Knowledge Resources

In deciding whether to lease or own the ITS telecommunications network, the agency must consider both the financial and technical implications of its choice. A financial analysis of the own versus lease option is necessary, whereby all forms of cost to be experienced during the analysis period are identified, as well as the time at which each cost will be incurred. While it will be possible to quantify many of these costs, agencies will also need to consider risks that may be impossible to quantify. In conducting a financial analysis, all phases of the system lifecycle must be considered, including planning, design, installation, testing, operations and maintenance. There are a number of important observations to be made regarding the financial analysis. These lessons learned include:

• Evaluate the costs of different network designs. How a network is designed is a critical determinant of the total cost; different network designs may meet the same set of system requirements, but at widely varying cost. Thus, agencies should design multiple networking scenarios and evaluate each separately. In Maryland, the SHA considered the financial implications of a range of different options for fulfilling its ITS requirements, including both lease and own options. Through performing this analysis, Maryland SHA was able to develop a network configuration that significantly reduced the total cost. Maryland SHA decided not to build a fully owned private fiber optic network, but instead selected a hybrid network infrastructure, relying primarily on leased services.
• Carefully consider the life cycle timeframe assumed in the financial analysis. To compare different network solutions, agencies must determine an appropriate life cycle, for this will impact the total cost of the telecommunications solution. Maryland considered a number of factors in selecting a ten-year network life cycle, including the rapid evolution of the technology, the ability to upgrade the network without replacing it, and the end-of-life "residual value" of the system. Maryland assumed that the accumulation of long-term lease charges over ten years would be higher than the capital costs of building a fiber-optic network over time. However, based on the ten-year life cycle that was chosen, the lease option was less than half the cost of the full-build option. As this example illustrates, the value for the life cycle should be chosen with great care. The report recommends comparing the results for different life cycle lengths to assure that the assumptions have not pre-determined the final network solution.
• Consider the level of risk in justifying an ongoing operations cost when compared to the cost of a capital acquisition. If lease fees are paid from operations funds, agencies may be faced with having to reduce system operations if operations funding is cut (or reduce other operations activities to fund the lease). While this is less of an issue with an owned system, the agency will still need to allocate funds for the maintenance of the owned system.

In addition to conducting a financial analysis, agencies should understand the technical impacts of leasing. In general, these impacts are due to the fact that the network user does not know or have control over certain factors, such as network switching, network routing over long distances, multiplexing and demultiplexing of signals, and termination devices at network endpoints. These actions can result in signal degradation.

Other technical issues that agencies must consider with leasing include:

• The impact of using dial-up services (a subset of leased services).
• The complications of integrating a leased network with an owned network.
• The inherent weakness of certain commonly leased telecommunications architectures (i.e. the multidrop network).

The decision on whether to lease or build a system is a complicated one. Agencies will need to consider the financial implications of their decision, by comparing the costs of a variety of network designs (including both own and lease options). This financial analysis, coupled with an understanding of the technical implications of the decision, will enable agencies to select the telecommunications solution that best meets their needs.