Beware bill shock in shift to subscriptions

If you still need convincing that Australia has embraced the pay-as-you-go (PAYG) approach to IT, let Glenn Cameron set you straight.

Cameron, chief executive officer of SerenITaaS, is so impressed with Australia’s move to PAYG pricing, he’s launching his storage-as-a-service in Amazon Web Services’ Sydney data centre almost at the same time as in his home country of Canada. He says Australia is well ahead of Canada in replacing capital with operational spending, which is also called anything-as-a-service, utility or consumption IT.

So strong is Australia for opex IT buying, SerenITaaS may get a major client here before they get one on their home soil.

“We’ve approached some of the [Canadian] television networks and it’s ironic that the Australian market is embracing opex,” Cameron says. “We find in telecommunications, less than broadcasting, they don’t want to give up this capex. They have it on the budget and they haven’t been forced to deal with it.

“Our experience in Australia is very different from Canada, and it surprises me. The Canadian market is a very conservative marketplace.”

SerenITaaS bases its solution on Zadara, backed by hard-drive maker Toshiba. SereniTaaS provides its Organik storage on-premises, in the cloud or a bit of both. Cameron expects customers in financial services and healthcare to be attracted to Zadara storage because it grows with their needs. It lends itself to organisations that roll over IT between projects such as marketing campaigns or drug discovery.

Zadara’s unique storage philosophy, which links data to physical spindles, makes it especially attractive to users who put a premium on customer privacy and security. Data isn’t sprayed across a storage array, which means it can be traced to a physical disk that can be removed and ground into dust, if necessary, Cameron says.

The security aspect is playing out in other ways. “We have one AWS client in Montreal who is using Zadara storage in the US and they’re quite concerned about the National Security Agency and the ability for the NSA, seemingly, to be able to walk into Google or Amazon and see that data. And Canada has much stricter privacy laws than US.”

It’s tempting to see the spread of utility pricing as cloud’s elasticity writ on traditional IT, but it’s closer to a mobile phone plan in concept. Providers require a monthly base payment, and customers must expect to grow their use during a contract period for as long as three years.

When CRN first spoke to Cameron at the AWS Summit in Sydney, he was still mulling the on-premise version of its storage solution. He said it would see commodity hardware running the Zadara solution installed at client sites; the customer would then only pay for what they use, as if they were buying cloud storage on a utility model.

“We’re bearing the brunt of the financial risk,” Cameron says. “If we take one of these on-premise equipment, we’re paying for 100 percent of that capacity and hoping the client will use it.”

The stipend only dents the cost of supply. “Our biggest fear was, you can start offering this, they would put it on their floor and not use it. The monthly fee ensures people are serious.”

Risky rewards

Duane Thompson, Oracle practice director at human capital consultancy Presence of IT doesn’t mind pushing the boundaries: risk is its own reward, he says.

“It got us a seat at the table. Customers appreciated that we were sharing some of the risk related to the solution we were putting forward,” Thompson says.

“[Opex] definitely impacts on cashflow, and this was a difficult part for any business. You have to tie up commitments to multiple vendors.

“The impact to us was we bore all the risk. We had to get hardware to support growth of the platform as we brought people on. Vendors want payments up front and we can’t back that all to the client.”

And smaller partners have a hard time. “Without vendors taking a more upfront move to do some of this stuff themselves, I think the smaller firms would have fallen away.”

But what to do when a project slips? In a capital, upfront arrangement, the end customer wears most of the cost.

“That’s where the lines begin to grey and it comes back to the reseller or distributor who bears the risk because vendors get removed or they’re backing a traditional model.” Even though it’s now consumption, the partner is still tied into a long-term contract with the supplier, says Thompson.

“You need strong project and change management because you have to drive a change in the organisation and ensure the parties understand their accountabilities.”

Managing risk now extends beyond finance to the partner’s culture and value proposition. Presence of IT responded to its clients’ desire for faster return on investment in smaller project chunks by bringing on skills outside technology. Partners may also have to start seeing themselves as business coaches or the enterprise equivalent of the personal fitness trainer.

Thompson says that this meant Presence of IT had to press a not-for-profit client to meet its milestones, even when this hurt a bit.

“We were very clear about the scope of the project and they said we were driving them to deadlines they ordinarily wouldn’t have met; at first they didn’t like that but we held them to it. We pushed them to deadlines because we’re sharing the risk.”

