Rust Never Sleeps

Shani Raja in London also contributed

Increasingly, companies are selling used equipment over the Internet.

MANAGERS AT HELLER FINANCIAL INC. know something about capital assets. After all, the Chicago-based Heller arranges equipment financing for small to midsized companies. But ironically, until recently, managers at Heller didn't know what to do with their own office equipment. According to John Gougeon, the company's vice president of asset management, Heller was spending $2 million a year to warehouse its used IT equipment and pay its technical staff--a fair chunk of change for a company with annual revenues of $952 million.

So last year, management decided to do something about it. Heller closed the storage facility and began selling its used equipment on virtual exchanges and auction sites. The cyber venue was TechSmart, which specializes in selling used technology over the Net. So far, the move looks like a stonecold winner. Gougeon says Heller not only saves the annual warehousing costs, it also recoups an extra $100 on each $1,000 in used equipment sold on the Web.

For many businesses, getting a reasonable amount of cash for idle capital assets is a big improvement. Typically, companies depreciate used or surplus equipment or donate it to charity for a tax write-off. Sometimes, businesses list second-hand equipment on land-based exchanges, or sell it at live auctions. But the longer it takes to unload second-hand equipment, the more the value of the equipment rusts away. Used heavy industrial equipment, which can take a long time to sell, rarely fetches more than 10 to 20 cents on the dollar when put on the block. Computers depreciate even faster. "It can be difficult to find a home for old computers," confirms Joseph Ottaviano, vice president of business development finance at Compaq Computer Corp., in Houston. "So they sit there. PCs depreciate at a rate of at least 1 percent a week."'

What's worse: Corporate executives often have no clue how much used or surplus equipment their company is sitting on--or where it is. The founder of one cyber exchange recalls meeting with a potential corporate client: "I asked an executive how many computers the company had in mothballs. He said he didn't know. Then he shook his head and said he wasn't even sure where the old PCs were." The computers were finally located--stacked in an old warehouse. Says Mark Weidick, CEO of Cymerc Exchange, which specializes in used communications and IT equipment: "Previously, companies weren't extracting the value of their investments."

They're starting to. According to Forrester Research, online B2B auctions and exchanges will do more than $30 billion in business this year. By 2004, Forrester predicts that figure will be more like $700 billion.

The rising corporate interest in selling surplus equipment online is understandable. Says Dermott Ryan, vice president of marketing at TradeOut, a Valhalla, New York-based online B2B marketplace: "Companies see these sites as a way to boost their ROA, turning idle assets and excess inventory into cash."

Online exchanges, which serve as virtual aggregators, make it easier and faster for companies to recoup some of their investments in capital assets. Live auctions, on the other hand, are not particularly suited for the sale of surplus business assets. This may explain why only 5 percent of all used asset transactions last year took place at live auctions.

In addition, B2B used-equipment sites enable companies to price their old equipment more accurately--like a Kelley Blue Book for capital assets. Brian Kelley, a vice president at Ford Motor Co., in Dearborn, Michigan, which uses ZoneTrader.com to dispose of its used capital assets, notes: "By taking surplus items off our hands and using Web auctions to determine their fair market value, ZoneTrader provides us with a tremendous service." It should be noted that Ford has an equity investment in ZoneTrader.com. Still, other car makers, including European auto giant Volkswagen, are also reportedly looking to sell excess capital assets online. Says Bruno Schick, CEO at Surplex.com, a Dusseldorf-based surplus equipment site: "The Net has brought an amazing liquidity into this market, which used to be confined to local offline dealing."

Industry watchers say used-equipment sites like Surplex, ZoneTrader, and FreeMarkets expand the market. "It enables companies to reach a global audience," says David H. Weinstein, director of research at Joseph Charles & Associates, an investment-banking firm in Boca Raton, Florida.

Granted, selling used equipment over the Web is a radical departure for many corporates. "This is a neglected area of a company's cost structure," notes Ottaviano. Thus, it requires a change in mindset for asset recovery and finance managers. Says Mark Miller, COO at Entrade Inc., a Northfield, Illinois-based ecommerce vendor that runs several B2B sites and develops ecommerce software and marketplaces: "We're changing the core business process and behavior of people who have a lot to lose by making a mistake."

TURBINES/THONGS R US

The core business process has already been changed at F-Cubed Technologies Inc. The New York-based high-tech leasing company was spending $150,000 a year storing and refurbishing its old computers and paying for technical staff--prompting management to consider selling the equipment on the Web. F-Cubed wanted to concentrate on its core competency--equipment leasing, not unloading old inventory. And in the PC leasing business, inventory gets old fast. "It takes an average of three months to resell a piece of equipment," says Raymond Merritt, F-Cubed's president and CEO. "If it gets really long in the tooth, we sell it overseas or donate it to charitable institutions."

