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December 22, 2015updated 28 Mar 2017 5:33pm

Moving to commercial contracts

By John Oates

One of the most important underlying changes in enterprise technology in recent years is how it is paid for.

The days of getting a large annual budget and working out what to spend it on are disappearing. More and more companies are paying for business services by the month, according to what they use, rather than paying out for big pieces of wholly-owned hardware which then depreciate over time.

Some are doing this by moving business processes to a cloud provider. Think of a company using Dropbox or similar provider instead of buying a storage device.

But there is also a way to get the benefits of paying a cloud-type monthly fee while still getting the advantages of keeping equipment on your premises.

There is another advantage to this move – it typically shifts spending from capital expenditure to an operating expense.

The trend started with storage but is increasingly taking over other areas of business technology too.

Hewlett Packard Enterprise calls this ‘flexible capacity’. It allows you to effectively rent solutions, keep the hardware on your premises and only paying for what you use. You pay for the average amount used over a month and you don’t pay for the spare capacity unless you need to switch it on.

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Chris White, sales manager for Europe, Middle East and Africa, said: “A business’s IT use over time is hard to predict – there’ll be peaks and troughs. The difficulty is that each time one business unit upgrades there is a process of re-alignment which means costs, risks and time. But flexible capacity can keep everyone happy – finance like it because they know what they’ll be spending, IT like it because they know what they’re getting and the business likes it because it gets more capacity almost instantly.”

Drawbacks

But it is not for every customer. If you can accurately predict demand for IT services over the next year with little chance of that increasing then paying for extra capacity is not likely to be cost effective. But for fast growing firms having an extra ten to 30 per cent capacity on-site ready to be switched on can be a real accelerator, especially when some organisations are still taking six months to get new infrastructure up and running.

It can work for businesses with big seasonal fluctuations in demand – retail companies which see massive extra demand on their websites in the run up to Christmas for instance.

HP Enterprise’s biggest customers for flexible capacity right now are telcos. They’re using it for both internal services and to provide back office infrastructure for a variety of cloud services which they sell to their customers. The way the deals are structured means they can offer customers almost instant access to extra services but the telco won’t have to pay for hardware or software licenses until the cloud customer starts paying for that service.

White predicts growth will continue, it is one of HPE’s fastest growing offerings, and for the market to widen, especially for financial services and insurance companies.

One such customer is Aldermore Bank, set up in 2009 and enjoying exponential growth.

Paul Johnson, Chief Information Officer at Aldermore, said: “It is part of our overall strategy of aiming for agile solutions without big upfront spending until we can see profit. We aim to be asset-free. We still use capital expenditure but more for specific projects and innovation rather than infrastructure. Technology moves so fast these days that you don’t want to be looking two or three years down the line when you need to change things and throw out a lot of hardware.”

He said: “It took more time than a normal contract because you need to be very clear on the base line – you have to be using more than the agreed minimum amount every month or you’re losing money. Make sure you get that modelling right.”

Johnson’s advice is to spend plenty of time getting the right contract in place and look carefully at who owns which aspects of each business service.

Johnson said: “We’re quite experienced with negotiating service level agreements but you need to be absolutely clear about the hand off process – who owns which element of the deal at every stage.”

Chris White agreed that contract negotiations can be complex with every customer having unique needs.

But the benefits for a fast growing firm are almost instant access to the services they need for a fixed cost.

Risk is reduced because you won’t be left with what might be the wrong hardware investment so you won’t have to start again from scratch in three years time.

There is a commercial advantage in always having access to more computing power if you need it.

Finally there is the advantage of reducing time to market – with instant access to more infrastructure there is one less bottleneck to bringing new products to market.

With the business infrastructure increasingly defined by the software not by the hardware it is no surprise that the way such deals are paid for is changing too. With at least part of most enterprises’s IT now provided by cloud companies the attraction of paying for what you use is becoming more obvious.

But there are still pitfalls to be avoided. You need to spend time getting the right contract in place. This requires detailed modelling of likely technology needs to ensure you don’t end up paying for more flexibility than you actually need. And you need to keep an eye on how well it is performing throughout the time of the contract. But get both these elements right and you could see improved performance and lower expenditure.

It is unlikely that most businesses would want to see all their infrastructure run on such a basis. Most firms will still see some core functions as worth keeping under their complete control on their own hardware – especially if it is a tried and tested legacy system which works reliably and cheaply.

But as differences between public and private cloud start to disappear there will be equally big changes in how, and when, IT budgets are spent.

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