Purchasing in the Secondary Market

Reprinted with permission from Processor magazine.

Make The Best Buying Decision For Your Small To Midsized Enterprise

by Dean Takahashi

Purchasing used high-tech equipment from the secondary market can be scary. Lots of transactions go off without a hitch. Purchasers can find bargains on nearly new equipment that is marked down anywhere from 50% to 90%. But a few horror stories, such as tales of counterfeit goods, stolen merchandise, and out right fraud, can scare away IT managers from seeking out bargains.

Still, judging by the torrid pace of eBay sales growth, people are putting aside these fears and buying used equipment in record amounts. Small businesses love used equipment because it keeps their startup costs low. Big businesses like to trade up to the most current gear, and they sell off their older equipment to get a better return on investment.

The trade group Alliance For Gray Market and Counterfeit Abatement estimates that sales of new and used equipment through the gray market has topped $40 billion a year. The same group estimates that counterfeit goods and black market sales of stolen goods account for $100 billion in sales each year. If those estimates are correct, they suggest that buyers are twice as likely to find bad stuff when they go out on the used market. When you're bidding on an auction site for used equipment with prices that are too good to be true, there's a decent chance you're going to be disappointed.

Quality At A Reasonable Price

Fortunately, finding a good vendor of used equipment isn't a total shot in the dark. Selling used high-tech equipment has become big business. For instance, Network Hardware Resale expects to do more than $100 million in sales this year selling used Cisco Systems networking gear.

Chuck Sheldon, founder and president of Network Hardware Resale, says there area few basic reasons to go with used equipment. Price isn't the only appealing factor. One of the best reasons is availability. When a piece of networking gear goes out, it's often a critical problem for an enterprise. If a used-product vendor can deliver a replacement to a customer overnight, that is a valuable service. Sheldon says his company can often beat manufacturers on shipping times because of inventory in the warehouse.

Another factor is quality. If buyers can find a vendor that tests used equipment thoroughly and offers a warranty of a year or more - often beating the manufacturer's 90-day warranty-the quality of the used item can be quite high. Sheldon says an independent survey of 2,200 customers showed that less than 1% had experienced problems with hardware, and less than 0.5% said they wouldn't do business with Sheldon's company again.

"Confidence is earned," Sheldon says. "No one starts out buying a used car, a used PC, or used technology equipment with 100% confidence. Everyone raises an eyebrow at us at the start. We encourage them to check us out with our customers and check our credit rating."

Help Along The Way

Another reason to buy from a used-equipment dealer is to get access to repair services or installation help. Sheldon's company doesn't do that, but that's one of the things that sets apart Network Resource Solutions, a vendor that specializes in used Nortel Networks communications gear. President Tom Tormey built up a customer base with a combination of installation and deinstallation services, free technical assistance, and five-year warranties.

The company had started in the middle of a glut of used equipment. The dot-com bubble had burst, and it dragged the telecom and networking markets down with it. Bankrupt companies unloaded their networking gear on the market, and Cisco itself got stuck with $2 billion worth of inventory in 2001. Over time, a lot of the excess equipment was sold off or became obsolete, and many of the fly-by-night vendors packed up and left the scene. The prices for used networking gear plummeted, so a fledgling firm such as Tormey's had to differentiate itself.

Network Resource Solutions isn't that big, but it hires a lot of technicians as temps to install the equipment at customer sites and to take out the old gear. It even works with temp agencies to place temps in jobs at the companies that buy the used equipment. Tormey's company also distinguishes itself by carrying tens of millions of dollars in Nortel networking gear in its inventory so that it can ship quickly.

To win over customers, Tormey will often give Fortune 1000 customers the chance to test his gear. He will ship it to them even before they've sent a payment, so they can check the machines out in a working environment. For smaller companies, brokers, and unknown customers, cash or credit cards are king. "We remove as much risk as possible," he says.

Customers often approach him and tell him that they can find cheaper prices on eBay. But Tormey says that once they get burned, those customers come back to him for assurances that he offers. About half of Tormey's customers are large corporations that are often buying new or nearly new gear.

Decide Carefully

Purveyors of used equipment often aren't authorized by manufacturers in part because they have different interests. Manufacturers want to sell brand-new goods that are coming off the line. But the smart ones recognize that the used-equipment market serves its purpose, and they help foster legitimate used-equipment sales by providing services such as verifying serial numbers or setting policies for re-registering software licenses.

Buyers have to first establish confidence that the sellers aren't con artists. There's good reason. Manufacturers are so concerned about counterfeiting and trafficking of stolen goods that they have formed the Alliance For Gray Market and Counterfeit Abatement. Nick Tidd, AGMA's president, says that counterfeiting touches "every tentacle of our industry," much of it made possible by online auction houses where buyers and sellers can connect easily without drawing much attention from authorities.

Sheldon says that his company has at least five different screening steps that can weed out any nonfunctional equipment or counterfeit parts. One of the best ways to do that is to buy used equipment directly from corporations that have been using it.

Tips For Buying Secondhand Equipment

  • Know the source. Check out the references of the dealer, including customers and business partners. Also check to see if the dealer belongs to a reputable industry association, such as ASCDI.

  • Make sure the seller has the equipment. Favor resellers who have their own warehouses and inventory over brokers who don't.

  • Review the testing procedures of the reseller of used equipment. Buy one sample and test it. If it checks out, buy larger quantities. Continue to test them.

  • Look for services or installation packages along with equipment. This way you can establish along-term relationship with a seller.

  • Don't consider price alone. Calculate the total cost of ownership.

  • Closely review warranty information.

  • Check the source's reputation at the original manufacturer. Cross-check serial numbers in case any of the parts might be stolen.

  • Look for trade-in or trade-up policies.

  • Always get serial numbers. Ask the broker for the source of the goods so that you can check it out.

  • Beware of prices that are too low.

  • Check out the company's Web site. Is it professionally done, and can it accommodate online shopping?

  • Check the seller's credit rating.

  • Consider that some companies require used-equipment buyers to register their serial numbers. These companies, such as Cisco, require the registration in order to approve transfers of software licenses.

  • Check to see if the vendor advertises in a lot of different places. Examples would include industry trade journals or Web sites.