Case study

How long before we scrap that PC?

This case explores the arguments for and against extending the lifetime of PC hardware.

Keith Cooke's hard drives were starting to crash and his monitors were beginning to flicker. As manager of IT services at Progress Energy's nuclear division, Mr Cooke last replaced his group's 3,000 personal computers in 1999 in advance of Y2K [a problem arising in date arithmetic in software and hardware in 2000, known popularly as ‘the millennium bug']. Four years on, the failure rate of those machines had increased fourfold.

So Mr Cooke's company, which serves almost 3m customers in three south-eastern US states, in January replaced the ageing PCs with new machines from IBM. The new PCs run Windows XP, Microsoft's latest operating system, and can thus cope with Progress's weighty but critical enterprise asset management software.

Upgrading PCs was a no-brainer for Mr Cooke. Applications performance improved by 70 per cent and employees no longer complain about sluggish desktops and notebooks.

And the new machines enabled Mr Cooke's department to cut support and maintenance costs sharply. The investment, he says, will pay off in just one year.

But these days, Mr Cooke is something of an anomaly - the kind of IT manager that PC makers would like to see more often. The computer industry is mired in its worst slump ever, and even though PC makers such as Dell Computer, Hewlett-Packard and IBM all say there are compelling reasons to buy new machines now, cash-strapped companies worldwide are still delaying new PC purchases as long as possible. Worse, industry watchers say they do not expect to see much of a bounce when the market rebound finally arrives.

Industry figures are as discouraging as they ever have been. PC unit sales in 2002 inched back into positive territory after contracting more than 4 per cent in 2001. But, with average selling prices in an inexorable downward spiral, the industry's revenues contracted in 2002 after plunging in 2001. The trend is set to continue, with PC unit sales growing 5 per cent in 2003 while industry-wide revenues fall 1 per cent to $162bn, according to Merrill Lynch.

If, and when, the PC market starts growing solidly again, it will be because corporations such as Progress Energy reach a point at which they can no longer afford to hang on to ageing machines. The corporate market is crucial to the likes of Dell, HP and IBM - it accounts for as much as 69 per cent of all PC sales, according to some estimates. With most companies already computer-savvy, the upgrade, or refresh, cycle is particularly critical to the health of the PC industry.

In past years, PC makers could count on the regular cycle by which corporations upgraded their computers every 3.5 years or so.

A recent Merrill Lynch report suggested the cycle shortened to three years in the late 1990s, in part because buyers needed faster machines to run the latest ‘killer applications'.

Concern over the Y2K bug also fuelled a corporate buying binge in 1999. But the dotcom bust, the lack of new applications and the anaemic economy have all helped push the PC upgrade cycle to an esti- mated four years by 2002. Worse yet, the brokerage estimates the upgrade cycle could on average stretch to 4.5 years by 2004 if there is no discernible pickup in demand.

‘We hope there is going to be an uptick in the replacement cycle this year but we don't really know. Visibility is really cloudy right now', says Jim McDonnell, vice-president for marketing at HP personal systems.

And he is not alone in his assessment. Following the release of Microsoft's latest quarterly results, John Connors, the group's chief financial officer, warned analysts that the outlook did not appear encouraging. ‘There are no clear indications the demand for PCs or corporate IT spending is improving', he says.

Given the pressing financial pressures most com- panies face, it is hardly surprising that many of them are moving conservatively on the PC front. Industry insiders say it is not uncommon to hear from a CIO who wants to upgrade technology, but is ultimately overruled by the company's chief financial officer.

‘The CFOs are winning more than the CIOs. I think right now, the onus is on the CIO to really prove what the return on IT is going to be', says Mr McDonnell. ‘I think it's returned back the way it used to be. In the go-go days of the late 1990s, things were per- haps a little too loose.'

Fortunately for PC makers, CIOs do have some valid arguments with which to make their cases. The most common argument, as Mr Cooke has noted, is simply that upgrading PCs is cheaper - and not nec- essarily just in the long run.

The rule of thumb for hardware is that acquisition costs account for roughly 20 per cent of overall cost. Maintenance and support accounts for the remainder. After three to four years, CIOs say they start to see a noticeable increase in the number of hard drives, fans or memory chips that fail, pushing up break-fix costs or preventative expenditure.

Doug Busch, Intel's chief information officer, recalls how accountants had earmarked roughly $1m to replaces batteries for notebook PCs that were more than 3 years old and were going to be replaced at some point in the near future. The obvi- ous solution - buy new notebooks right away and put the $1m to better use.

Another factor is that a PC software load tends to increase over time, meaning that older machines might require new components or additional memory to prevent them from getting bogged down under the increased demand of more complex software.

Question

You are a chief information officer (CIO) for an organization with a holding of several hundred PCs. The average age of a PC is approaching three years, and you think it is time to upgrade the PCs.

However, the chief financial office (CFO) believes that PCs only need to be replaced every five years. Using the article:

1 Summarize the argument that the CFO is likely to use to argue for a five-year upgrade cycle.

2 Develop your own argument to counter the CFO's case.

Equally important, but harder to demonstrate, is the argument that newer machines will boost worker productivity. IBM says studies show that new PCs can reduce hourglass time - the amount of time workers waste staring at a PC's onscreen hourglass while the machines process commands - by an average of 40 hours per year per employee. In other words, a new PC can bolster a worker's productivity by about one week per year.

A further factor regulating PC consumption is leasing agreements, which account for perhaps one- quarter of the overall market. Most leases run for three years with a one-year extension. After that point, it makes less economic sense to continue leasing older PCs.
Microsoft could also have some influence over the PC refresh cycle. An issue will be the company's decision to stop providing technical support later this year for older versions of its Windows desktop operating system.

This is particularly worrisome because the older operating platforms are riddled with security flaws that constantly require tweaking. Mr Busch at Intel, for example, says he is particularly motivated by security concerns and hopes to step up his PC purchases this year.

Optimists hope security concerns and the end to Microsoft's support will compel companies to purchase new machines that can run Windows XP, a more robust operating system.

A final growth driver will be the push toward wireless notebook PCs that employees can take with them into the field. Sales of notebook PCs grew 5 per cent last year and accounted for about 21 per cent of all PC sales in 2002. Analysts expect that trend to accelerate in the next few years, particularly since the recent launch of Intel's Centrino wireless chipset is expected to increase demand for Wi-Fi enabled machines.
While there appear to be any number of reasons for companies to upgrade their PCs, financial con- cerns are likely to take precedence for perhaps another quarter or two. When PC spending does once again start to grow there are not many analysts who expect to see hockey stick curves. Charles Smulders, analyst at research group Gartner, says: ‘What was expected to be an upgrade wave, now looks like it will probably be more of a ripple'.

Source: Scott Morrison, Working life gets longer for corporate PCs, FT.com, 7 May 2003.