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Think buying new computers is complicated? Try getting rid of the old ones.
Norm Alster, CFO IT
June 16, 2003
When Huntington Bancshares bought 4,000 new personal computers last year, it held out some hope that the 2,000 old PCs and several hundred servers it was replacing would fetch something on the used-computer market. As it turned out, the bank literally could not give them away. "The machines are becoming cheaper and cheaper," says Brad Gaitten, vice president of network and customer support services at the large regional bank, "so it really becomes easier for some charities just to buy them or to set minimum requirements for what they'll accept." In the end, the bank gave away fewer than 100 PCs and got what Gaitten describes as "very minimal" results on the resale market.
Call it the flip side of Moore's Law: the relentless surge of technological improvement has ensured an equally swift and powerful backwash of obsolescence. The simple truth is that in terms of residual value, PCs are a lot more like dot-com stock options than Toyotas.
Indeed, after 24 to 36 months, PCs have lost nearly all their economic value. That's why some experts say the first step for CFOs and CIOs formulating what's known as an asset-disposition program is recognition of that reality. "There is the perception that all that equipment still has some value. In a lot of cases, there is no value," notes Frances O'Brien, research director at Gartner.
Jennifer Koppy, a senior research analyst at International Data Corp., puts some hard numbers to the reality: "If a CFO trades in to the original vendor or a competitive vendor, they can expect to receive 7 to 10 percent of the original cost — if they get rid of the PCs within 24 months," she says. Hang on to them longer and you'll likely pay about 3 percent of the original cost to get someone to take them off your hands.
But poor or no resale value is the least of the headaches facing organizations that need to retire old equipment: they must also consider the legal risks of disposing machines that are lethal repositories of such toxins as lead, mercury, and cadmium. Computer monitors can contain four pounds or more of lead, which is used to shield against radiation (the Environmental Protection Agency has estimated that about 70 percent of the heavy metals in U.S. landfills comes from discarded electronics).
Apart from potential Superfund liability, disposers of electronic waste face an ever-more-punitive local regulatory environment. California and Massachusetts have already banned landfill disposal of cathode-ray tubes, and other state legislatures across the country are preparing their own measures to tighten control over electronic waste. "At last count, we were aware of legislation pending in 22 states," says Kathy Ferguson, the business-unit executive for asset-disposition and support services at IBM Global Financing.
The Silicon Valley Toxics Coalition estimates that fewer than 10 percent of computers are recycled and that up to 80 percent will eventually be shipped overseas to China, India, and other countries, posing an environmental threat and substantial health risks to the workers who dismantle them. Europe's more-stringent laws governing E-waste may provide a model for the United States with regard to both disposal and "green" design, and last year, a group of 15 mostly smaller electronics recyclers signed a pledge to responsibly dispose of hazardous E-waste in the United States and restrict its export overseas.
But to date, legislative activity at the federal level has not given environmentalists much to cheer about. In March, Rep. Mike Thompson (D-Calif.) introduced legislation that would affix a $10 fee to all PCs, monitors, and notebook computers, and provide incentives for vendors to take them back to recycle or otherwise reuse. Dubbed the National Computer Recycling Act, the bill would also require the EPA to work with private organizations and state and local governments to establish computer recycling programs. But Thompson's earlier attempt to pass similar legislation stalled in the House. Levying fines for improper disposal has proved more effective than spelling out the terms of proper disposal or mandated recycling. A number of grassroots efforts are under way but tend to target consumers, not businesses.
The Junkman Chargeth
Perhaps even more worrisome than environmental exposure are the new consumer data privacy laws that turn hard disks into ticking time bombs. Financial-services firms face new customer privacy protection requirements under the Gramm-Leach-Bliley Act. For health-care companies, the Health Insurance Portability and Accountability Act sets both civil and criminal penalties for exposing patient records. Last year, John Halamka M.D., chief information officer of both the CareGroup Healthcare System, an alliance of six Boston-area teaching hospitals, and Harvard Medical School, disposed of roughly 1,500 PCs and 140 servers. Not only did he get no money for the used gear, but in some cases, the hospitals actually had to pay to have the old equipment destroyed.
Indeed, more than 315 million computers will require recycling or trashing by 2004, according to the National Safety Council. This looming trash heap represents a business opportunity for players large and small that are swarming into the asset-disposition industry. It also forces companies to think about how they should dispose of old computers, preferably before they buy them.
In fact, there are so many questions to be asked about how to dispose of old equipment that it amounts to its own form of ROI analysis. When it comes to choosing an asset-disposition firm, for example, do you go with a deep-pockets vendor like IBM or choose a smaller and likely more economical local outfit? Should you insist on indemnification against environmental liability? Should you be concerned that the gear might be shipped overseas, where in the absence of strict regulation the equipment winds up an environmental pollutant and occupational hazard? And just how much does the disposing corporation want to spend to destroy drive data? Depending on the methodology, drive destruction can cost from $30 to $80 per unit. Could it be that the best idea is to just park the old gear in a utility closet, putting off the costs and risks of disposal?
Already, the National Safety Council estimates, more than 150 million obsolete PCs are gathering dust in warehouses, storerooms, and closets as they await decisions on disposal. IBM's Ferguson knows of one potential customer who was using an entire floor of a Times Square office building to store old equipment. Marveling at the waste, she observes: "That's expensive real estate." And while storage may make sense if the equipment is still being depreciated — since disposal would require a write-down of the residual asset value — most idle PCs have already been written down. Meanwhile, companies are often responsible for paying state or local property tax on idle assets, she warns.
