Financing the Cloud

The rapid emergence of cloud computing technologies is prompting leaders of businesses large and small to consider how to put them to use and to what extent. Security, of course, is a topmost concern, influencing firms' decisions about whether to employ a public cloud, a private one, or a hybrid solution that encompasses both. How cloud capabilities will be integrated into existing IT infrastructure is another issue, as is how to choose from a wealth of emerging cloud service providers.

One subject not getting near enough attention, though, is the role IT financing will play as companies migrate to the cloud in a bid to save costs and bring added flexibility to their business models. The thinking seems to be that the need for IT equipment will be dramatically reduced ' that it will somehow evaporate in the cloud. In reality, IT equipment is the backbone of the infrastructure that supports the day-to-day workings of the cloud. After all, technology equipment will still be required in order to store data and run applications from the cloud.

In this, the cloud will in all likelihood be just as transformative for IT financing as it will be for companies' operations. Some customers will procure their cloud services from the very same vendors that supply their computers and peripheral devices, and they will want to spread the costs over a period of time rather than handle them in one lump-sum payment. Meanwhile, service providers will need to manage new financial risks brought on by the cloud, from taking on a greater share of overall IT spending to dealing with customers' demands for flexibility and service opt-out clauses.

An Evolution, Not a Revolution

First, it's important to bring some historical context to this dynamic technology. Cloud computing traces its roots back to the 1950s, when large-scale mainframes began giving educational institutions and corporations access to data through “dumb terminals.” It wasn't until the expansion of the Internet during the 1990s that businesses began using centralized computers to access applications on remote servers. Software as a service, or SaaS, didn't really take off until after the turn of the century.

It's arguable that small to midsized businesses should be early adopters of cloud services. After all, they are sensitive to increases in operating expenses, and the cloud should enable them to grow while keeping IT costs in check. But most indications to date are that smaller businesses are taking an incremental approach to adopting cloud services. For instance, roughly three in every 10 midsized firms recently polled by market intelligence firm International Data Corporation planned on implementing a public cloud solution over the next 12 months, while two in 10 planned to add a private cloud solution over that time frame. See http://idcdocserv.com/995.

This go-slow approach is reminiscent of how businesses have reacted to other ground-breaking technologies, such as Voice over Internet Protocol. One recent survey found that only 16% of small businesses have started using VoIP services, more than two decades after the first VoIP application was launched and nine years after the introduction of VoIP services that use broadband Internet access. See www.teotech.com/content/voip-adoption-slow-among-small-businesses. What such episodes tell us is that the evolution of the cloud is probably going to be more evolutionary than revolutionary, despite its immense promise.

The Appeal ' and Pitfalls ' of Pay-As-You-Go

Understanding this, cloud service providers have rolled out attractive pay-as-you-go structures to induce customers to dip their toe in the cloud. These payment plans, which set monthly fees based on actual usage, give customers the flexibility to employ different software applications as their needs or business models change. A key inducement included in many of these arrangements is the ability to cancel at any time.

While pay-as-you-go may help attract new customers to the cloud, it can also create new headaches for service providers. The basic challenge is the variable nature of payments; when customers use fewer services their related charges decline. The perennial threat of cancellation means service providers have to bring in more paying customers than the ones who are departing, or they can't continue to invest in the growth of the business or recoup money spent to build out the original IT infrastructure. Variable billing will soon become a requirement. And expertise in variable billing will help keep things simple for vendors and end users alike.

The skills it takes to manage these new dimensions aren't core capabilities for most IT providers, who are rightly focused on service differentiation and continued innovation. As a result, IT providers will soon face the prospect of spending their own time and resources, or finding experienced financial partners to help them structure transactions and provide services that complement their offering in order to keep customers on board. If an outside vendor is brought in, it's critical for the hiring organization to conduct its due diligence and pick the right financial partner to structure and tailor financing and leasing programs that are designed to help increase sales. A finance company with expertise in invoicing and servicing such structures is critical.

Simplicity over Complexity

Having been in this business for almost 30 years, I can tell you that when it comes to paying for business services, companies almost always prefer simplicity over complexity. Given how difficult it has been for some business leaders to wrap their minds around the workings of the cloud, the last thing end users are going to want is added complexity in managing their IT budgets.

