NFIB

Old Equipment: When to Replace, When to Keep
04/ 22/ 2004

by Charles R. McConnell

In this era of rapid technological change, a piece of equipment purchased today is likely to be followed in a very brief time by a new generation of equipment that will do the same job better, faster or more economically. It's a certainty that the people who sell the equipment would have us believe that the "new and improved" model is essential if we are to continue operating efficiently. We're told that what we're now using is obsolete. But there are different kinds of obsolescence, and the equipment that's obsolete in one sense may remain perfectly appropriate in another sense.

Rapid technological change ensures that much equipment we buy becomes technologically obsolete in a short time, meaning there's now something available that's superior in some respects to what we're presently using. But if an equipment replacement decision is made on the basis of technological obsolescence, we could be shelling out good money that we could possibly avoid spending. For equipment to be truly obsolete and a candidate for replacement, it should be functionally obsolete, that is, it will no longer do the job it was meant to do.

Functional obsolescence is true obsolescence. When a particular piece of equipment can no longer serve its intended purpose, this is either because the equipment has deteriorated or the function has changed. Consider the example of an office copy machine. Say a company bought Machine X a year ago, and today our friendly sales representative arrives with the news that Machine X is obsolete because Machine NIX (New-and-Improved X) is now available. Machine NIX will make copies 25 percent faster than plain old X, so Machine X is indeed technologically obsolete. But a close look at the use of good old Machine X reveals that our volume of copying hasn't changed much and that only 50 percent of Machine X's capacity is being used. Copy quality remains consistent and quality requirements haven't changed. So Machine X isn't functionally obsolete because it will still do the job it was intended to perform at essentially the same cost.

Another simple example that most people in business can relate to: this article was written using a computer that's nearly two years old. Given galloping computer technology, this machine is technologically obsolete several times over. But since the application is predominantly word processing and the software used remains consistent with most publishers' systems, this equipment is far from functionally obsolete. In brief, no matter how many bells and whistles are available on new-and-improved models, it isn't the equipment, the old-versus-potentially-new, that has to be assessed. Of course if the present piece of equipment is broken down and can't be repaired at reasonable cost, a replacement decision is likely in order. But otherwise, what has to be thoroughly considered first is the application. If the application remains such that the old equipment will still do the job, the equipment, although technologically obsolete, isn't functionally obsolete and can continue to do its job. If the application has changed such that the old equipment can't perform at all, or, more likely, can't perform fast enough or economically enough, then the old equipment is functionally obsolete and replacement is indicated.

There are times, however, when it makes sense to go for the up-to-date bells and whistles, all of the fancy features of the newest model, and that's when the new technology means bankable cost savings. Thus there are two important steps involved in deciding to replace or keep. The first is determining whether a piece of equipment is functionally obsolete or if it remains appropriate for the application. If the equipment will still do the job, the second step is to subject the old equipment and the potential new equipment to a comparison of all costs of owning and operating both. This means subjecting the potential new equipment to a straightforward cost-benefit analysis. Since the acquisition costs of the new will usually far outweigh the costs of retaining and maintaining the old, it's an infrequent occurrence for the new technology to prove more cost effective than the old one unless the parameters of the application have changed.

Technology is never obsolete just because there's something new and improved available. It pays to go with what's in place as long as it will do the job within all time, cost and quality constraints.

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