The public cloud subscription model appeals to customers: pay as you go, only for what you use, with no further commitment if you decide to stop.
That’s one thing for big players such as Microsoft Azure and Amazon Web Services, quite another if you’re building that service yourself. It means investing in hardware, software and professional services to get it up and running, and that’s expensive. How do you fund it?
“Funding is one of the big challenges of developing a cloud strategy and a cloud business,” says Craig Somerville, managing director of well-known Sydney IT services provider Somerville. He says vendors still usually require contracts, 12 months or longer in most cases. This means that if customers get no-contract options, the risk is placed on the reseller. “The financial institutions don’t have their head around this at all,” Somerville says.
Graeme Boorer, a management consultant with Customer Strategies International, agrees. “The cloud promise has not been matched by the financial services industry,” he says. Boorer believes most of the existing funding options are mired in old ways of thinking, when physical assets were the majority of a company’s value. “Banks want to take the lower-risk approach of ensuring there is a long-lived, valuable asset – like a director’s house – as collateral if the venture doesn’t work out.”
The big challenge, according to Boorer, is that professional services are required to configure the physical assets into a cloud-style service, yet those aren’t physical things that can be taken back if you don’t pay your bill. “How do you repossess the cloud?”
Nick Verykios, chief executive of Distribution Central, says: “What we’re seeing more and more from service providers is that they’re starting to not want the assets on their balance sheets. There’s more and more financing of the equipment happening, which is a smart way to do it. You don’t have to own the equipment you’re using to provide a service to your customers.”
Distribution Central wants to add new financing options by offering a package that includes the services, not just the physical equipment. “The package we’ve put together with several finance companies allows the entire transaction to be taken off balance sheet,” Verykios says. “That includes the installation, it includes the management, it includes the servicing costs.”
Understanding what you’re trying to fund is vital when you’re trying to present your case to a financier. They need to see what you’re trying to do, and how you’ll pay the money back. “The place to start is always the business case,” Somerville says. “Why would you build a cloud service if you can’t make money out of it? If you can’t make money then neither will your lender.
Says Verykios: “The risks are like any managed service: What if I build it and no one comes? If you’re smart, you’re not going to build the components that Amazon, Microsoft and SoftLayer already do really well.”
Next: Cautionary tale
In Australia, a recent cautionary tale comes from local operator Cloud Central. The Canberra-based provider has a strong foothold in the government sector and was optimistic about pivoting this into a public listing on the ASX.
But before the reverse float could succeed, it was derailed when two of the would-be executives got cold feet, worried about a business model that would see a relatively small local player like Cloud Central need to make massive investment to stay competitive against AWS and Azure.
It’s not just local outfits that have faced this issue – Rackspace, one of the earliest proponents of public cloud, has also struggled to match the investment budgets of Amazon and Microsoft.
A smarter option can be for resellers and managed service providers to start using a broker model, by bundling components from different vendors into a service with more value than the total cost of the components by themselves.
Verykios sees a role for Distribution Central here; the distributor offers a marketplace of different vendors’ offerings that can be bundled to provide a valuable service to customers.
But vendors still have a way to go in adapting to consumption pricing, says Somerville. “They’re still thinking in old terms, unfortunately. They want this commitment.” While some software vendors, such as Veeam, offer true software-as-a-service consumption pricing, many still want 12-month contracts in place even though they may charge only by the month. Somerville tries to encourage vendors not to focus on lock-in contracts. “To have a customer for a long time, make a great product and they’ll stay.”
But what if they don’t? “The IaaS consumption-based model creates the expectation that the end customer can turn infrastructure on and off much like they do a light switch,” says Neil Hitz, managing director of CloudTrek, a highly regarded AWS partner. “Where the reseller assumes the liability for the underlying cloud infrastructure, it is important to consider who might carry the can when the music stops.”
This isn’t a new risk, though. Customers have always been slow payers – or worse, gone bankrupt. “The age-old requirement to perform a credit risk assessment never goes amiss,” Hitz says.
And just because a customer might decide to stop using a service doesn’t mean that they will. In many cases, it’s not possible to simply turn a service off.
Says Verykios: “What IT decision-maker in their right mind would invest their company in an application, or in infrastructure, that they’re only going to need for a month? If it’s a one-off, it’s not strategic.”
It all comes down to service design. Customers want to have certain services for a certain price, and part of running a business is working out what to sell at what price. AWS offers both spot prices and reserved instances, for example, and there are bigger discounts available for longer-term commitments.
Verykios offers some words of encouragement to resellers considering building up a services business. “Resellers who are investing in becoming managed service providers, and taking assets off their books by using financing, are building great, legitimate businesses,” he says.
Cloud might be in vogue now, but this kind of exposure is nothing new in business.
“In any business you build there’s always a level of risk,” Somerville says. “It’s no different to the risk of putting three new sales guys in, because if they don’t sell then you have a cost and no revenue.”
Risks of the cloud switch
There are few guarantees in life, but there are ways to minimise your risk by being prepared. Forewarned is forearmed.
No one shows up
What if you build it and no one comes?As with any new product or service, it’s important to do your homework. Is there a market? How much will it cost to provide the service? How much are customers willing to pay for it? Will the likely profit compensate you for the risk? If it doesn’t work, can you stop doing the wrong thing quickly?
Legal risks
Hire a lawyer who will do what’s needed to understand your business. They can draft terms that will help to protect you when things go wrong. Have them review contracts from vendors or distributors and get them to help you negotiate the right terms. This is not a place to cut corners on costs.
Unbalanced contracts
Vendors want contracts and customers want to pay-as-they-go. Strike a balance between the two extremes and price the risk appropriately. You won’t be able to outsource all your risk, but not all distributors, financiers or vendors are the same. Shop around for the right deal that works with what you want to do.
Customers don’t pay
Cash is king. Make sure you have good procedures for managing accounts payable and keep an eye on your cash flow. Perform credit risk assessments on customers and suppliers alike. Have early warning systems in place so you know about problems before a full-blown crisis develops. Make use of factoring and debt-collection services to keep the cash flow if you need to.
Supply chain risk
What if a key supplier goes out of business? Make sure you have a plan B to keep your services working, because the best contract in the world only helps you after the fact. Financial compensation will go to your creditors if you go out of business in the meantime.
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