This tendency is going to create opportunities for cloud providers that offer bundled packages combining cloud access with hardware devices. Each month, these providers will invoice their customers once ' with a portion of the bill going to cloud services and the other for equipment. In some cases, the service providers themselves won't be the ones providing the equipment. Instead, it will be supplied through IT equipment vendors supported by a third-party financial intermediary with experience in the sector and invoicing and servicing expertise. This financial partner won't just handle the IT equipment leasing, though; it will also manage the day-to-day account maintenance, variable billing and servicing. The risks that customers either reduce their services plan or drop it altogether may be shared.

As important will be how the financial intermediaries work with the customers, because those relationships should offer ripe opportunities for cross-selling additional products and services. We know from a host of studies on how businesses perceive the cloud that there is a wide knowledge gap between small to midsized business owners and cloud solution providers. Conveying key information as part of the invoicing and services process will be critical to bridging these gaps and motivating companies to expand their use of the cloud in the future.

Finding the Right Financial Partner

When considering a financing partner to help you make a sale, who you decide to go with can make all the difference. It's important to choose a company with extensive experience in financing technology because a strong understanding of the risks and opportunities can help you avoid potential missteps and bring you closer to your customers. It's also important that the financing provider have experience with usage-based billing and bundling transactions. These days, customers want one-stop invoicing, with everything available in one place and in one monthly payment. Being able to provide that level of service is a differentiating capability that will make you much more likely to add and retain customers as they grow more familiar with cloud computing solutions.

Remember, cloud customers are still finding their way in this evolving landscape. The deliberate approach they are taking as they explore the technology and see what makes sense for them is an opportunity for you to lend a guiding hand. At the same time, you need to know that someone has your back when it comes to meeting your own growth aspirations. The right financial partner can help you manage both of these fronts, and help assure that the upheaval brought on by this exciting technology doesn't extend to your balance sheet.

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Ron Arrington is the Global President of CIT Vendor Finance, a business with over $5 billion in assets operating in more than 20 countries. He has 25 years of experience in providing intermediary financing for both commercial and consumer markets. Arrington may be contacted at 973-740-5605 or [email protected].

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The rapid emergence of cloud computing technologies is prompting leaders of businesses large and small to consider how to put them to use and to what extent. Security, of course, is a topmost concern, influencing firms' decisions about whether to employ a public cloud, a private one, or a hybrid solution that encompasses both. How cloud capabilities will be integrated into existing IT infrastructure is another issue, as is how to choose from a wealth of emerging cloud service providers.

One subject not getting near enough attention, though, is the role IT financing will play as companies migrate to the cloud in a bid to save costs and bring added flexibility to their business models. The thinking seems to be that the need for IT equipment will be dramatically reduced ' that it will somehow evaporate in the cloud. In reality, IT equipment is the backbone of the infrastructure that supports the day-to-day workings of the cloud. After all, technology equipment will still be required in order to store data and run applications from the cloud.

In this, the cloud will in all likelihood be just as transformative for IT financing as it will be for companies' operations. Some customers will procure their cloud services from the very same vendors that supply their computers and peripheral devices, and they will want to spread the costs over a period of time rather than handle them in one lump-sum payment. Meanwhile, service providers will need to manage new financial risks brought on by the cloud, from taking on a greater share of overall IT spending to dealing with customers' demands for flexibility and service opt-out clauses.

An Evolution, Not a Revolution

First, it's important to bring some historical context to this dynamic technology. Cloud computing traces its roots back to the 1950s, when large-scale mainframes began giving educational institutions and corporations access to data through “dumb terminals.” It wasn't until the expansion of the Internet during the 1990s that businesses began using centralized computers to access applications on remote servers. Software as a service, or SaaS, didn't really take off until after the turn of the century.

It's arguable that small to midsized businesses should be early adopters of cloud services. After all, they are sensitive to increases in operating expenses, and the cloud should enable them to grow while keeping IT costs in check. But most indications to date are that smaller businesses are taking an incremental approach to adopting cloud services. For instance, roughly three in every 10 midsized firms recently polled by market intelligence firm International Data Corporation planned on implementing a public cloud solution over the next 12 months, while two in 10 planned to add a private cloud solution over that time frame. See http://idcdocserv.com/995.

