The Lease Method is used to allocate the investment cost and total associated expense of shared capital resources that are used in a dedicated manner.
This method along with the Meter method is intended to replace the Recovery method. The main drawback of the Recovery method is that the capital asset is being priced annually using the Tax Code. This leads to a labor intensive process that result in inconsistent and unfair pricing.
The Lease and Meter methods are identical in that they deal with shared resources. They also use the Total Cost of Ownership and the asset’s life for determining usage based pricing. The difference between the two methods is that the Lease method deals with the dedicated use of a shared resource, while the Meter method deals with the community use of a shared resource.
Method
Properties
Cost Horizon
The Cost Horizon for this method is on a Life Cycle basis and will use the Total Cost of Ownership as the basis for the cost calculation.
Resource Type
The product and services associated with this method deal with shared resources and generally is Commodity in nature. That is to say, the resources are generally commercially available products, but are of such capital expenditure that it is advantages to have more than one unit or group using the resource.
Usage Type
This method deals with the dedicated use of a shared resource. For one part of a shared resource (i.e. disk subsystem), there is a single identified user or group.
Pricing Policy
Since this method is based on the Total Cost of Ownership, the IT group can establish rates that will recover the total cost of the investment over the asset’s life. By using a “Not for Profit” business model, the IT group can establish prices that are fair and will be fixed from year to year.
Price Formation
Since the method is based on the Total Cost of Ownership, the IT group will have to perform technical and budget forecasts that span the life of the asset. The technical forecast determines the total use of the asset based on a measured usage rate. The budget forecast determines all the associated IT costs for the asset. The net result of the forecasting is the total use and total cost of the resource.
Pricing Frequency
Since the pricing of a capital asset is based on the Total Cost of Ownership, pricing of the asset needs only be done one time. This pricing will be done just prior to the asset being placed into service.
Attributes
This method uses an Activity Based Allocation method for the costs associated with the capital asset. Since the price formation spans the life of the asset, there is no reconciliation process needed. An allocation method for assigning costs to the user can be used because all overheads are included in the price. This method allows for a true cost allocation to the dedicated user.
Behavioral Drivers
Overall, the behavioral drivers are mostly positive (upper quartile) for product and services within this method group. Since prices are calculated only once, the process is simple in nature (even though the actual process could be complex), and the resulting prices are predictable (fixed) from year to year. Since the calculation takes into account all use over the asset’s life, it results in a fair application of asset cost to the clients. Since the method is based on dedicated usage, the client has a greater ability to control their associated resource costs.
Bill of IT
The Bill of IT for the Lease method will usually consist of a list of itemized “rentals” that have been made by the client during the time period. This list will be similar to the receipts that are provided by any business that rents property or objects. The items that are leased could be for an entire entity (similar to a building) or part of an entity (similar to an apartment). For each item in the list, there will usually be the following:
- Item ID
- Item Description
- Number of Units Leased
- Unit Lease Price
- Total Price
