Nearly one-third of companies interviewed by IDC Research for an equipment leasing industry survey completed in December 2011 plan to use external leasing or financing for cloud initiatives.
Inquiries about cloud computing received by The Alta Group from information technology (IT) vendor executives center 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 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% 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...."
- Now is the time to consider cloud financing initiatives. "IDC believes that as uncomfortable and potentially confusing as IT cloud computing seems in its current forms, these market segments have reached the multibillion-dollar threshold, and based on that, it is time for providers to begin pursuing these financing opportunities, as they account for almost half of this market's net growth."
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. She also spoke on the subject during a recent foundation webinar that was well attended, mostly by people with questions about how to determine credit and risk factors in this entirely new kind of financing.
Carter said the most valuable finding of the foundation's study was that cloud computing represents a real and accessible technology with economic benefits regardless of the challenge of implementing it. Although the industry will have to overcome some hurdles including metering and related measurement issues, she is confident that, as with past challenges, a solution - most likely a variety of solutions - will be developed.
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 centers 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 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."
“Alta is an excellent source of knowledge and guidance in evaluating options and determining a path”, she said. “The consultancy has 20 years of experience performing industry benchmark studies and helping organizations establish successful new business models and outsourcing relationships and structures. Its team of proven consultants includes professionals with vendor financing experience, such as Paul Frechette, and risk management experts, such as Joe Boland and Andy Mesches.”
This article appears with the kind permission of The Alta Group North America www.thealtagroup.com/north-america.