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

By

Philip Dawson

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.


www.metagroup.com

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).

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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.

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