Utilizing ASC 842 Lease Accounting Adoption as a Catalyst for Spend Reduction
Unlocking the Hidden Benefits of ASC 842
While many companies are devoting time and resources to comply with the new lease accounting standard (ASC 842), few are utilizing the adoption process as an opportunity to review their spend and implement transformative cost-saving measures. Using ASC 842 as a catalyst for change, companies can leverage access to corporate wide lease data to drive targeted lease spend reduction for long-term impact.
Frequently, companies employ a strategic sourcing team to focus on managing and monitoring spend for goods and services, but few are applying this same method to reduce their lease spend. This inattention to lease spend exists for several ingrained reasons: First, many companies have a decentralized leasing function, which leads to an inability to pursue a concerted, corporate-wide spend reduction strategy. Second, lease decisions are generally driven by a lease versus buy analysis and not by the best overall leasing terms. And third, the ability to leverage purchasing power by consolidating leases under a smaller number of preferred lessors is seldom systematically pursued at the corporate level.
Fortunately, by leveraging the information collected as a result of complying with the new standard, finance teams can unearth the chance to review lease spend and determine where cost-saving opportunities exist.
When implementing ASC 842, finance teams must collect and review data for all leased assets, including descriptions of the leased assets and lease terms (e..g, monthly payments and other contractual details). For most companies, the data review ends there. But the data that is captured throughout this process can easily be utilized to conduct a spend analysis that provides insight to areas for potential cost savings. For companies that carefully conduct lease spend analysis, the analysis can highlight areas of their lease spend that are on track and areas for improvement. For instance, a company that recently adopted the new standard learned that, in a majority of cases, the same leased asset with the same lease terms had different monthly payments. From this analysis, the company realized they were paying more than double to their most expensive vendor for the exact same asset. In doing this analysis for all leased assets, they identified an opportunity to save more than $150 million in their annual lease obligation, reducing their overall lease spend by more than 10 percent.
Once areas for potential spend reduction are identified, companies can employ a number of effective cost-saving techniques. Renegotiating leases with low-cost vendors is one option to ensure that companies are maximizing the opportunities available in their spend analysis. This approach also serves to consolidate the vendor base, which in turn can help negotiate further discounts from lower cost vendors. In some cases, vendors are willing to terminate the original lease and re-lease that asset at a lower monthly rate. Another way to renegotiate more favorable lease terms is to use a formal proposal process to consolidate all future and current leases to the lowest cost vendor. Outside of spend analyses, companies can better manage lease negotiations by properly utilizing centrally available lease information data to determine when certain leases are expiring and what the lease cycle is for various assets. This data can also help rationalize the leased assets by focusing on assets with similar service levels but better overall lease terms.
In addition to facilitating cost savings opportunities, centralized lease data provides an opportunity for enhanced governance over the lease procurement process. With a central repository for leases, internal controls can be implemented that will optimize cost savings. Examples of these controls include reviewing the type of leased asset for use of a preferred low-cost vendor and standardizing lease terms for specific types of assets based on entity wide best practices. Better governance over the lease procurement process will enhance cost savings opportunities.
Implementing ASC 842 can provide more value than merely complying with the new standard; adopting the new standard provides an opportunity to identify areas for reducing operating lease spend, to increase visibility of lease terms for assets, and to collaborate with vendors to develop long-term solutions that reduce the total cost of leasing assets.
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