IBM expanded its asset-recovery offering two years ago, a move that seemed both a natural outgrowth of its end-of-lease Global Asset Recovery Services business and, perhaps, a sign of the times. IBM had already built up a vast refurbishing infrastructure, along with ties to dealers and brokers that could help move old equipment.
With so much old equipment out there, and customers less eager to snap up new gear, the company saw a new opportunity; it expects $50 million in revenue from its asset-recovery program this year. It also plans to take back roughly 300,000 PCs of all makes, a small piece of a fast-growing market. Last year, more than 56 million PCs were disposed of, which is more than were sold.
To date, asset recovery has been a market with many small or regional players but no giant. IBM clearly hopes to change that, with not only its reach but also its breadth of services. Customers typically qualify for one or more of four options. If their equipment retains market value, they can accept a fixed price for the lot or enter into an agreement in which they get 70 percent of any proceeds IBM can generate through either resale of the systems or components and raw materials. If there is no resale value but some modest salvage value, IBM will simply take away the equipment at no cost. If the equipment is pure junk, IBM will charge 26 cents a pound to take it off their hands. Ferguson says the business is currently divided about evenly among the four options.
IBM leverages its size in other ways as well. Its financial muscle allows it to offer indemnification against environmental liability, an issue that companies will have a difficult time grappling with because the EPA itself admits the Superfund law is unclear on this point. (To date, most Superfund sites predate the era of the PC, but Jason Swift of the EPA says that "awareness is rising" within the EPA regarding the problems posed by discarded electronics.) And IBM's ability to collect and dispose of assets on a global basis makes it attractive to multinationals that want to deal with a single service provider.
IBM is not the only major computer vendor to get into the asset-disposition business. Hewlett-Packard also has a network of facilities that can break down old computers into components, and the company emphasizes its environmental friendliness. RenÉe St. Denis, product recycling solutions manager at HP, says that to avoid electronic waste exports, "our goal is to process the material where it is used." HP is also working to reduce the number of plastics used in its computers, because plastics separation is one of the most difficult aspects of computer disposal. But the company does not offer environmental indemnification. HP argues that Superfund laws allow the government to go after anyone involved in the ownership chain of polluting materials. The EPA has initiated enforcement actions against several universities in this regard; the lack of clear precedents makes this a risk-management issue that companies must confront.
Although IBM and HP bring broad capabilities to the emerging asset-disposition business, most other large computer manufacturers have some form of take-back program. In fact, analysts say that companies can often get more for used PCs if they're willing to change vendors, because competing vendors will take the machines at a loss in order to win business.
If all else fails, there's always eBay. In January, the company created ebaybusiness.com, a dedicated site for (mostly) small businesses to buy computers and other equipment. eBay says it sells more than 2,000 computer systems and 15,000 related products on the site every day, and that 60 percent of the computers sold are used, while another 14 percent are refurbished. IBM, HP, Dell, and many other companies use eBay as a channel for overstocked and refurbished gear, but 90 percent of the sellers are small merchants or individuals. Is there room for a broad swath of Corporate America to unload equipment this way?
Companies could put their own gear up for auction, but many prefer to sell on consignment through remarketing firms such as TechSmart in Edgewood, New York. Over the past three years, the company has completed 22,000 transactions on eBay, successfully reselling gear from General Electric, GMAC, and a range of other companies, including leasing firms and retailers. TechSmart also works directly with corporate clients on all facets of asset disposition. These days, says Mike Browne, senior vice president of asset-management sales and service, "CFOs are more involved because asset management has become a major focus and asset disposition falls under that." He says clients typically overestimate the value of their equipment. "Lower prices on new gear, 0 percent financing deals, and other factors have cut used prices by 50 to 60 percent over the past two years."
TechSmart often works on a revenue-sharing basis, remitting 60 to 75 percent of the sale price to clients. It's a mode of disposal in which timing can be everything. When a major drugstore chain tried to unload hundreds of printers just as a government agency was doing the same, the sell-off stretched from an anticipated 80 days to 200, and prices dropped 40 percent.
Whether a company takes this route or not, consultants say that senior execs should develop a "sunset" plan for getting rid of IT gear lest ROI analyses be undermined by overestimated used-computer values or underestimated liabilities and risks.
One facet of asset disposition that shouldn't be overlooked is the need to erase data from machines that might — and in fact do — find their way into other people's hands. Redemtech, a company that specializes in data erasure, processes almost 60,000 pieces of equipment a month, primarily for banks, insurers, health-care firms, and other companies that face ever-stricter data-protection regulations.
Erasure takes many forms. On the low end, clients can opt for a perfunctory destruction of the file-allocation tables (a somewhat suspect process that's "good for almost nobody," according to Redemtech's Jill Vaske), up to a process in which Redemtech will overwrite them seven times with randomly generated ones and zeroes, which should foil any sort of forensic recovery.
By way of comparison, four overwrites is the military standard, but some companies go further. IBM actually offers an option of 100 overwrites, which, a spokesman concedes, nobody takes. There are other techniques as well. "If you really have sensitive data, the best option is total destruction," says Frances O'Brien, research director at Gartner. "That means shred, pulverize, incinerate, or melt the drive." Some customers overwrite the drives and then pulverize them. — N.A.