In-Depth

Finding New Value in Old PCs and Servers

Gold Certified Partner TechTurn is making a big business out of selling refurbished PCs and servers. A new program through Tech Data gives other Microsoft partners a way to get in on the opportunity to go green.

TechTurn Inc. didn't start out green. In 1999, founder Jeff Zeigler launched the company because he saw an opportunity to build a business out of all the systems that were about to be scrapped as companies scrambled to get ready for the year 2000 date switch.

The Austin, Texas-based company's transition from capitalizing on the one-time Y2K problem to becoming one of the highest-profile channel companies in green IT matches the emergence, the ups and downs and the growing maturity of the IT asset-recovery industry. A new deal with distribution giant Tech Data Corp. that makes TechTurn's services available to a wider set of solutions providers underscores one of the key concrete opportunities for Microsoft partners in the feel-good -- but often-fuzzy -- area of green IT. While many of the green IT solution areas involve power management and cooling for enterprise data centers, IT asset disposal is a service from which any solution provider's smallest customer can benefit.

'Every Piece of the Buffalo'
For a midsize Gold Certified Partner company of about 200 employees, TechTurn boasts a high-powered board of directors. Former U.S. Senator Bill Bradley, well-known environmental professor Dan Esty and professionals from private equity firm Catterton Partners sit on the board.

The company's employees work with incoming used IT equipment such as PCs, servers, smartphones, printers and flat-panel display monitors at two facilities: one in Texas and the other in Richmond, Va.

"We did about a million units last year," says Jake Player, president of TechTurn. "The company has processes and a culture of maniacally focusing on reusing every piece. We like to say it's reusing every piece of the buffalo."

Player continues: "We'll actually take systems and tear them down for parts. For us, we're the anomaly here; we have about 80 percent [of devices] that we're able to refurbish and remarket, with 20 percent recycled. The industry is almost reversed."

 "We like to say it's reusing every piece of the buffalo."

Jake Player, President, TechTurn Inc.

To that end, the company stockpiles parts into piles of like-for-like components, and never invested in a shredder. Player says not having shredding equipment provides an incentive for finding ways to reuse parts.

TechTurn brings in revenues from fees for providing IT asset-recovery services, from remarketing refurbished systems and repairing systems, with a small part coming from recycling services. The company's service offerings include physical removal of equipment, data wiping and reporting, amont other things.

For a company like TechTurn, the devices roll in from many directions. Large OEMs, such as big PC and server manufacturers, represent "a pretty large source," according to Player. Large systems integrators and distributors also provide plenty of business. TechTurn also partners with leasing companies, whose customers send their systems to TechTurn at the end of a contract (this was one of the company's core businesses early in its history). The company also has contracts with major retailers, handling the sizable business for electronics returns. In those cases, TechTurn is the company behind the retailer, repackaging in a refurbished brown box the 5 percent or so of electronics merchandise that consumers return to retail stores. Finally, the company does business directly with Fortune 500 companies for the retirement of IT assets.


 
A system that has been identified as malfunctioning during the routine discovery and testing process gets repairs (top). A box of notebooks (above, right) arrives in receiving at the company's Austin, Texas, facility. An employee (above, left) repairs a notebook.

Once systems are refurbished, TechTurn has several channels to get them back out into the market. Direct-to-consumer sales are available on the company's techturn.com Web site. The company also sells systems either to or through e-commerce partners. TechTurn also sells systems to schools and small businesses, as well as dealers. In general, newer systems get directed to domestic markets, while older, tested and functional systems find their way to international markets.

Fortunes Rising
The years 2006 and 2007 were heady times for the economy, and very promising years for TechTurn. At a time when the economy was booming -- and the privately held TechTurn was riding a $1.5 billion IT asset-recovery industry that was estimated to be growing at 45 percent per year -- the company made a number of strategic moves to build its business.

Called Newmarket IT since its inception in 1999, Zeigler changed the name in August 2006 to TechTurn to reflect the company's focus on turning around used IT equipment for reuse. The change in name came soon after an investment of $50 million by the private equity firm Catterton Partners.

Joining TechTurn's board at that point was Michael Farello, a partner at Catterton and a former Dell Inc. executive. Farello said at the time: "Clearly, there's tremendous opportunity in the space, and our assessment shows that Newmarket IT is the most disciplined operating company in the sector with the greatest opportunity for growth. This infusion of capital will give Newmarket IT the firepower it needs to establish a stronger national presence, build an international presence and launch services for additional product categories such as cell phones and PDAs."

