Ongoing developments in the ITAD/eWaste sector suggest that established players in the industry are going through a soul-searching exercise. This phase, albeit necessary, can be difficult and is the result of a deep industry transformation amid a changing IT landscape. Indeed a series of events hint of some difficult choices industry executives have to make. The closing of sites owned by the likes of Creative Recycling and SIMS, the rebranding of R2 Solutions to become SERI, Ingram Micro’s recent acquisition of GMP and other events are how the sector is responding to the challenges it faces.[membersonly]
While traditional players in the IT recycling and eWaste space are trying to come up with a reasonable business model that makes economic sense, it is not always about the acquisition path that is seen as the best way forward. In previous analyses, we wrote about the need for the most forward looking ITAD pure-play companies that have not been targeted by potential acquirers to start thinking about the merger path. Our argument is very straightforward. Many end-user companies, from banks and insurance firms, to government institutions say that they have a preference for a service provider whose core business is IT
AD. They want to keep that end-of-life function separate so that they feel they are getting full attention. Going with a provider whose core activities are traditionally outside of ITAD is seen by many of our customers as a potential risk given the ITAD function within the provider could be secondary. So much so that one particular company executive in a media company told us that “dealing with XYZ is like organizing a wedding.” The executive was talking about a large corporation that submitted a bid to handle their asset disposition.
But one other venue that we have not spent enough time on is not about acquisitions or mergers, but about the creation of a new ITAD pure-play company. Many in the sector remain skeptical about the prospect of a new ITAD firm and think that would be a daring move, but there is always the possibility that a new player comes into the marketplace with fresh-enough ideas to disrupt the sector. That happens even in traditional industries. Meet Sage Sustainable Electronics.
SageSE is an interesting player that is in its very early stages. It caught our attention because of the people behind it. It is true that the barriers of entry in ITAD are not necessarily high, but when the two former top executives of Redemtech decide to form a new company, it is definitely a business venture that could at least add solid competition in the marketplace, if it does not disrupt it altogether.
SageSE is the brainchild of Bob Houghton and Jill Vaske. Bob used to be the President of Redemtech before parent company Micro Electronics sold it to Arrow. Jill was Executive Vice President in charge of all customer-facing activities including both product and services Sales, Customer Service, and the Practice Advisory.
When we began covering end-of-life at IDC in the mid-2000s, Redemtech got on our radar screen not because of any marketing campaign from the Redemtech folks, but because of their customers. We conducted a big survey of US-based global corporations among IT and procurement management and on the question of who was their ITAD provider, we allowed non-aided responses, essentially forcing folks to enter the name of the provider, as opposed to pick from a pre-determined list. Although we immediately recognized the usual names such as Dell, HP, and IBM, we were surprised to see the unknown name of Redemtech showing among the top ones in this business. The survey was repeated several times over the years, confirming that there was no data error: Redemtech was up there with the majors.
Leadership Position:
Redemtech’s position in the market was an interesting question to ask. A survey conducted in 2012 showed that Redemtech’s penetration rate of corporate US, which would include SMB, large enterprise and public sector, was at the decent rate of 7.5%. What this means was that Redemtech was probably able to touch more than 7% of US-based businesses, one way or another. That figure put Redemtech on-par with CDW, a giant in the IT distribution sector. Although the single-digit number may be seen as misleadingly too low, the reality is that while being statistically tied to CDW, there were only three companies showing greater numbers than Redemtech, actually in double-digit rates, and those companies were: Dell, HP and IBM. For Redemtech, this was a terrific position to be because it is normal that most IT and procurement departments would chose their primary IT provider as the chosen ITAD provider. The trio Dell, HP and IBM has always had vibrant ITAD operations tied to their sales and to their leasing and financing operations. So it is no surprise to see them up top. Same for CDW. But for Redemtech to show among top-4, it is indeed a confirmation of a leadership position considering its pure-play status.
Focus on Large Enterprise Accounts:
Then the data expanded the story about Redemtech with more specific and interesting details. We found out that if Redemtech was ranked fourth with a penetration rate of 7.5% for the whole business market, its rate in the large enterprise accounts, defined as businesses with more than 10,000 employees, exceeded the 10.5%. This double-digit rate, essentially the only one with the trio mentioned above, dropped CDW to less than 6%, while GE Capital, a leasing and financing giant moved up to 9.8%. This finding, later confirmed through executive interviews and secondary research, suggested that Redemtech’s focus was much more among the lucrative large enterprise sector than SMB. Indeed there are greater margins to generate when servicing a bank than a medium-sized retailer, and that was a strategic decision that Redemtech senior management may have made from the get-go.
Can SageSE Thrive in the Current Environment?