No more. Last January, F-Cubed agreed to have TechSmart sell its used computers. When an equipment lease terminates, F-Cubed's customer sends the computers directly to a TechSmart warehouse on Long Island. TechSmart catalogs the equipment and determines whether the equipment is saleable, needs repair, or should be scrapped. F-Cubed is notified so that it can track the status of its equipment.

Interestingly, F-Cubed is only receiving about 12 cents on the dollar for used equipment--less than the 15 cents it got when it resold the equipment on its own. But Merritt says F-Cubed is still saving about $120,000 a year by outsourcing its used capital asset sales to an online reseller. "We eliminated refurbishing, reduced our rent, and don't have to pay marketing costs for selling used equipment," he explains.

IF THE INTERNET is TAKING THE HASsle out of capital asset recovery, choosing a site can still be a pain.

Two years ago, 10 used-equipment sites existed. Today, 300 to 500 online B2B auction sites and exchanges are up and running. Auction sites use several dynamic pricing schemes, including reverse bidding. Exchanges, on the other hand, tend to mimic the bid-and-ask system of traditional stock markets.

Some vertical sites, such as Cymerc Exchange, traffic in one type of used capital equipment. Horizontal sites usually offer an array of products. TradeOut, for one, auctions everything from steam turbines to sandals. Similarly, FreeMarkets sells office supplies, electronics--and train engines. Online Asset Exchange, which boasts Lee Iacocca as spokesman, specializes in selling used heavy industrial equipment.

In Europe, where the surplus equipment market is estimated at $100 billion, online used-equipment sites are springing up like weeds. Surplex.com, which opened in February, facilitates the buying and selling of used equipment for the food processing and metal industries, among other things. The London and Munich-based GoIndustry.com, which conducted its first auction in January, lists items from fax machines to 10-ton traveling overhead cranes.

When choosing a used-equipment site, Carl Lenz, research director at Gartner Group, advises sellers to be certain they can differentiate themselves as suppliers at an auction site. If not, disposing of the equipment offline may make more sense.

Prospective sellers should also make sure a site has the technical infrastructure to support a company's business model and handle customer relationships. Beyond that, CFOs and risk managers will most likely want to know whether a site offers value-added services, such as financing and insurance. But Mark Miller, spokesman for Entrade, points out, "There's far less risk selling online than there is buying online."

Further, floggers of online auctions and exchanges insist that sellers of used equipment net more money in cyberspace. Cory Ravid, CFO at DoveBid, a virtual and land-based auction house in Foster City, California, says that, based on company tracking, winning bids can be as much as 33 percent higher online than at live auctions.

Whether these premiums drive buyers away is uncertain. But some industry watchers are forecasting a consolidation in the online used-equipment mart. "I'd guess that in 24 months," Weinstein of Joseph Charles says, "75 percent of B2B online companies will be gone."

For now, many corporate purchasers appear willing to sacrifice price for convenience. Linda Kelly, who buys used semiconductor-processing equipment for Santa Ana, California-based Microsemi Corp., prefers the virtual approach. "Online," she says, "I don't have to spend three or four days a week traveling to auctions and buying." Corporates sitting on billions in fast-depreciating capital assets no doubt hope there are more Linda Kellys out there.

Gary Stern is a contributor at eCFO.

A Little Help from Above

While some companies are beginning to sell used equipment over the Net, others are just trying to get a handle on where the stuff is. "The controller's nightmare," says Joseph Ottaviano, vice president of business development finance at Compaq Computer Corp., in Houston, "is not knowing where assets are, not being able to track them from cradle to grave."

To exert a bit of control, managers at Compaq are examining a product marketed by Houston-based iVita Software. Employing a variety of location-tracking technologies, including global positioning systems, the iVita application reads signals that indicate the whereabouts of equipment. The system then integrates this information with other data pulled from the Internet, such as the value of an asset, industry trends, and benchmarks. iVita's program prompts customers to take actions, based on those customers' own criteria. In theory, the prompting should help managers decide the best time to redeploy, sell, barter, or donate used capital equipment.

So far, Ottaviano says he's impressed with what he's seen. Compaq management originally considered using the iVita application to monitor the flow of its products returned by customers (those products are repaired, then sold as refurbished models). Now, Ottaviano says executives at Compaq are also thinking about using iVita to keep tabs on the company's office equipment. "You can integrate the system with your asset ledger, then integrate it through other parts of the company," he notes. That enables you to redeploy equipment in a rapid fashion." With 65,000 employees worldwide, such a redeployment could turn out to be a substantial cost saver. When you think about how much equipment people are consuming," muses Ottaviano, "it's mindboggling."

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