This go-slow approach is reminiscent of how businesses have reacted to other ground-breaking technologies, such as Voice over Internet Protocol. One recent survey found that only 16% of small businesses have started using VoIP services, more than two decades after the first VoIP application was launched and nine years after the introduction of VoIP services that use broadband Internet access. See www.teotech.com/content/voip-adoption-slow-among-small-businesses. What such episodes tell us is that the evolution of the cloud is probably going to be more evolutionary than revolutionary, despite its immense promise.

The Appeal ' and Pitfalls ' of Pay-As-You-Go

Understanding this, cloud service providers have rolled out attractive pay-as-you-go structures to induce customers to dip their toe in the cloud. These payment plans, which set monthly fees based on actual usage, give customers the flexibility to employ different software applications as their needs or business models change. A key inducement included in many of these arrangements is the ability to cancel at any time.

While pay-as-you-go may help attract new customers to the cloud, it can also create new headaches for service providers. The basic challenge is the variable nature of payments; when customers use fewer services their related charges decline. The perennial threat of cancellation means service providers have to bring in more paying customers than the ones who are departing, or they can't continue to invest in the growth of the business or recoup money spent to build out the original IT infrastructure. Variable billing will soon become a requirement. And expertise in variable billing will help keep things simple for vendors and end users alike.

The skills it takes to manage these new dimensions aren't core capabilities for most IT providers, who are rightly focused on service differentiation and continued innovation. As a result, IT providers will soon face the prospect of spending their own time and resources, or finding experienced financial partners to help them structure transactions and provide services that complement their offering in order to keep customers on board. If an outside vendor is brought in, it's critical for the hiring organization to conduct its due diligence and pick the right financial partner to structure and tailor financing and leasing programs that are designed to help increase sales. A finance company with expertise in invoicing and servicing such structures is critical.

Simplicity over Complexity

Having been in this business for almost 30 years, I can tell you that when it comes to paying for business services, companies almost always prefer simplicity over complexity. Given how difficult it has been for some business leaders to wrap their minds around the workings of the cloud, the last thing end users are going to want is added complexity in managing their IT budgets.

This tendency is going to create opportunities for cloud providers that offer bundled packages combining cloud access with hardware devices. Each month, these providers will invoice their customers once ' with a portion of the bill going to cloud services and the other for equipment. In some cases, the service providers themselves won't be the ones providing the equipment. Instead, it will be supplied through IT equipment vendors supported by a third-party financial intermediary with experience in the sector and invoicing and servicing expertise. This financial partner won't just handle the IT equipment leasing, though; it will also manage the day-to-day account maintenance, variable billing and servicing. The risks that customers either reduce their services plan or drop it altogether may be shared.

As important will be how the financial intermediaries work with the customers, because those relationships should offer ripe opportunities for cross-selling additional products and services. We know from a host of studies on how businesses perceive the cloud that there is a wide knowledge gap between small to midsized business owners and cloud solution providers. Conveying key information as part of the invoicing and services process will be critical to bridging these gaps and motivating companies to expand their use of the cloud in the future.

Finding the Right Financial Partner

When considering a financing partner to help you make a sale, who you decide to go with can make all the difference. It's important to choose a company with extensive experience in financing technology because a strong understanding of the risks and opportunities can help you avoid potential missteps and bring you closer to your customers. It's also important that the financing provider have experience with usage-based billing and bundling transactions. These days, customers want one-stop invoicing, with everything available in one place and in one monthly payment. Being able to provide that level of service is a differentiating capability that will make you much more likely to add and retain customers as they grow more familiar with cloud computing solutions.

Remember, cloud customers are still finding their way in this evolving landscape. The deliberate approach they are taking as they explore the technology and see what makes sense for them is an opportunity for you to lend a guiding hand. At the same time, you need to know that someone has your back when it comes to meeting your own growth aspirations. The right financial partner can help you manage both of these fronts, and help assure that the upheaval brought on by this exciting technology doesn't extend to your balance sheet.

'

Ron Arrington is the Global President of CIT Vendor Finance, a business with over $5 billion in assets operating in more than 20 countries. He has 25 years of experience in providing intermediary financing for both commercial and consumer markets. Arrington may be contacted at 973-740-5605 or [email protected].

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