My Assets are Killing Me: Part 1

Why is 2020 different?

In my introduction to the series, I discussed the incredible march of technological progress over the past 55 years, predicted by the famous Moore’s Law. In that time period, we have seen processing power increase by approximately 40% a year. Certainly, we all wish our 401K would perform like this. At the same growth rate, a $100 investment from 55 years ago would now be worth over $3 Billion!

With performance improving at 40% a year, the value of existing assets tumbles at about the same rate. Anyone buying a new laptop or iPhone knows this reality; the new ones are usually twice as fast every other year and your 2-year-old phone or laptop is worth less than half of what you paid for it. This is nothing new – this has been happening for decades. I believe that 2020 is different. I believe we have reached a tipping point where data center assets are now liabilities and business leaders can no longer rely on 3-5 year depreciation schedules and refresh cycles for hardware assets. The change is the result of several factors coming together at this critical time period.

1. COVID-19
2. Security in WFH.
3. New Options
4. Supply and Demand

COVID-19 – a case for elasticity. If negatively affected by COVID-19, a company owning its own data center assets has been especially hard-hit. The staff that has traditionally kept everything running may now be unable or unwilling to come in to support the equipment. Furthermore, if revenues are down, the company is still paying for maintaining and supporting servers, storage, and networking equipment that far exceeds current capacity needs. Many costs, (like rent, software licenses, etc) continue unabated and are difficult to reduce during a downturn. In this environment, these idle or underused “assets” are now liabilities. Contrast this to companies that are using cloud computing resources and are able to quickly scale down capacity. For those companies, expenses are eliminated immediately! While elasticity of cloud has been touted as an advantage for the last few years, 2020 has proven the value beyond a doubt.

Security in WFH. Security expenses are much like insurance premiums: sunk costs that add no business value, except, of course, warding off disasters. 2020 has seen a huge increase in work from home, which has added new security challenges for most companies. Applications that have typically been accessed by workers in the office are now exposed to a team of employees working from home. Companies operating mostly in the cloud are much more prepared for this reality since these platforms were designed with security and performance in mind for remote access. For companies struggling to survive, it has been especially cruel to now have increased security demands while overall revenue and budgets are being slashed.   

New Options. For decades, the options in running IT infrastructure have been based on simple decisions on which manufacturer to pick: IBM vs HPE, EMC vs NetApp, or Dell vs Apple, etc. Annual 40% gains in performance caused one product to leapfrog another for a short period of time, and manufacturers built-in differentiation to try to cause vendor lock-in and avoid customer churn. However, decisions were based on which hardware would run an application the best for a business over a multi-year period. Once a platform decision was made, it often meant that for the next 10 years, a company would need to depend on that manufacturer’s hardware. Change was difficult! Cloud computing changed the entire game. There is a new option, which is whether a company should buy hardware at all. Over the last few years, this option has been tested and now proven as a viable choice. Those hardware decisions made 5-10 years ago are now being challenged. Instead of refreshing servers, storage and networking equipment with the associated multi-year lock-in, companies are now decommissioning entire data centers with all applications moving to cloud platforms. 2020 is different due to the speed of business now demanding a more flexible platform.    

Supply and Demand. The initial trickle of companies turning to cloud has turned into a torrent.  The result changes some of the economics of owning data center assets. Somewhat like during the dot-com crash, supply of data center hardware exceeded demand and the value of used computer hardware has taken a beating. The result is that equipment under a 3-year depreciation cycle is almost certainly worth less than book value. 

Example: Assume a company buys $100,000 of equipment and depreciates it over 3 years. Book value based on a 3-year straight-line depreciation cycle would look like this.

Year 1: $66,667 book value  

Year 2: $33,333 book value

Year 3: $0 book value

However, if this company needed to liquidate these assets they would find that the equipment is almost certainly worth less than book value. For companies using 5-year depreciation, the situation is even worse. In my next post, I will dig into this more and look into the reasons why some equipment depreciates faster than others.

I believe that the net result is that these four forces have simultaneously come together to change the dynamics of data center equipment. With this in mind users should consider the following options when considering a go-forward strategy:

1. Consider an immediate cloud migration
2. Avoid buying any new data center hardware. Just stop buying it!
3. With prices at huge discounts to new, look at refurbished options if upgrades or refreshes are necessary to extend the life of any assets.
4. Utilize a third-party maintenance provider on all post-warranty hardware. Savings are usually 50-70% from manufacturer prices.