With Farello and Catterton, the pipeline from TechTurn's corporate neighbor from Round Rock, Texas, opened wider.

TechTurn bought a 120,000-square-foot facility in Austin that was formerly used by Dell and increased the company's remanufacturing capacity by more than 300 percent. The company also brought Player on board as president. His previous experience was as the leader of Worldwide Asset Recovery Services for Dell, a group that grew 82 percent while he led it, according to his corporate bio.

From there, the company moved quickly to raise its national profile. The team managed to bring on Bill Bradley as a member of the board of directors in January 2007. Bradley, a former NBA star, a former U.S. Senator from 1979 to 1997 and Al Gore's longest-running challenger for the Democratic presidential nomination in 2000, provides high-level business advice and a lot of help for TechTurn in getting a foot in the door with Fortune 500 companies, according to Player.

Then in July 2007, Dan Esty joined the board, bringing with him a strong boost in corporate environmental credibility for TechTurn's growing focus on the green side of its business. Esty is a member of the Yale faculty in the university's environment and law schools. As an author on the intersection of business and the environment and a former official with the U.S. Environmental Protection Agency (EPA), he's a recognizable expert on environmental affairs.

Microsoft Pays Attention
At the same time TechTurn's profile was increasing, Microsoft was paying more attention to the PC refurbishment market at the commercial level.

Microsoft had been involved with refurbished systems for years, but mostly as part of its "digital divide" efforts to bring PCs to the developing world. In a March 2008 document on "Microsoft and the Secondary PC Ecosystem," the company said it started the Community Microsoft Authorized Refurbisher program in 2000 in the United Kingdom. The program expanded worldwide in 2005, but the focus was on schools, non-profits and other specially approved clients. Indeed, Microsoft categorized the effort as part of its Unlimited Potential program for reaching the next billion PC users by 2015.

In explaining Microsoft's approach to the secondary PC market, the company listed what it called "common misperceptions." The company could easily have been detailing internal concerns that Microsoft itself had to overcome before latching onto the refurbished PC market. Common objections, according to the document, included hurting sales of new computer hardware and software, the idea that secondary PCs are substandard goods and a lack of trustworthiness in the secondary PC market.

With those concerns apparently overcome internally, Microsoft launched a new category of partners in late 2007 called Microsoft Authorized Refurbisher (MAR). The program provided companies the ability to load and sell genuine Microsoft Windows OS licenses for refurbished PCs, to promote themselves as a MAR and to use proprietary installation tools to simplify the Windows deployment process.

 
An employee plugs a system into TechTurn's automated discovery, testing and Department of Defense-level data-wiping process.

TechTurn leapt on the program, getting itself positioned as one of the two worldwide MARs announced in the inauguration of the program on Nov. 9, 2007, and hurrying to be the company to install the first MAR OS license a month later in a ceremony at its Austin facility with Microsoft executives on hand.

To Player, the benefits of participating in the MAR program are plentiful. "No. 1, it adds credibility to our brand and our company straight away," he explains. "No. 2, it absolutely provides more value in recoveries for our clients. Taking these systems, wiping them and then reimaging them with a genuine copy of Windows has allowed us to access a different channel in the secondary market. Before, we were going through some brokers and dealers."

Clearly other firms see the benefits as well. As of mid-March, there were 18 MAR participants in North America, with more serving Europe and Japan. North American MAR partners include Apto Solutions Inc., Compugen Inc., EPC Inc., GEEP Ecosys Inc., Grupocomp LLC, IBM Corp., Intechra Group LLC, Joy Systems Inc., LifeSpan Technology Recycling, Macquarie Group Ltd., Metro Business Systems, Norris Systems, Plan IT ROI, Redemtech Inc., Stallard Technologies Inc., Systemax Inc. and U.S. Micro Corp.

Recession, Netbooks and Bad Actors
Just as TechTurn was loading its first copies of Windows onto refurbished PCs, the stock market was peaking and the worst recession in more than 60 years was beginning, although few observers realized it at the time. The enthusiasm for the new opportunities in refurbished systems met the hard reality of increasing economic uncertainty.

