Providing On-Premise Infrastructure in a Cloud World
By Larry Gentry, President and CEO, cStor
Several changes in the last few years have dramatically changed how clients view or need to procure their on-premise IT infrastructure.
The first is the advent of cloud, on-demand infrastructure. While this has not been the nirvana solution for every company or every application, it has caused clients to view how to acquire the hardware and software differently than in the past.
Cloud’s Impact on the Procurement Model
Traditionally, clients worked with their partners, like cStor, to determine what they needed in order to achieve the business outcome they desired. Then, they would go to the CFO or some other committee to procure the funds needed to buy the solution. This caused procurement needs, from a CFO perspective, to be lumpy. They would spend a lot the first year, but less in years two and three, and then start the cycle all over again. Businesses never really liked this model, nor did CFOs, due to the difficulty in budgeting for this type of activity. Many went to leasing or financing to smooth out payments at a predictable level. We will get to the other big change that made this option not as attractive later in this blog.
The advent of the cloud changed this procurement dynamic. Organizations could now pay for what they needed on a monthly basis, making it easier for them to smooth out their procurement cycle. This allowed companies to spend what they needed now without laying out the entire expense at once for the next three years. CFOs love the idea of this model; it looks and feels like an electric bill – the company only pays for what is needed. The biggest downside was most organizations, especially those that jumped in early, didn’t really have the expertise in-house or a trusted partner to manage costs in the cloud and some would get sticker shock when they got their monthly bill. There were also some security concerns with certain cloud providers. Still, this model is desirable if companies navigate the other concerns.
So, how have infrastructure and software providers responded? Some have gone to a monthly pay-as-you-go subscription model which feels more like a cloud consumption model and eliminates a large amount of capital needed upfront. Again, CFOs like this model! The one downside is that companies usually must sign an extended contract for one to five years to get that price (think Salesforce). While it saves spending a lot upfront, organizations are still on the hook for the full amount over time. More companies will continue to develop this model, especially software companies, as they work to ensure they are relevant in a cloud consumption world.
Cloud is here to stay, and it has its advantages. Things like DR, Backups, bursting capabilities, volatile workloads, DevOps, long term archival, etc. are all excellent use cases for cloud. However, most of cStor’s work with clients shows that once a workload becomes predictably slow or low growth, there are significant cost advantages to operating that application on-prem.
Liability and Balance Sheets
The second change that has caused organizations to look at or even accelerate consideration of consumption models is the accounting rule changes that recently took place. These rule changes were designed to ensure both public and private companies had all obligations on their balance sheet. The net effect of these rule changes required companies to now capitalize all obligations that were greater than 12 months on their balance sheets as a liability. Some companies had deemed that certain leases were operating leases, so they previously did not have to place or acknowledge those on the balance sheet as a liability. Now, even long-term rental agreements greater than 12 months must be captured as a liability, which was never previously required. This has taken away one of the tools that CFOs could use in operating leases to keep such items, legally, off the balance sheet, even though it still provides opportunities to delay or spread out capital expenditures.
The accounting rule change has caused more CFOs to look at consumption models as even more viable since these agreements are open-ended, month-to-month, can be stopped at any time and don’t have to be recorded on the balance sheet as a liability.
A New On-Prem Infrastructure Model
Based on these changes, cStor has been working to provide clients with an open-ended, month-to-month consumption-based model without a long-term contract that allows them to procure on-prem IT infrastructure and have it look and feel like the cloud consumption model. It works very differently than other financing options. The client works with their partner, cStor, to determine what IT infrastructure (hardware, software and services) they need to accomplish their business objectives. This can be in their data center or a co-location. cStor then works with a bank that will buy and own the IT infrastructure the client wants. The bank then charges the client a monthly fee based on usage, not a flat amount like a lease. Yes, it can go up or down each month like a cloud consumption model. It is month-to-month and the client can exit at any time if desired. The client does have to agree to use the infrastructure but saves significant money – especially early on when first procuring the solution.
The offering gives back control of the IT architecture to the client, allowing them to utilize familiar, comfortable solutions their staff is trained on – eliminating the need to learn new tools in a cloud world. It also provides cost savings for many clients while letting them be in control of the security aspects. While this model may not be suitable for every client or every supplication, it does give clients and CFOs, another way to procure on-prem infrastructure and have it look and feel just like the cloud providers.