Used Tech Gear: Notes From The Underground

"Cisco is out to kill me," says Mike Sheldon. "They wish me dead."

What earned this executive the enmity of one of the world's most powerful companies? Money, what else. Sheldon is president and CEO of Network Hardware Resale, a $170 million-a-year company in Santa Barbara, Calif., that sells used Cisco Systems products to a market hungry for reliable, low-cost IT gear. Sheldon and others like him operate on the borders of respectability: Equipment manufacturers don't like losing sales to these independent resellers, and some companies forbid their IT organizations from buying secondhand gear.

But does that stance make sense? Sure, counterfeit and stolen products pollute the pool of aftermarket equipment. The Alliance for Gray Market and Counterfeit Abatement, a trade group, estimates that one of every 10 IT products sold may be counterfeit. That figure is based on surveys of electronics industry executives, conducted with KPMG. In the past three and half years, stolen network equipment worth more than $41 million has been recovered by Rapid Enforcement Allied Computer Team, a multiagency task force that fights high-tech crime.

However, if you choose your partners carefully, taking a risk on used gear can pay off. In our survey of nine resellers, the average price for a 13-slot Cisco Catalyst 6513 switch, which lists at $65,995, was just shy of $29,500 (see chart "Beyond The Bottom Line"). In general, preowned equipment can be purchased at 10% to 90% less than the cost of new systems.

Who's buying used gear? Better to ask who isn't. The customers of secondhand equipment range from small busi- nesses operating on tight margins to Fortune 500 companies and global telcos. For some, deep discounts are the draw. For others, the secondary market opens new channels for hard-to-find parts and components, particularly for products such as mainframes and printers that original vendors no longer sell or support. For example, in an online survey conducted in May by InformationWeek, one IT pro wrote that his company buys used dot-matrix printers--required by certain financial applications--at deep discounts over what new ones would cost.

Before shopping the secondary market, know the players and understand the ground rules. If you want software upgrades or service contracts from the original vendors, for example, expect to pay fees to get right with them. Forgoing software licenses means no access to upgrades or security patches, a potentially dangerous situation.HE SAID, THEY SAID

Independent resellers are painted by OEMs as primary sources of fake equipment and components. "Our concern is that when a customer goes to the aftermarket, they're losing business and productivity," says Benson Chan, senior manager of worldwide business development and marketing for Cisco Capital Remarketing. "Maybe it's product authenticity or quality."

Read: Buy used gear, your business will suffer.

No wonder secondary resellers we spoke with want to dispel the miasma of suspicion surrounding them. The United Network Equipment Dealer Association was formed to promote industry best practices, ensure high standards of product quality, and enforce ethical business practices. The 350-member reseller trade group recently launched an anti-counter- feit task force to help members identify and return counterfeit networking gear (see story, "Fighting Fakes In The Market For Used IT Equipment").UNEDA has mechanisms to penalize members for shady business practices or for knowingly trading in stolen or counterfeit goods; it has expelled three members in the past 12 months. Still, the group lacks real teeth because expulsion doesn't stop a reseller from continuing to operate.

Not all resellers are created equal. There are three tiers of used-equipment dealers. On the top rung are vendor-authorized resellers of "certified refurbished" products, which means the gear has been examined for authenticity, tested, repaired if necessary, and brought up to factory specs. For example, Cisco's Certified Refurbished Equipment program is run by Cisco Capital, the company's financing arm. Cisco works with authorized resellers to refurbish and sell equipment that has been returned from leases as well as manufacturing overruns, liquidations, and unsold inventory.

Other vendors, including IBM, EMC, Hewlett-Packard, and Dell, have programs that restore equipment to original factory specs and often provide hardware warranties, all necessary software licenses, and even tech support contracts. Dell Outlet, for example, sells refurbished PCs, servers, printers, monitors, and other gear.

The second tier comprises independent resellers, a polite euphemism for companies that aren't necessarily affiliated with, or authorized by, equipment makers. Independent resellers get their stock from value-added resellers or enterprises that overbought a product or canceled a project, as well as through liquidations, their own customers, and a network of other resellers. There are hundreds, perhaps thousands, of independents in the United States, ranging from mom-and-pop outfits located at strip malls to $100 million-plus companies with large warehouses, testing and refurbishing facilities, and dedicated sales teams.

Many independents act primarily as brokers, finding equipment for other resellers. Others sell direct to IT departments, VARs, and integrators. Resellers may offer warranties that range from 30 days to the life of the product, and some offer their own tech support. One big caveat: If you buy from an independent reseller and want access to software upgrades, security patches, or OEM support, expect to pay the vendor an inspection fee on top of software license and support contract costs.Customers dealing with independent resellers also run the risk of getting counterfeit or stolen equipment, or "gray market" gear that was obtained through an unauthorized channel and resold elsewhere. The severity of the problem remains unclear, but consider this: In May, a federal grand jury indicted a Massachusetts man for falsely requesting "replacement" parts from Cisco at least 700 times and then selling those parts to resellers across the country. Cisco estimates that this alleged scam cost it millions of dollars in lost business.

