META Report: Secondhand Hardware A ‘Risk E-Business’

The dot-com debacle has left truckloads of new or barely used servers saturating the market, hurting vendors such as Sun Microsystems. Project managers and procurement staff must weigh the risks associated with the secondhand hardware market.

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Through 2005, the secondhand server market will account for less than 5 percent of installed production platforms. In a buyer’s market, as server platforms become more commoditized, they become easily substituted; therefore, secondhand value will deteriorate nearer to 35 percent to 40 percent compounded (from about 25 percent) per year.

However, the secondhand market will pressure server vendors to reduce margins and increase discounts as platforms become less differentiable. Likewise, the inventory of computer scrap is becoming more of an issue for vendors. Purchase decisions for electronic devices are increasingly influenced by environmental concerns.

In Germany, for example, legislation has been enacted that forces computer manufacturers to recycle existing equipment when upgrading a customer to new systems. In many companies worldwide, waste disposal and resource preservation issues are being made high priorities. We expect component recycling and reuse to become more of a manufacturer’s legal requirement and this, too, will increase the cost of goods and erode margins.

From 2002, despite the global economic recovery, we do not expect hardware prices to recover or the secondhand market to be an attractive proposition for production platforms.

We believe users should not consider the secondhand market for production systems, because this will have negative warranty, maintenance, and service-level impact, as well as increased costs. Although discounts may initially look attractive, users must balance potential savings against increased risks and opportunity costs. These include difficulty in finding particular configurations or current product lines, and unpredictable time-to-in-service-deployment (due to shipping, reinstallation, and vendor certification).

We recommend targeting any savings toward improving infrastructure planning and developing more unified (e.g., replicable) platforms and services, thereby minimizing future integration and life-cycle costs. However, legitimate refurbished or resold hardware from the vendor or its channels is a viable option.

The following is a summary checklist of the potential savings from street prices and the levels of risk from different channels of the secondhand hardware. These are:

• Refurbished platforms from the manufacturer: Using traditional ex-demo or evaluation (refurbished) hardware is a good way of saving. The technology may not be the hottest from the manufacturer (almost always it’s the previous season’s stock), but some savings can be had. Additionally, complex projects that require a consistent platform deployed to many sites during a set time frame will require a level of consistency not provided by the piecemeal availability of refurbished hardware. However, point-project or development platforms can only be fulfilled using this source if a full warranty is provided.

• In-channel used inventory with reseller warranty: In-channel inventory returned to a dealer or distributor is fine if not opened! However, any other condition moves the warranty from the manufacture to the dealer on a case-by-case basis with the dealer or distributor. This secondhand market should not be encouraged, as users will be too exposed to the dealer’s support without necessary escalation to the manufacturer.

• Brokerage with limited warranty: A secondhand dealer will not be able to support the platforms at all, even though upfront costs may be attractive. Brokers should not be considered for infrastructure platforms.

• Auction with hardware at reduced book value: A limited sale or return warranty may be available from the auction house, but the risk associated with this as a source of secondhand hardware is too high.

• Cold call from brokerage “one-off offer”: These offers by cold call that appear too good to be true are. Clients should not consider this as a source of secondhand platforms.

Infrastructure planning and development staff should assist traditional finance procurement departments in assessing the cost of the secondhand hardware. A glut of nearly new hardware is available on the market that looks attractive to finance departments (compared to new), but several issues must be considered when using secondhand hardware for production platforms. These are:

• E-business fit: The rules for secondhand platforms align to the e-business platform layers. Too much risk is associated with secondhand hardware for production database and application server platforms. Extreme caution must be used for commoditized Web servers. In-house development systems are a legitimate target for secondhand hardware has long as the management and risk is addressed by the developer community or infrastructure operations.

• Mechanical devices – storage and printers: The nearly new disk tape and printer market may appear lucrative, but the sheer nature of these devices is purely mechanical. No easy way of tracking previous use exists.

• Non-transferable warranty: Infrastructure is not like a car! The warranty is generally not transferable from dealership to dealership or owner to owner. Therefore, any secondhand hardware must be from a legitimate channel. Risk-takers using secondhand hardware in production environments will be exposed to unsupported infrastructure with invalid warranties that offset potential savings.

• Service levels and maintenance, risk reduction: Non-maintained or out-of-warranty hardware is at high risk when setting service-level agreements. The client’s support channel will not set support levels on illegitimate hardware, and non-declaration will invalidate any support contract. This will also affect any legitimate hardware and software licenses from the vendor in client infrastructure portfolios.

It is natural that finance departments will be attracted to secondhand hardware savings. But to expect them to select the best-used platforms and best fit for infrastructure layers from the best source is unrealistic. Infrastructure developers must assist finance departments in selecting the equipment and determining the true overall cost.

Business Impact:In general, users should not consider the secondhand hardware market for production systems. They should, however, leverage the surplus in the resale channel to strengthen their hardware platform negotiations. Vendors’ surpluses and refurbishments with full warranty can be considered for internal or development systems.

Bottom Line: The initial savings of secondhand hardware is offset by the cost of integration and maintenance (including hidden opportunity costs).

Philip Dawson is a consultant for META Group, an IT consulting firm based in Stamford, Conn.