Sweat Your Ass-ets Off: Balancing Depreciation and Innovation in IT Asset Management

“Sweating assets” is not a Peloton workout nor does it involve Richard Simmons, but rather refers to the practice of extracting the maximum possible economic value from an asset over its lifespan. Often, this practice stems from a financial decision made to avoid writing an asset down if the book value of the equipment is greater than the resale value. Unfortunately, this is nearly always the case with IT equipment. Actual depreciation of IT assets typically outpaces the depreciation recorded on the company’s financial statements. This difference can result from restrictive OEM practices like recertification charges, software licensing charges, and contractual restrictions that all contribute to making the resale of IT hardware difficult. These practices contribute to a massive drop in value for the server, storage, or network device the minute it is “driven off the lot.” Therefore, IT decision-makers who need to refresh or replace an asset are often left with a difficult choice: write down the asset or delay an important project and sweat the asset until the write-down is more manageable.

Whether or not sweating an asset is a good idea depends on several factors. First and foremost, it is important to know what you are comparing against. Scenario 1 is often to replace the asset with a similar asset. Scenario 2 is to get rid of the asset altogether when moving to a new way of doing business. For example, a farmer 100 years ago may have had to decide if he should keep his horse around until it dies. This farmer could decide to sweat his asset or look at alternatives. Scenario 1 would be to buy a younger, stronger, healthier horse, even though the first horse might not be fully paid off. Scenario 2 would be to retire his horse and buy a tractor. In this case, it is important to weigh the benefits of moving quickly with the benefits of keeping your old horse around to try to save money.

Scenario #1

Replace the IT asset with a similar asset. For example, buy the newer, more powerful, and efficient IBM Mainframe to replace your 5-year-old IBM Mainframe. There are several factors to help you make the decision:

Condition of the Asset: If the asset is in good condition and continues to perform efficiently without significant operating costs, then it can be advantageous to “sweat” it.

Maintenance and Repair Costs: If the asset requires frequent repairs or high maintenance costs, it might be less costly in the long run to invest in a new asset. Always consider third-party maintenance for post-warranty assets, since savings can be 50-90% off OEM maintenance prices. This may make sweating your asset a valid option.

Risk: If the asset’s failure could cause significant disruption to your operations or if it poses safety risks, it’s generally better to replace it. Most data center hardware is technologically obsolete well before it has the risk of failure, so this is usually not a factor.

Environmental Considerations: Newer assets might be more energy-efficient or environmentally friendly. In this case, the environmental and potential financial benefits of replacing the asset might outweigh the benefits of sweating it. However, the environmental cost of manufacturing a new device needs to be weighed against the efficiency gains. Frequent refreshes may actually have a harmful environmental outcome. So, refreshing the asset likely has little environmental benefit. But a move to the cloud could have a significant benefit, as described in scenario 2 below.

Productivity or Efficiency gains: Will refreshing the asset lower costs, increase revenue, increase employee productivity, or lead to better customer retention? This is usually the hardest question to answer and could also have the biggest impact on a decision. When just looking at book values, depreciation schedules, and operating costs, the business gains from newer technology are sometimes forgotten.

In summary, if you are just going to replace the asset with a similar asset, it probably makes sense to sweat it and get the maximum economic value. The exception would be if a newer asset has other benefits to the business. For decades, this decision of refreshing vs. sweating has been decided based on relatively simple economics comparing the total cost of ownership and performance of an existing asset with the total cost of ownership and performance of the new one. When a new technology (like cloud computing) comes around that is no longer just a refresh, the decision becomes more complex.

Scenario #2

In this scenario, the choices are to sweat your asset or retire the asset and invest in a new technological advancement. For example, retire your on-premises servers and migrate your applications to run in the cloud. For this scenario, let’s assume you have already determined that this is a good idea. But if you have millions of dollars invested in data center hardware, should you sweat the assets and delay your application migration, or go ahead and do it now to take advantage of newer technologies sooner? Factors to consider are the following, assuming the choices are to move to the cloud now or sweat your assets some and delay your migration.

Cost of Waiting: Depending on your applications, the cost of running in the cloud could be significantly lower than the cost of running on-premise infrastructure. Sweating an asset delays the operational savings that can be generated from cloud computing.   

Scalability: One of the major benefits of cloud computing is its scalability. If your business is rapidly growing or has significant fluctuations in demand, the cloud allows you to quickly scale up or down as needed. With physical servers, you would need to purchase additional hardware to scale up. Therefore, sweating assets can end up being a never-ending cycle in a growing business. If it is likely that additional computing resources will need to be acquired, the scalability of the cloud may be a major reason to quit sweating assets.  

Business Continuity and Security: Cloud services often come with robust disaster recovery and security capabilities, ensuring your data is secure, backed up, and can be restored quickly in case of a disaster. With all on-premises infrastructure, companies should evaluate any additional investments that might need to be made while sweating assets.    

Innovation and Digital Transformation: Cloud services can offer access to the latest technologies such as AI, machine learning, IoT, etc., which will likely not be possible or cost-effective with on-premises servers that are being sweated. Here, business leaders need to work with IT to quantify the benefits of new technologies, and the cost of waiting. Comparing this to any possible financial advantages of sweating assets is the most difficult part of the decision process.    

Conclusion

In conclusion, there is no universal answer to this question. On average, IT assets are planned to have 5-year economic life cycles, but with all the technological advances over a 5-year period, older assets may become obsolete much faster,  making it beneficial to replace the asset rather than continue sweating it. Regardless, third-party maintenance of post-warranty equipment should always be considered for any on-premises equipment.