Many executives are effectively sifting through the trees, trying to see the forest. The dilemma of choosing between new or used hardware is boiled down to the same nuts-and-bolts reasoning that goes into buying a car - you can buy a Lexus new and loaded or settle for an older model with some miles on it from Crazy Ed's Used Car lot. Either way, you want the best value for your dollar. Analogy translated for buying hardware: You want products that will provide the best results for the dollar.

What to consider
Executives say much of the decision-making depends upon how big a company is. A small to mid-sized business may not have any other choice other than to buy second-hand, which may not be a bad thing. Brainlink International (www.brainlink.com), a New York-based provider of website and application development and hosting, needed a router three years ago, in order to cope with a rapid expansion of traffic and support. Buying it new would have cost $75,000. The company bought a second-hand Cisco 7000 for $12,000. It turned out to be the right move, says Raj Goel, Brainlink's chief technology officer and cofounder.

"Mass market and consumer-based equipment degrades rapidly and is built cheaply," Goel says. "But server grade equipment, whether it is Sun, HP, IBM, or Cisco, is built to last. These manufacturers have formal trade-in/trade-up programs. Or they provide in-house leasing for corporate customers. Buying reconditioned equipment from the manufacturer works well, precisely because the vendor offers excellent warranties or optional support packages. New or used, a Sun server is a Sun server, and Sun Microsystems has a vested interest in maintaining a good reputation. Server grade equipment is also usually well cared for by previous owners - unlike PC grade equipment.

The car analogy again: "PCs and consumer grade equipment are the Toyotas and Chevys - good, cheap workhorses," Goel says. "Servers and routers from the big-iron manufacturers are more akin to the Caterpillars [tractors] or Rolls-Royces - well maintained, long lasting, and dependable."

Of course, like any other kind of purchase, buying something previously owned can be risky. As with a used car, you have to take more precautions than simply kicking the tires when it comes to making a smart decision.

"You usually get what you pay for," Goel says. "Getting a 'good deal' from an online auction outfit or elsewhere that's significantly below market rates usually costs more than you realize. The parts may be thoroughly abused. Machines may be stripped. The vendor may be a fly-by-night operator. If you're buying unfamiliar equipment, research is critical."

Relationships and the economy It helps to build relationships with established manufacturers and reap benefits there, says Barry Turbow, the vice president of marketing at Myrient (www.myrient.com), an Aliso Viejo, California-based managed services provider. Myrient has a lasting relationship with IBM that allows for purchases of top-of-the-line products for zero up-front capital cost.

"Nobody has ever been fired for using IBM gear," Turbow says. "In turn, we can offer our clients the best of the best, without a huge up-front investment, allowing us to give our clients great prices for our services. The way the market is right now, price is the absolute deal-maker or breaker. There are many companies out there that are sacrificing security and cutting corners in order to minimize their I.T. expenditures, [in order] to make money."

Also, companies should bear in mind that, given the economy and vast turnabout of fortunes in the market, used equipment may not be as used as you think it is.

"There is so much equipment out there that is barely used," Turbow says. "So many providers that received funding blew all their money on network build-out or on acquiring a ton of hardware, before they made [even] one sale. Several of these companies became insolvent and filed Chapter 11, and are liquidating their gear for pennies on the dollar. Whether we can buy the equipment or buy the warranties through the manufacturer - perhaps Cisco gear for networking infrastructure - we could buy service contracts for the used equipment that makes it as good as new."

Sean Murphy, the vice president of international sales and a cofounder of Optimus Solutions (www.optimussolutions.com), an Atlanta-based services provider, says the savings for used products is still very tempting and - given the stakes in this shaky economy - must be strongly considered. For a customer with an existing Sun Microsystems E6500 Server looking to add 2GB of memory and an additional 400MHz CPU, for example, the difference in pricing between new and used is $14,250 versus $3,250, for a memory kit and other needed hardware, he estimates.

"New equipment is available both direct from the manufacturer and from approved value-added partners," Murphy says. "Typically, value-added partners are able to sell at prices lower than available direct from the manufacturer, but often not as low as used. Used equipment pricing is driven by market availability - the most current technology has the highest demand, and therefore carries a price less competitive compared to equivalent used-equipment prices. Customers that are looking to upgrade 12- to 36-month-old technology, however, will find that used equipment is readily available and very competitively priced, when compared with new equipment. Furthermore, the equipment was originally manufactured to operate for many years past its useful economic life."

Still, other executives swear by buying everything brand-spanking new. Why risk the future on someone else's discard? Today's economy has made new hardware as attractive a purchase as cheap stock, says Jeff Multz, the director of sales and marketing for Atlanta-based Firstwave (www.firstwave.net), a Web-based, automated B2C customer management company.

"Today, with the downtrodden economy causing hardware vendors to be more competitive than ever, it's a no-brainer to purchase new hardware," Multz says. "Why would someone even consider used equipment when you can buy new servers for as little as $500 to $800? Normally, a company would conserve their cash via leasing instead of purchasing, receiving all the tax benefits. And, more importantly on short-term leases, they'd turn the hardware in and get new leased or purchased hardware at a later date. But, today, hardware keeps getting bigger, better, and cheaper. An ISP/ASP/hosting company would be crazy to risk SLA liabilities on used hardware. They'll owe more than they're getting to the customers, should the hardware not work 99.99 percent of the time as they promise."