Mentioning the details above serves the interesting purpose of arguing whether SageSE, call it Redemtech 2.0, has the chance to thrive. And my personal conclusion is yes, and here’s why:
- The market is looking for alternative suppliers: The acquisition wave we’ve seen in the market since 2010 has essentially removed some of the best players from the competitive landscape. The acquirers, from Arrow to Ingram Micro, Avnet and a few others, were correct to purchase good ITAD assets. But as a consequence, the pure-play space has been quickly reduced, forcing many end-user companies to reassess and wonder where the situation was headed. So argument number one: there is demand for pure-play companies whose core business is excellence in ITAD as some end-user companies remain hesitant to deal with large corporations.
- SageSE has the necessary skills and network to build upon: Three areas that we found the ex-Redemtech management excelled in their previous positions, and that could be to their advantage as they build the new firm:
- They have excellent track record building relevant business programs that were actually used and implemented among their clients pre-acquisition. The so-called Practice Advisory Groups were teams of specialists focused on specific topics from tech deployment to logistics. They were established and deployed to help customers deal with the complexity of a variety of functions. These advisory units were instrumental in dealing with large enterprise customers, and they tend to be even more important when dealing with specific vertical industries such as finance, healthcare, government, etc.
- They maintain an impressive “rolodex” of prospective customers: At more than 10.5% penetration rate of large enterprises in the pre-acquisition era, the SageSE team today had, and probably still maintains, direct connections with decision makers in IT, procurement, CSR, finance, and other functions. Personal relations will be critical in building the new company.
- They are building a solid team of experienced executives. Client Engagement is handled by Barbara Scott who knows the end-user mindset, having been a Global Asset Manager for Capital One. With Barbara at this top position, SageSE is clearly indicating that its focus will remain on the lucrative large enterprise accounts. Other important appointments are those of Jason Gilbreath, a former Redemtech Director, joining as the CTO and bringing the tech knowhow with him, and Mike Keegan, a highly experienced financial specialist as SageSE CFO.Argument number two: SageSE appears to have the proper DNA to compete properly.
- First Major Strategic Alliance with Hugo Neu Recycling: In its startup mode, SageSE succeeded in striking a critical partnership agreement with the long-established recycling firm Hugo Neu Recycling, a unit of Hugo Neu Corporation. What this alliance means is that SageSE will essentially be able to not only offer IT Asset Disposition services, but it will also provide customers with one-stop-shop for pure electronics recycling. Indeed most ITAD companies tend to struggle with what to do with obsolete electronics, since their primary focus has always been remarketing. In this case, we expect a new economic model to emerge as a result of this relationship, with the two partners anticipated to expand in tandem.
What to Watch Going Forward:
Bringing all of this together will be Jill Vaske and Bob Houghton’s role. Their task will not be easy considering that not only they have to deal with the competitive landscape, but they also face drastic changes promised in the IT world.
On the competitive front, although we could easily identify why they could succeed, as pointed out in the previous section above, it will remain critical for them to show to their prospective clients some substantial differentiation versus their competition. Bob’s tenure at eStewards could turn out to be a key advantage, in particular when approaching highly environmentally-sensitive customers. But that has to be more than an environmental value proposition to regain the momentum. Special considerations have to be given to the functions of data security and compliance, finance, IT management, procurement practices, CSR, etc. Furthermore, SageSE must be aware of how their competitors approach the market and adjust their offerings accordingly.
On the IT transformation front, it is critical that SageSE has a broad view of the IT landscape and its future shape. The ITAD industry is still very far behind when it comes to understanding the reasons behind the current collapse of the PC space, and the strengthening of data center and mobile devices. Most of the strategies I heard from ITAD companies to date remain substandard, unimpressive and void of strategic vision. SageSE and others who want to do well will have to break from that position of status-quo.
Concluding Positions:
For companies that use ITAD providers: The emergence of a new player, headed by veteran executives who were successful in their previous ventures should be a welcome development. The new company promises new practices, new ideas and new value propositions, which we recommend to assess in light of your own priorities. In potentially dealing with SageSE, we recommend that you focus your probing on what differentiation the company brings to the table. Special consideration should be on how their business model fits in your compliance requirements, how they could demonstrate at least some level of cost control, and how they demonstrate their commitment to your environmental stewardship.
For competing ITAD companies: It is inevitable that new competitors inject new ideas and fresh perspectives. The executive team at SageSE has a strong track record of generating ideas and executing on them. Given that they are no longer tied to a parent company, we expect SageSE management to push further in the direction of innovation and new business processes. This could indeed be disruptive.
For SageSE: SageSE has successfully accomplished its first critical step of establishing itself, and bringing together a talented management team. With this first step behind, execution should be on a business plan that has some elements that are either best-in-class or disruptive to the market at best.
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