Balancing the Value of Gray Market IT Hardware and...

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Balancing the Value of Gray Market IT Hardware and Software

by - edited

By Todd R. Weiss

Saving money for your company's IT department is a great thing, unless the savings come at the price of security, reliability, and security. That's the conundrum that many companies find today as they ponder hardware and software purchases from non-traditional, and usually cheaper, sources such as "gray market" vendors.

What's a gray market IT offering? According to the Alliance for Gray Market and Counterfeit Abatement (AGMA), it's the "unauthorized sale of new, branded products diverted from authorized distribution channels or imported into a country for sale without the consent or knowledge of the manufacturer." Or, as it might be presented to you, “Such a deal!”

What gray market usually means for businesses and consumers is that the products might look and work the same for less money, but they may open huge cans of worms that can leave your IT systems lacking when you need them most, according to Scott Olsen, a spokesman for the Los Gatos, Calif.-based AGMA non-profit member association. Since 2001, the AGMA has worked to fight gray market and counterfeit goods on behalf of its member companies, which include AMD, Avaya, Cisco Systems, Deloitte, Hewlett-Packard, Microsoft, IBM, Hitachi Global Storage Technologies, Oracle, and Seagate.

A key problem with gray market goods is that they may lack critical elements such as valid U.S. warranties, full vendor support and service, and even U.S. regulatory approvals, such as UL listings.

"Any time there is a recession or there are concerns about IT budgets, this topic comes up," Olsen said.

The latest KPMG analysis on the impact of gray market IT sales estimated about $58 billion in gray market in 2007, the latest year that figures were available, Olsen said. That amounted to an estimated 5% to 30% of total IT sales worldwide.

When a buyer has a problem with an item procured from the gray market, Olsen said, they have to call the vendor and work with the reseller. The real trouble arises when traditional vendors can't support the goods because they were bought through improper distribution channels and aren't authorized for local sale.

There are several other red flags for users in the seamy world of gray market sales, Olsen said.

Counterfeit goods need to be carefully evaluated to rule them out before purchase, he said. Sometimes, a business is at the mercy of a "bait-and-switch" sales model, too, causing users to be drawn into "deals" that never pan out the way they expected, Olsen said.

Be very wary when you are shopping for highly-desired IT hardware; that's the stuff that's most likely going to be the target for gray market vendors. "The more popular the product is, the more likely there will be a potential gray market for it," Olsen said.

So how big a deal should this be on your IT agenda? IT analysts have differing opinions on whether it should be a major concern.

Dan Olds, principal analyst with Gabriel Consulting Group in Beaverton, Oregon, said these kinds of worries with gray market products should definitely be on the minds of business leaders, especially when a potential IT product deal looks too good to be true.

"Some of this stuff is coming from completely knock-off companies, including some that have no quality control systems, while some of it is just coming out the back door of other companies," Olds said. "There are a lot of things to be concerned about."

It's one thing to buy a knock-off gray market wristwatch, handbag, or DVD on a street corner in any major city, he said. At that point, if it falls apart, the worst case scenario is that you've wasted a few dollars, but it won't ruin your life.

“But if you're talking about buying and deploying gray market, uncertain equipment, or software for your company's critical IT systems, then that would scare the hell out of me,” Olds said. When he shopped recently for a hard drive array for his own business, Olds found an online retailer selling arrays that were returns from other customers, for $100 less than he'd seen elsewhere. “I didn't know if it was used or if it already had been registered for its warranty,” he said. “It gave me the creeps. So I didn't buy it from him.”

Instead he bought a known new product from another vendor and saved himself a lot of potential aggravation, he said. “There are a lot of little companies out there who are buying up returns when a vendor doesn't want to mess with products,” he said. “They might strip it or do a cursory test and send it in a new box. These things can change hands a number of times before they get to you.”

And if it's a gray market component for your network infrastructure, then Olds would worry about potential security vulnerabilities it could contain, including back door viruses or malware. “You could be buying something that's potentially going to infect your systems and you do might not have any recourse. I'm not above looking for a good deal and being happy to get one but I'm not a guy who's willing to risk his business on it. It's like buying knock-off surgical instruments or cheap experimental airplane parts. The kinds of failures you can get from this stuff is far greater than the benefit you can get from a lower acquisition cost."

Another analyst, Charles King, of Hayward, Calif.-based research firm Pund-IT, has no quarrel with the AGMA’s stance on actual gray market sales which involve stolen or fraudulently misrepresented goods. However, King feels companies shouldn't completely abandon at least checking into the possibilities of gear that comes from non-traditional vendors.

"There's a certain amount of unacknowledged stress between regular systems vendors and the aftermarket vendors," King said. "AGMA in their statement makes it clear that its concerns are about stolen and rebranded equipment, and not about used equipment. But at the same time, they put fear into people's minds."

King pointed out that the AGMA warnings may cause businesses to steer clear of deals in quality used hardware. "The emphasis on purchasing new equipment through a vendor's conventional channel partners is a bit like an automobile manufacturer that wants to steer people toward its existing dealerships and away from buying used cars off a common lot," King said. "On the plus side, you're always driving a new vehicle and enjoying the latest bells and whistles but in point of fact there aren't many instances where a new vehicle is absolutely required."

Much of it does come down to “buyer beware,” he said. "It's a touchy issue.” A huge amount of fake or misdirected equipment is being sold at bargain-basement prices. Companies need to be careful, ask a lot of questions, and know who they are dealing with, King said. "I think that it's true for the IT business like any business."

So in the end of the analysis, what can you do to prevent gray market equipment problems inside your company?

The best ways to prevent potential issues is to have a plan to know exactly what you are buying, said the AGMA's Olsen.

Understand the scope of the gray market issue. Learn what to look for and what to ask when buying equipment from non-authorized vendors.
Create compliance guidelines to help your workers identify red flags for gray market goods, such as when a price is dramatically and unexplainably lower than from other vendors. Validate and verify your sources and ask your vendors to do so, too.
When you’re offered a great deal, call the manufacturer to verify authenticity. Check on serial numbers and product numbers if you have any doubts. Ask the vendor if the company you are dealing with is an authorized agent for the products.