Grappling with Cloud20/03/2012
Nearly one-third of companies interviewed by IDC for an equipment leasing industry survey completed in December plan to use external leasing or financing for cloud initiatives. Inquiries about cloud computing received by The Alta Group from IT vendors centre on how to formulate an entirely new form of financing that requires adjusting internal relationships (including cost allocations) and external market approaches, particularly pricing and transaction structuring. Since cloud computing represents a significant, new area for growth, possibly the largest opportunity in the IT marketplace for the next several years, and there are no standards for comparison, taking full advantage of this opportunity requires research, benchmarking and deep experience in creative service financing.While some lessors may still be grappling with the definition of cloud computing, others are already in various stages of developing a new business niche.
The Equipment Leasing & Finance Foundation’s (“ELFF”) recent report based on IDC's research, Financing the Cloud - A Market Study, found that:Cloud infrastructure build-out is an expanding segment with positive long-term financing prospects for IT leasing and finance companies. Global spending to build internal private IT cloud infrastructure and public IT cloud infrastructure reached an estimated $12.7 billion in 2011 and should exceed $32.3 billion by 2015. IT public cloud services represent another growth opportunity. IT organizations and consumers have begun buying computing and storage resources from third-party service providers in a manner reminiscent of timeshare services. Globally, customers spent 30 percent more on public IT cloud services in 2011 ($29 billion) than in 2010, and should spend $55 billion annually by 2014.
Unusually high cash balances at Fortune 500 businesses concerned about the economy represent the greatest short-term challenge for IT leasing and finance companies. On the other hand, “the pendulum on cash hoarding will shift to leasing and financing over the next 24 months, as end users look to leasing as a means to limit their risk exposure for IT equipment and solutions....”So far, mostly captives and independents are exploring potential business models, according to Melisa Carter, a consultant with The Alta Group who was involved in the development of the study. However, she added, there is a long way to go before most credit officers and chief information officers reach comfort levels. Jon Fales, a senior managing director in The Alta Group and leader of the consultancy's IT vertical practice, explained, “In the past,
IT and office equipment vendors could measure usage-based, cost-per-unit cycles or number of copies, but with cloud computing an application might be running on different servers and it would be almost impossible to track cost-per-unit time. You can't use old school measures. Vendors are now trying to figure out how to measure usage based on number of users and their ability to log in to the cloud application as needed. Vendors also are grappling with the implications these cloud structures will have on revenue recognition. “Other market dynamics will also have to be addressed strategically. For example, many customers of captive IT vendors will either reduce the size of their own data centres or move entirely to public clouds. This will result in fewer clients but larger portfolios for some lessors, who in turn will have to consider their concentration risks.”
Other questions can arise when looking at cloud computing as a service. “For example, if there is a default, what can be repossessed? Cloud financing will require understanding critical-use software, and knowing how important use of the application is to the business,” Fales said. Carter added, “There are active discussions going on now between captives and parent companies about how to do this.” For more information about cloud financing, contact Jon Fales or Melisa Carter.