What happens to existing equipment when a new asset is acquired and installed in a laboratory environment? Often, the asset is underutilized, ends up taking up valuable lab space or it is stored in a warehouse, never to see the laboratory again
What factors influence the process? In almost all cases, the asset is not removed from the lab until it has been fully depreciated. When the useful life of the asset is shorter than the depreciation schedule, equipment is kept far longer than necessary and recovery dollars are far more difficult to realize.
In other cases, laboratories may fall victim to a “just in case I need it” mindset, where old equipment is kept as a backup to new technology. And sometimes, organizations just don’t have the structure or processes in place to efficiently remove assets while preserving value. The tendency can be for assets to sit longer than necessary, lose value, then eventually be disposed of.
Unfortunately, this approach ends up costing organizations significantly. Not only does it increase the TCO through ongoing maintenance, storage, tax, and personnel costs, but it also prevents the organization from realizing the recovery value of the equipment. Like most assets, the value of scientific instruments is greatest early in the lifecycle and decreases rapidly once the equipment is no longer being used or maintained.
Finally, having underutilized equipment ties up capital and reduces flexibility. While more difficult to quantify, organizations need to consider the opportunity costs associated with not taking advantage of technologies when available due to economic or accounting restraints. These costs, for example, could come in the form of longer development times, delays in getting to market, lost market share, or increased development costs, all of which play a significant role in the organization’s performance.
The TCO of Leasing vs. Purchasing Scientific Equipment
As organizations continue to require new and innovative equipment, they need a way to lower the TCO, mitigate the risk of carrying underutilized assets, and increase the flexibility for their organization to acquire and use the equipment best suited for their specific applications.
The following chart illustrates typical costs that are incurred when assets have a three- and four-year period of high utility but are kept at the facility longer than necessary. The comparison is based on a typical three- or four-year lease structure vs. an outright purchase. The pricing is similar to a recently structured proposal.
- $1,000,000 cost of assets = 3 Mass Spec Systems each costing $333,333.
- No cost of funds is associated with the time value of money is assumed.
- Return on Equity for capital dollars not spent is not considered, further supporting the lease economics
- Lease rental dollars reflect a one-time single payment lease. This is consistent with a typical purchase expense. If paid over time, then the time cost of money would be factored.
- Storage/Lab Space assumes $60 monthly cost for all three instruments, multiplied by 36 months of low utility.
- Shipping costs reflect $500 per instrument.
As the chart demonstrates, leasing equipment can significantly reduce ongoing costs to the organization and lower TCO across the useful life of the asset. In addition to these economic benefits, leasing equipment positions the organization to make better equipment decisions as it relates to the research project. Asset decisions can be made based upon the science and best possible technology without the constraints of depreciation expense and other confining factors. Not only does this prevent underutilized equipment from being kept at the facility, it also allows organizations to “bail out” and correct acquisition errors when the long-term utility of an asset is difficult to predict.
Reducing Costs and Increasing Flexibility Through Leasing
Leasing provides a cost-effective and flexible alternative to purchasing an asset outright for organizations that require cutting edge equipment to improve their operational options. By taking a TCO approach to managing scientific instruments, removing the hidden costs associated with keeping underutilized assets, and freeing the organization from the constraints of depreciation expenses, leasing equipment makes it possible to make stronger asset decisions and acquire equipment based on scientific need.
Paul Corcoran is President & CEO of McKinley Scientific. Contact us today for a no-obligation conversation about asset management processes for lab instruments