Stolen equipment can be hard to track in the secondary market because it may pass through several brokers' hands before arriving on the customer's loading dock, but it's out there. "We've had some of our own equipment stolen and put on the market," says the head of network operations for a financial institution.

One tech professional who participated in our online survey says his company experienced "eight or nine incidents of counterfeited components" when buying used Cisco equipment. To put an end to the problem, the company banned future purchases of used Cisco products.

On the bottom tier are private sellers that work through auction sites such as eBay. While their prices tend to be rock bottom, you usually get what you pay for. What A Bargain

Nearly 46% of respondents to our survey say they occasionally buy secondhand equipment; 14% do so regularly. They buy used products mainly to save money. Preowned gear can be had for as much as 90% off list price, a tantalizing discount for budget-strapped IT departments, which often see an opportunity to get more features or processing power than they could otherwise afford.Vendors of secondhand equipment cite two other perks: speed of delivery and availability of spare parts. Sheldon says he can get his hands on just about any piece of Cisco hardware he could want in 48 hours.

As for how much less expensive certified refurbished equipment is compared with brand-new gear, that's up for debate. Cisco says its certified refurbished equipment is generally sold at 25% to 30% off list price for current products and 35% to 70% off list for end-of-life gear, equipment that's no longer being manufactured or supported.

But the savings aren't always that significant. Refurbished gear is generally 10% to 20% less expensive than new equipment, says Frank Kobuszewski, VP of the technology solutions group with CXTec, which resells both Cisco-certified gear and equipment it has refurbished under its own brand, called Equal2New. Customers pay a premium for Cisco-certified products because they come with up-to-date software, field upgrades, and Cisco-provided SmartNet support, Kobuszewski says. Independent resellers, on the other hand, promise greater savings.

The head of network operations for a large financial institution, meanwhile, turns to independent resellers for spares. "There's circumstances with equipment that's end-of-life where we've had to resort to going aftermarket," he says. That includes secondhand modules and line cards running in production environments. But he doesn't deal directly with the secondary market, instead relying on a VAR to bring in equipment from trusted resellers.

Get Right With The LordWhen it comes to buying noncertified networking gear, realize that used switches and routers come with software to run them, but they lack software licenses, and without those, buyers of used equipment can't get patches, updates, or upgrades, and they aren't eligible for OEM-provided tech support.

"Our position is that the software is nontransferable," says Dave Walters, Cisco's director of brand protection in the United States and Canada. "If a customer has purchased from the secondary market and they want SmartNet, they need to pay the inspection fee and re-up the license." Cisco charges between $600 and $7,000 per component for inspection fees, depending on the product.

You can't blame vendors for this stance--they're competing with independent resellers for the same customers. A used product represents not just the loss of a new product sale, but potentially lost revenue from software licenses and tech support contracts.

However, there are ways to work the system. "There are VARs who will put a device on SmartNet without charging the license fee or the inspection fee," Network Hardware Resale's Sheldon says. "If it's a software upgrade, they may charge the licensing fee, but not the inspection fee."

This isn't altruism; VARs often have little choice. That's because customers don't like getting hit with a hefty inspection fee that cuts into the discount they got in the first place. "Customers get incensed by that," says Sheldon. "VARs are in a tough spot."Of course, not every used-gear buyer wants service from the vendor that made the product. Many rely on support contracts offered by the independent reseller. CXTec encourages customers to get up-to-date software licenses for used equipment, Kobuszewski says, but it will provide hardware support even if they haven't.

Sheldon estimates that 25% of his customers pay for new licenses because they want additional features such as advanced management or security capabilities that come with add-on software modules. However, the fact that 75% aren't relicensing software means lost revenue for OEMs, one reason they frown on the secondary market.

Software licenses are less of an issue with PCs and servers because companies that sell equipment on the secondary market are, or should be, careful about wiping drives before equipment leaves the premises. Many resellers wipe drives clean of data, applications, and operating systems before putting the equipment into their inventory pools. By reselling bare-metal hardware, dealers and customers of used PCs and servers skirt licensing issues entirely.

click image for larger viewApproach With Caution

The promise of the secondary market is matched by its perils: 37% of respondents to our survey don't buy used equipment and don't plan to. The top reason: They don't trust it. The least popular types of used gear are hard drives and storage hardware, with nearly half of respondents saying they would never consider such purchases. That's not surprising given the proprietary nature of most storage systems.One IT pro who participated in our online survey shared the horror story of a hard drive that failed in a server that was purchased used, wiping out three years' worth of data. Upon investigation, the IT department learned that the hard drive had been refurbished twice before the system was brought into the company.

The moral of the story: Trust, but verify. Before you even consider buying used gear from an independent reseller, perform the following due diligence:

Most replace damaged components, and larger resellers will remove dents and repaint chassis. Those that deal in PCs and servers generally provide data-sanitization services to ensure that sensitive information isn't passed along with the savings.

There's no question the secondary market offers tempting bargains, but dollar signs aren't the only measure of a good deal. Quality products, attentive support, and legitimate access to licensed software must be part of the equation. And if something sounds too good to be true--it probably is.Write to Andrew Conry-Murray at [email protected].