Vendors are behind the curve, Thompson says. There’s no single person or department at his major vendor to provide all the puzzle pieces. This is especially true in production systems such as payroll and human resources, he says.

“The vendors are still making that move but there’s all these legacy applications that need to come on,” he says. “All vendors have different challenges, they’re all at different stages. I think the vendors can do a much better job. As vendors step in and provide more options around consumption pricing then we get a better product.”

Over the next year or two, partners will have to rely more heavily on their own intellectual property. “It’s anyone’s game,” adds Thompson.

Oracle is helping partners, including software vendors, by creating the platform on which they steep services and hardware, says Stuart Long, the database vendor’s chief technology officer for Asia Pacific. This ranges from the Exalogic platform of engineered systems that include computer, networking, storage and software to clustered systems that “allow you to do it a more generic way and layer the platform on top”, Long says.

Long says partners can choose the customer metrics they want and pay accordingly. But he acknowledges that enterprise and financial systems are evolving.

“Production systems are still not as elastic as people would like them to be, so there are some applications that scale well but the run-of-the-mill enterprise applications tend to be not as flexible, so they typically have longer contracts,” he says.

Partners can stagger their clients on to the platform, paying for some services up front and amortising the rest. “The hardware underneath is pretty cheap, so using x86 and Oracle Linux is flexible and the licensing and cost can be varied quite easily.”

Between the partner and the vendor, distributors such as Avnet have a place in the mix thanks to their cash reserves, access to cheap interest rates and wider market view. This extends to carrying stock on their books for resellers and providing cloud services to be white labelled, says Darren Adams, vice-president and general manager of Avnet Australia & New Zealand.

Although he sees benefits in the opex model, Adams says the channel “will over-cook it over the next five years and swing too far and too fast”.

“The opportunity for distribution is still to be an aggregator,” he says.

Partners that launched managed services a few years ago, investing in their own capital, are coming back to Avnet, which recently launched its own backup-as-a-service offering.

“Partners still want to control the customer and have leverage in the channel, but they’re starting to think, ‘Maybe I don’t need my own data centre or capital equipment. Maybe I can leverage Avnet to help me do that and maybe get them to leverage IBM’s new Softlayer, Amazon or Azure infrastructure-as-a-service.’”

Adams says Avnet already services several hundred partners on its infrastructure hosted by Fujitsu. “It’s a poorly kept secret but, if you look at distributor land, we have one of the biggest managed services and hosting services in Australia – in the millions of dollars every month.”

Endpoint management and Softlayer are growing areas of interest. Avnet wants to streamline the service, so partners can get the cloud equivalent of a drop-ship for hardware. “The gold standard would be to give the partner a self-help portal and have a true B2B connection.”

Avnet has also embraced software-as-a-service for its own processes, outsourcing HR to Success Factors and using Concur expense solutions.

The right things

Rapid response to competitors – or ‘agility’ – and business uncertainty are also reasons why the end customers are pushing for more flexible ways to consume IT, says Adams.

“In business, if you fail, you want to fail fast. Over a long period of time, failing gets more expensive. Using an opex consumption model means you can wind your costs back quickly.”

Even IBM, renowned for its nine-figure, multi-year outsourcing agreements, has responded to customer demand for leaner, swifter projects with rapid returns to the balance sheet. Last year it bought cloud-computing provider Softlayer, to compete with AWS, and now provides its System Z Unix servers under opex terms. IBM expects to provide storage on similar terms later this year, says Big Blue’s server business executive Andreas Wenzel.

And although there was no demand for Pure Systems yet, IBM is open to discussions with partners.

“We’re enhancing at the lower end of the product portfolio, so the smaller servers, and storage is something we’re working through,” Wenzel says. “I expect to see that in the next couple of weeks, months, we should have that available. It’s a more bespoke solution we customise for our clients but as it takes off, it’s a standard that we have to go to.”

And opex models are becoming more important for partners serving government, emergency services and public safety that are under IBM’s Smarter Cities umbrella.

“With the right partners and utility model, we have more flexibility to bring partners to market faster and help cities and regions deliver the right level of services to citizens.”

Wenzel says partners can start at IBM’s cloud marketplace.

“From a hardware perspective, the utility model is at the core of what we’re doing,” he says.

“We’re moving firmly into an opex world. The workload will determine if it sits on premises, off premises or on public cloud.”