Financing Cloud Solutions

by Nicholas Small May/June 2014
CIT Equipment Finance’s Nicholas Small discusses how cloud technologies, while increasingly popular, are catching more than a few companies off guard as a result of unexpected costs. He explains why using traditional financing approaches will not work for cloud solutions, and advises companies to plan ahead and develop flexible financing in order to make the transition a smooth ride.

Now that cloud computing technologies are taking off across scores of industries, the costs related to their adoption are catching more than a few companies off guard. The general thinking is that transition costs, along with the various types of cloud structures, are not fully understood.

The reality is now settling in: Many cloud computing technologies still require basic IT equipment and infrastructure to work. Data and applications still need to be stored somewhere, and end users still require laptops or other devices to access that information over the Internet. Furthermore, cloud-related concerns about security and control are steering firms toward private, in-house solutions that carry higher costs than public cloud alternatives.

Unexpected costs was one of the themes CIT Equipment Finance uncovered in a recent survey of more than 250 senior middle-market executives to gauge their views on cloud computing services. The findings left no doubt that middle-market companies are investigating the cloud in force. In fact, 82% of the respondents said their company now utilizes a public or private cloud in some way. With the cost-saving benefits that cloud-based solutions can offer, it is easy to see why adoption has been so widespread among mid-sized companies that might not have robust IT budgets or departments.

Moving to a cloud-based environment entails transition costs that many companies have not anticipated. In our survey, more than three-quarters of the companies that use public cloud solutions are replacing at least some of their existing IT assets or applications as they tap Software as a Service (SaaS), Platform as a Service (PaaS) and Infrastructure as a Service (IaaS) offerings. These spending demands surprised a good many firms — one-third of public cloud users said their cloud services have been more costly than they initially expected. In addition, nearly half of the public cloud users expressed concern about vendor pricing and unforeseen costs.

Private cloud adopters face even higher transition costs. CIT’s survey revealed that security and control concerns are prompting many mid-market companies to keep key processes and data in-house, and the transition to or buildup of a private cloud can require a substantial up-front investment. More than two-thirds of those we surveyed said they have built their private cloud projects by virtualizing or extending their current data centers, and nearly one-quarter said their private clouds are entirely new systems. Two out of three companies told us that such transition costs forced their companies to spend more on IT infrastructure as a result, and 44% said their projects are being hampered by unforeseen costs. In addition, 51% of private cloud users reported being worried about the costs to maintain or add to existing systems.

Part of the cost problem likely stems from the fact that so many middle-market firms are new to the cloud. More than three-quarters of those we surveyed who are using the public cloud have been subscribing to these services for less than two years, and two-thirds of private cloud users report the same. That means that some of the turbulence companies are experiencing as they move to the cloud may simply be the result of getting familiar with the technology and the initial transition costs that come with it.

Same Old Financing Approaches Won’t Work

But there is another factor involved here, and it is the method mid-sized companies are using to finance their cloud initiatives. Seventy-seven percent of private cloud users revealed that funding for such efforts comes out of their IT budget, and most companies have not altered their financing or accounting approaches for cloud adoption. In fact, 52% of surveyed executives said they fund cloud services and systems with the same financing and accounting mechanisms they use for standard IT systems.

A growing number of cloud service providers are keen to this dynamic. In fact, some have begun to introduce attractive pay-as-you-go structures to help companies spread the costs of cloud adoption over time. Leasing as a financing option gives customers the flexibility to employ different software applications as their needs change. This is a critical feature given how quickly cloud technologies are evolving; obsolescence is a real and present threat. Leasing companies must be prepared to bill and collect on equipment and value added services sold by multiple providers.

But it also speaks to the cautious approach many mid-market firms are taking in adopting cloud solutions. While many companies have only started using the cloud over the past year or two, we know from experience that many of them are engaged in trial runs, in which they adopt the cloud first for ancillary, non-core functions. This helps explain why customer relationship management (CRM) applications have been such a hotspot for early SaaS migration to the cloud.

As these efforts start to bear fruit and companies gain comfort with the technology, over time they will start extending cloud-based services to more critical functional areas within their organizations. As such, they will need a financing solution that grows along with them. Two to three years from now, as more companies get comfortable with the cloud, they will start pushing more of their applications and data to the cloud, and that’s going to require additional equipment and upgrades.

Furthermore, as companies adopt cloud solutions, they will be acquiring not only equipment but also services, from multiple parties. As such, the service providers will need to have the capability to invoice for this — and equipment lenders will need to adapt and provide this service as a core competency.

Of course, the service providers themselves have to consider the new financial risks that come from offering such flexible payment terms, as well as service opt-out clauses. This is a new challenge for these providers, whose core competency is providing technology solutions for the customer. To be frank, billing and collecting capabilities aren’t in their wheelhouse. Therefore, they will need outside partners who can design broad financing programs that address customers’ needs, while helping the service provider manage customer accounts, spot for problems and bring predictability to their financial forecasting.

For Simplicity’s Sake

As complex as some of these emerging cloud solutions are, the last thing end users want, when it comes to paying for them, is added complexity. Simplicity, rather, is going to rule the day. Cloud service providers that offer bundled packages combining cloud access with hardware devices — one-stop-shopping so to speak — are going to have a serious leg up on the competition, because they are going to make cloud adoption that much easier for their customers. With this approach, customers will receive one invoice each month that allocates a portion of the bill for cloud services, and the other for equipment, even when that equipment is provided through a third-party intermediary.

The pace of technological change has always challenged companies and their ability to keep up. The evolution of the cloud is no different — it’s going to take some time and it’s going to bring some turbulence as new solutions are introduced and companies figure out which solutions are right for them.
There is no good reason why the disruption that technology so often causes should translate to IT budgets. By planning ahead and placing a premium on flexible financing structures that grow along with cloud innovation and the business’s needs, companies can enjoy a smooth ride as they nimbly and adroitly take the most advantage of this exciting and productivity-enhancing technology.

Nicholas (Nick) Small is managing director of CIT Equipment Finance, US. In this role, he brings global best practices to bear on oversight of the US Equipment Finance business. Prior to this role, Small served as interim managing director for Vendor Finance Europe and chief operations officer for Global Vendor Finance. Previously at CIT, he was director of Shared Services, overseeing the consolidation of the technology and service platforms of various CIT entities into one operation.

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