Are My Data Center Assets Worth the Book Value?
IT leaders or their colleagues in finance often ask about the value of their installed IT assets. With ReluTech being the recognized worldwide leader in evaluating used IT equipment, it would seem like a fairly straightforward question. Customers often want to know if their book value is close to the actual value. This becomes important when planning mergers and acquisitions, equipment refreshes, or migrations. Customers want to avoid unplanned write-offs when equipment ends up being worth far less than the book value. Yet, there are several important variables that affect the results: depreciation method, resalable hardware acquisition price, and the rate of obsolescence.
Book value is the value on a company’s balance sheet and is solely based on the original acquisition price less accumulated depreciation. But, two companies buying the exact same product may have vastly different book values after any given time period. For example, one company might depreciate IT assets over three years and another company may depreciate over five years. A $1 million acquisition by the first company would have a $0 book value after three years, and a $400,000 book value if owned by the second company. To make this more complicated, some companies may have accelerated depreciation vs a straight-line calculation.
Accelerated depreciation more closely aligns with the actual drop in value over the first year, and companies using this method may have book values that more closely match actual value.
Furthermore, the two companies may have negotiated very different prices when they made the initial purchase. With IT equipment, it is not unusual to see one company pay double what another company pays for the exact same products. Clearly, book value is no indication of actual value and may vary greatly depending on the original price and depreciation method.
The second variable is what I like to call Resalable Hardware Acquisition Value. This is the resalable value of the hardware on the day after purchase. Everyone is familiar with the idea that a new car loses value the minute it is driven off the lot. IT equipment devalues in the same way – but much more significantly. Some IT equipment may be worth only 10% of the acquisition cost the day after driving off the lot. This is usually due to anti-competitive practices by the manufacturers. Some OEM’s bundle necessary software with the hardware, and then require second users to buy the software again. Or, manufacturers may restrict warranty transfers and try to limit where used equipment can be sold. It is advisable to completely avoid buying such products due to the almost 100% loss of value caused by these practices. Such systems can really only be sold as spare parts and components. So, the Resalable Hardware Acquisition Value is the value of the hardware components that can be resold. This may vary greatly by the equipment bought. Some systems (most WinTel servers) retain most of their value. Many specialty flash storage providers are on the other end of the spectrum and the equipment becomes worthless almost immediately. This is often due to the lack of warranty transferability and embedded software that can’t be resold.
The rate of obsolescence is the third variable and one which is mostly out of the customer’s control. Moore’s Law, as discussed in my previous article, has led to a doubling of IT performance at least every two years. This equates to approximately a 40% annual rate of performance improvements. Meaning, installed IT equipment is going to decline in value at approximately the same rate. For example, a piece of hardware worth $100,000 today, is likely worth $60,000 in one year, $36,000 in two years, and only $21,600 in three years. Some equipment will retain more value, like core network switches, while other products may decline even faster.
So, is your equipment worth its book value? If you have acquired the right products at competitive prices, and used accelerated depreciation, then the answer is probably yes. But most of the time, relatively new equipment has not been depreciated fast enough, and we find a large disparity. Companies in this situation will likely have to write equipment down if needing to dispose of it. I would suggest a thorough evaluation first to determine the situation because there is no easy way to accurately guess the magnitude of the issue.
