How to finance cloud when customers hold all the cards

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