According to David Daoud, an analyst with IDC, the economic crisis hit the IT hardware disposal and recycling sector hard. In a statement in May 2009 describing the fallout, he wrote: "After a few months of collapsing demand for used IT equipment ... vendors and refurbishers seem to be enjoying a slight recovery. Ironically, while demand for used equipment is growing, companies holding on to their hardware longer and postponing refreshes are constraining the supply side in the used equipment market."

TechTurn weathered the downturn, as many others did, with a lot of effort and a reduction in expectations. "We were able to grow, even despite that," Player says of the recession. "But a lot of corporations held onto their technology for an extra year or 18 months."

Netbooks also hit the scene just as Microsoft began authorizing refurbishers. With very low prices for brand-new systems, the trend appeared dangerous for the notebook sector of the refurbishment market.

"When they first launched netbooks, internally we kind of looked at that and thought, 'Wow, this is going to just kill us because no one is going to want a used or refurbished laptop,'" Player says. "That really hasn't happened. The secondary market is as high as it's ever been. People are still going to want to have the Mercedes brand, like a ThinkPad."

So far, TechTurn has found that netbooks get resold out of different channels, such as direct-to-consumer or through e-tailers. Schools and small businesses have been uninterested for the most part, he says.

Meanwhile, the perception of bad actors in the refurbishment market remains a problem.

In an e-mailed statement to a reporter, a Microsoft spokesperson wrote: "There are two major problems legitimate resellers are forced to deal with when counterfeit and unlicensed software is sold through the secondary market. They must compete with heavily discounted fake products in a down economy, and reconcile customer satisfaction issues that arise from faulty products."

According to Player, disreputable companies loading non-genuine versions of Windows "absolutely can" hurt business. "What that means is, if I'm competing for 100 systems, if the customer is really interested in only the cost benefit, it can come into play there if someone isn't playing by the rules. They're not incurring the same costs," Player says.

Generally, most deals don't come down to simple cost benefits, he says. "We'll typically sell the benefits of the program, and not necessarily get into [a cost comparison]."

Ready for a Lift?
After a pause, the market seems ready to grow again. IDC's Daoud was bullish on the mid-term and long-term prospects for the IT asset-disposition market.

"In the mid-term, the supply side is likely to ease as companies will be able to deal with the decommissioning of orphan systems that stopped operating as a result of layoffs and bankruptcies. The easing of the supply side will enable the used equipment market to grow faster," Daoud wrote. "In the longer term, IDC expects a substantial wave of hardware decommissioning, driven by the combination of economic recovery and the need for a new refresh cycle."

Player reports seeing much the same thing among TechTurn customers. "We're starting to see a significant number of these companies consider refreshing to newer technology, and that's going to help us quite a bit. We saw a lot of the lessors extend lease terms last year. This next year should be a pretty big year for companies that are considering refreshing," he adds.

With those signals flashing from the market, Microsoft and its MAR partners have begun making moves again. Microsoft in October added Windows Server to the program, for the first time allowing refurbished server systems to go out with genuine Windows OSes preloaded. Again, TechTurn was at the front of the line. Also in October, TechTurn hired Bill Benton from Microsoft, where he founded and managed the Commercial MAR program. Benton is TechTurn's vice president of channel partners.

Toward the end of 2009, Microsoft launched a program to reduce fraud in the refurbishment market. The company is borrowing techniques it used to help law enforcement bring down a global software piracy ring based in China in 2007 that was accused of manufacturing and distributing an estimated $2 billion in counterfeit Microsoft software.

"As part of MAR, Microsoft launched a program of refurbished PC test purchases to identify refurbishers and resellers who are marketing and selling counterfeit software. Microsoft is seeing a growing trend in uploads of counterfeits to refurbished PCs as it's easy to deceive unsuspecting consumers," a Microsoft spokesperson said of the program launch.

"When Microsoft receives notice from customers that suspect non-genuine software -- [for example], a computer is not working correctly, upgrades aren't available -- test purchases are made from that vendor. And just as a customer takes the PC or software home, Microsoft takes it to a lab where they can test the software and software components to determine their authenticity," the spokesperson said.

The continuing existence of fraud doesn't seem to be souring Microsoft on the potential for the refurbishment market. Microsoft planned to launch a program this spring for small and midsize refurbishers worldwide to allow them to supply PCs preinstalled with Microsoft software to local consumers and businesses. The company was also adding volume-licensing options to the MAR program.

