News Feature

Procurement Strategies: Good Stuff Cheap

By Scott Berinato

October 15, 2002 — CIO — In the early 1970s, when the government, as part of a lengthy antitrust action, forced IBM to sell equipment and not just rent it, companies such as Comdisco and Forsythe-Macarthur bought IBM S360s and entered the leasing business. Thus, the secondary marketplace?where used hardware is bought and sold?was born. It was a niche business, and it stayed that way for 25 years. Until everyone lost his mind.

That was about five years ago. Flush with Internet cash, CIOs stocked up, buying a server for every application. With Y2K looming, they bought backups too. With the Web, there was no such thing as too much storage or networking capacity. Demand was massive, and supply strained to keep up.

Then, overnight, demand vanished. Companies that had been buying hardware in bulk?mainly telecoms and dotcoms?went out of business. Other companies decapitated their IT budgets and started consolidating servers and data centers. Most also decided that their old servers were good enough. Who needed the new new thing? Leases ended on a startling amount of equipment.

Put it all together, and you get a sudden and unprecedented surplus of perfectly good routers, switches, disks, servers, PCs and notebooks.

There is so much used hardware available now?and so much emphasis on cutting costs?that the secondary market is no longer a niche business. Nor does it appear to be a transient, post-boom phenomenon. Experts point to four factors to support this assertion: 1. chips don’t wear out like automobile engines, meaning this gear will be marketable for years to come; 2. the sheer volume of hardware created during the late ’90s can support the secondary market for years (consider that a startup, MicroCast, earned $880,000 in revenue between 1999 and 2000, filed Chapter 11 in late 2000 and left behind hardware valued at $40 million); 3. once buyers get used to wholesale prices, it’s unlikely they’ll willingly go back to buying retail; 4. the services developing to support the secondary market are making it easier and less frightening for buyers to participate. Soon CIOs won’t be able to imagine not having the option to buy used.

This is a complex market. You can buy from brokers or tweeners or vendors. Or eBay. There are license transfers, inspection fees and third-party maintenance options. There’s disposition to think about. (How do you throw this stuff out without running afoul of the Environmental Protection Agency?) Just learning the lingo is a chore. (See "The Secondary Market: A Glossary," on Page 58.) But as CIOs of enterprises both large and small are currently learning, the rewards for diving into the secondary market can be great.