Other factors to consider
Often, the pure logistics of needed precision requires new hardware.

"We focus on keeping our production environment and systems as 'pure' as possible to ensure the highest quality and performance of our offerings," says Jeff Wenger, the vice president and chief technology officer of Tax Technologies Inc. (www.taxtechnologies.com), a Haworth, New Jersey-based tax services ASP. "Before promoting anything into production, we test it fully in our staging environment. By definition, this requires us to have identical equipment in both staging and production. Getting equipment to precise specifications is difficult, if it's not new and made-to-order."

There are other complications that having nothing to do with the eternal new-versus-used debate. For example, too many companies fail to effectively gauge the level of usage the particular piece of hardware will need to support, says Simon Crumplin, the managing director for Data Integration (www.dataintegration.com), a United Kingdom-based application delivery service company.

"It can be very expensive," he says. "One organization I know of bought a significant amount of equipment without having any idea of the number or requirements or the likely users within their hosting environment. They are now in a position where, if the hosting center does not fill up, they have spent too much money. Conversely, if they do utilize the center to more than 65 percent capacity, they have bought the wrong equipment, as it is not easily scalable."

What about return on investment models? Executives remain mixed on the subject. Brainlink's internal operations purchases are evaluated using minimal support costs/downtime metrics.

"This equipment is a long-term investment and may take 12 to 24 months to pay off," Goel says. "Customer-facing equipment - servers or software for managed hosting, colocation or ASP operations - is usually purchased with a 90- to 120-day payoff metric. In effect, we should be able to recoup the purchase costs within 3 to 4 months."

Treb Ryan, the senior vice president of technology at Metromedia Fiber Network (MFN; www.mfn.com; White Plains, New York), a digital communications infrastructure provider says: "The toughest part about buying new equipment is getting payback in a reasonable time frame. For example, if a company buys a box with huge amounts of capacity, but can't sign enough customers to pay for the box, the company will go out of business quickly. On the flip side, the company may not be able to be price competitive if it buys a smaller box designed for one or two customers, since each customer has to take on a large portion of the costs. You can spend a lot of time researching costs and break-even points, but you still need to make sales in the end. In today's market, the biggest challenge is accurately projecting how much a company will sell before it actually hits the market."

In MFN's case, the company has developed an analysis tool that helps measure the internal rate of return on capital expenditures. Basically, their algorithm looks at the amount of money spent on equipment and monthly operating expenses, taxes, and other factors, and then assesses how long it will take to break-even, along with the potential revenue over the life of the contract. The tool also allows the company to look at how much MFN can save in ongoing expenses and the return it will get compared to other uses of capital.

Boiling it down...
"When it comes to deciding whether to purchase new or used equipment, it really gets down to two factors," Ryan says. "First, if the equipment is for a customer site, it will largely depend on whether the customer has a bias against used equipment or their budgetary constraints. If the customer doesn't have a bias and we are able to procure late model equipment, we will use it if we can. Second, we usually use newer models, so we can plan for a three-year life on the equipment. By using older models of the same equipment, we have to take down the life span in the IRR [internal rate of return] model, which means it is much tougher to make the investment profitable."

Something old, something new...

A case for buying used and one for buying new.
"Does the equipment have to be new? Not necessarily. The equipment needs to be stable and it needs a robust configuration. This does not necessarily imply a new chassis or highest-speed processor," says Chris Pickett, vice president of customer operations at Interliant (www.interliant.com), a Purchase, New York-based service provider. "For example, some of our shared hosting platforms are comprised of used equipment. These servers are stable and their configuration is optimized to support the greatest number of customers. It is more important that this equipment is of the workhorse type - reliable and experienced - with solid system testing, understood hardware failures and fixes, and scalability and load balancing. New equipment is much more volatile and susceptible to failure. These servers do not need to reflect the latest form factor. Dell and Sun systems are consistent and reliable, and relatively easy and inexpensive to upgrade, versus the total cost of a new server.

Lee Le Clair, the chief technology officer of Ephibian (www.ephibian.com), a Tucson, Arizona-based application development and enterprise management services company says: "Companies considering the purchase of used equipment need to evaluate the purpose of the equipment and the level of reliability they need, then decide whether the additional risk of going with used equipment is worth it. Intel-based server hardware has become inexpensive enough that it doesn't make a lot of sense to buy it used. The same isn't necessarily true of Cisco Routers, tape backup, or other equipment. For example, if the equipment is to be used for internal purposes or supplemental applications, where it isn't critical, then it makes sense to acquire used products. If it's to be the primary production equipment for a critical application, it probably isn't worth the risk. Like a used car, the risk is that the equipment has no warranty - or [only has] a reduced one - and has been mistreated or heavily used. Any of these elements increases the chance of a failure or reliability problems."