Getting into the Game
While large MARs have the biggest growth potential in IT asset recovery, Microsoft's new programs and the deal between TechTurn and Tech Data create more room for solutions providers to get involved.

"Most resellers are trying to figure out ways to provide more services to their existing accounts. Among the ways we work with them is to provide this service as a white-label service," Player says. "We have it SKU'd so they can re-brand it themselves. We provide full end-to-end logistics, reporting and even value back. They're able to resell this service and capture margin through the sale of this service."

He adds: "They're usually in there with customers selling a variety of things. This is a good green conversation. As more and more integrators and IT resellers want to start talking to their customers about their green IT strategy, this is probably the one area that can provide the most benefit."

Tens of thousands of solutions providers gained access to TechTurn's services in February when Tech Data began distributing its services.

"Greater green awareness and laws nationwide prevent people from sending old computers to the landfill," Barb Miller, Tech Data vice president of government, health care and technical services, said in a statement. "Security concerns, compliance with regulations like Sarbanes-Oxley and HIPAA, and the threat of litigation make it difficult for users to confidently dispose of devices that store sensitive information. With a partner like TechTurn, resellers can help their customers retire old hardware in a secure and environmentally friendly manner."

 
Through repairs, TechTurn is able to return most systems to fully tested and functional status, maximizing the value for clients and reducing the number of systems that need to have their parts completely recycled.

The TechTurn services available through Tech Data include:

  • Asset recovery and rebuilding, which includes data wiping, asset-tag removal, hardware value assessment and disposition through refurbishment, and resale or recycling.
  • Logistics, which includes packaging and discounted shipping to one of TechTurn's processing centers, and can include secure, sealed trucks to pick up IT assets.
  • Recycling by breaking down assets into base materials in compliance with the EPA's Responsible Recycling/Recycling Industry Operating Standard (R2/RIOS) certification.
  • Redeployment, which involves testing, diagnosing, wiping data, reimaging and rebuilding systems for continued use by the owner.
  • Lease-return processing to help users manage and return their leased equipment in compliance with lease terms.

'100 Percent Cost Benefit'
Despite momentum in popular sentiment and corporate awareness about the value of green, selling IT asset recovery in any form is far from a lock.

"Awareness around environmentally disposing of equipment is growing, but it's low," Player says. With sales to business, environmental responsibility discussions are like the famous IBM green TV advertisement, where the young employee is boring her boss about environmental responsibility until she reaches the part about saving money.

When it comes to sales, it's "probably 100 percent cost benefit and then the environmental piece is good," Player says, then reconsiders. "Good is not the right word, but that alone has not won us business. We've invested a significant amount [in environmental certifications]. For these major companies, we have to comply. We're audited by their compliance teams annually. 'You passed the compliance audit, congratulations. Now, you can talk to me,'" he explains.

"The [environmental certification compliance] piece, over the past three years, has gotten more and more attention. And it continues to garner more attention from these large companies," Player says.

Competing with the Storage Closet
Will increasing regulation drive more sales for IT asset recovery and disposal? Player says the regulatory picture is the definition of a patchwork. "There are 20 states that are considering legislation. There are 11 states that have passed legislation, mostly around producer responsibility. We're actually in favor of a federal law or regulation because it's difficult to keep up with the states and their different pieces," he notes.

Even as regulation can drive the market, so can software-compliance initiatives, especially those from Microsoft.

"Software compliance, while it hasn't gotten a lot of media attention, I think is the next big thing for our industry. Because we're an authorized provider, we're able to assure customers that we're going to be in compliance with all of the software pieces. We're able to demonstrate that every system has a genuine copy of Windows on it," Player says.

Even with all those business drivers, TechTurn and the other big MARs may be concerned less about each other than they are about inertia and complacency.

"Our biggest competitor is the trash can. A lot of people throw this stuff away, although landfilling the stuff is illegal in most states now," Player says. "[The other major competitor is] the storage closet. We think it's shifting more toward the storage closet."

If customers start bringing their systems out of the storage closet, the refurbishment market could be the very picture of a greenfield. In discussions about the refurbished PC market, Microsoft uses a figure of 35 million refurbished PCs hitting the market each year. By comparison, market research firm iSuppli Corp. estimates that nearly 265 million PCs shipped in 2007. Even if only half of those new PCs are replacing existing systems, that's a lot of potential growth for repurposed machines.