Here's an in-depth exploration of expected IT hardware life, leasing IT hardware, and budget planning for hardware replacement.
Question posed by reader Amanda:
I am better trying to understand the accounting lifecycle of servers and other IT hardware. I am curious how exactly the analysis of the expected useful life of a server is conducted. How can a buyer most accurately estimate the time until obsolescence of a piece of hardware?
Response by: Jerry
QPC has been a certified Dell hardware solution provider for 20 years.
We sell, support, and service a lot of server hardware. A long time ago, we found that server leasing was a wasteful strategy that led to organizations replacing servers long before their useful life was over. And this false replacement schedule was forced exclusively by the leasing return schedule, and it caused unnecessary migration labor. Basically, leasing server hardware is just a bad business decision unless a company is publicly traded and their number one objective is stock price smoothing (manipulation) by making everything look like OpEx (operating expense) rather than CapEx (capital expense).
In the world of businesses that are not publicly traded, 99% of the time they are interested in total cost of ownership not only being minimized, but also manageable. The labor will always be the most expensive part of any IT project. Therefore, it behooves a company to buy hardware with an appropriate warranty and sized properly to have a reasonable service life.
If we look at servers, it is extremely reasonable to expect a 7-year usable life in a primary capacity for a server that has been sized correctly and purchased with a 7-year warranty. Many people foolishly balk at the acquisition cost of 7-year servers saying that the price is too much. The problem is that the alternatives are even more expensive. Why would you want to pay for IT labor every 3 or 5 years to migrate all the stuff off the server onto new hardware? You don't. Your budget for IT labor is best spent on security and proper maintenance, not migration labor that could have been avoided simply by buying the right thing from the beginning.
In a lot of cases, your server is still working after 7 years. I would never advocate for usage of a server in a primary business function when the hardware is no longer under active hardware warranty contract, but there is no reason to remove the server from a secondary capacity as long as it still works. We call this bonus time. It is not unusual to see Dell PowerEdge servers lasting 9 years.
It would be extremely inadvisable to run any critical (primary function) business operations on a server that is not fully updated, maintained, and covered by a hardware warranty contract.
One of the big things we do for clients is function as their vCIO, assisting them with writing their IT budgets. Part of that is the 1, 3, 5, and 7-year budget that shows the replacement cycle for all IT hardware, service contracts, and software renewal fees. The concepts above apply to literally all IT hardware. We buy PCs and laptops with 5-year warranties. Switches can be expected to last 8 years, assuming they are kept up-to-date and covered by service contract.
Another alternative is hosted servers. However, when you do the calculations on that, you find that 18 months of a hosted server will cost you the same as 7 years of a physical server you own. And with hosted servers, there is no bonus time. A typical company will pay $700-1000/mo for a hosted server. And that fee does not include the cost of backing it up.
Response by Amanda
Jerry, thank you for your response. Your thorough explanation of asset acquisition for IT really filled in some blanks for me that had been lying dormant for a long time. For 15 years, I worked as an IT consultant and financial analyst, primarily on teams designing, implementing, and maintaining finance systems for large manufacturers and CPG producers. As an application developer, the scope of my team's work never included hardware procurement. That component of a project was always managed internally by the firm's own IT resources. For a long time, we were doing server migrations every 3-5 years for some systems, which I never fully understood the reasoning behind, but it kept us well-engaged and paid, so we didn't question it. Then came Windows 7, and a client wanted to do a huge migration for all the finance apps. During testing, it was discovered that numerous existing systems would not even run on Win7, which caused many problems, as you can guess. We ended up getting a lot of "bonus time" out of servers that were supposedly going to fail if we didn't migrate. Here we thought we were getting 5 years of bonus time out of hardware when really the business had probably been in a pattern of prematurely migrating to new servers every 3-5 years. Something I suspected, but never a matter in which I had a say.
I really find your perspective that buying is a better option than leasing IT equipment interesting, as so many clients over the years leased their major hardware as well as personal PCs. We could probably go on and on about this topic, but I think you explained the logic behind managing the expenses and controlling the costs in a clear way that makes so much sense. Thank you for sharing your background and knowledge!