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Server financing: CAPEX, OPEX or something else

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Workshop In the current economic climate access to spending money is tight across all businesses. In truth, the spotlight has been thrown ever more closely onto IT spend over the course of the last decade, not just the past two years. This focus on IT spend has brought forward the question of the best way to budget for IT systems and operations.

With all budgets under pressure, IT has been asked to keep spend on capital acquisitions to the minimum. This restriction on what for many organisations has been the standard financial approach to acquiring new systems is making organisations look at alternative methods of paying for kit.

But what are the alternatives? The old standard is to lease equipment, and sometimes some of the software components, on fixed payments for a specified period of time - usually three years. At the end of the term the equipment either returns to the lease company, which may be the original hardware supplier, or the contract may allow for the length of time the kit can be used to be extended.

Clearly this offers the benefit of avoiding significant capital expenditure and pushes the spend onto the operations budget, an approach with some attraction at a time when many banks are still reluctant to lend money even to their best customers. The downside is that the exact terms of the contract need to be well understood, especially if there is any chance that the equipment may be needed operationally for a longer period of time than that defined at the signing.

Leaseback schemes have begun to turn up in some scenarios where an organisation essentially sells servers and storage platforms to a third party, sometimes the original vendor and then pays some form of lease or rental fee in order to carry on utilising the systems. Such contracts may often include elements of managed services or outsourcing.

This type of deal has the benefit that it can provide the company with an instant injection of capital but the lifetime costs need to be very carefully weighed in order to ensure that the returns to the company are either financially positive or deliver some other operational benefits.

It is also apparent that the use of outsourced and managed services continues to grow. Such projects can make financial sense by removing capital items from the accounts but successful projects are usually based more around the service benefits delivered rather than simple cost reductions.

A less well-known offering to help fund some IT projects is known by the name of “project financing”. This model sees a provider of finance - in these times when banks are afraid to lend to anyone, this will be the financing division of a major IT vendor involved in the deal - essentially pay for a large IT project using its own resources. The customer then pays the suppler pre-defined amounts as targets installation targets are met.

In this way project financing can help bridge the time gap between when the company has to spend money and when it sees some form of material benefit. If the business were to fund the project itself, this time gap can be substantial.

The rise of SaaS/IaaS/PaaS and the so called Cloud services might offer some headroom for project funding as trust in such models develop. This approach to using infrastructure or applications on a pay per use or annual contractual basis provides another way to avoid some up front capital costs. It might also offer some benefits in terms of avoiding additional operational overheads on overstretched IT staff.

The risks associated with using such services for long periods of time are not well understood. There is some evidence that concerns over the long-term costs of using such services, along with the usual challenges around security, are factors considered by potential customers. With the relative youth of some offerings, customers are also seeking reassurance over quality of service coupled with reservations over long term vendor viability and lock-in.

Finally there is the question of how the channel relates to the potential use of financing in projects. We know that some of the big IT vendors make financing resources available to certain channel partners. This is certainly a valuable approach as otherwise, many channel partners would not have the scale to source viable financing options themselves. It is also clear that some channel partners are now actively promoting managed and outsourced services, sometimes with the direct participation of the mainstream vendors.

As must be stated, the use of financing solutions may help projects get implemented now that might otherwise have been cancelled, but the movement from large scale projects to smaller, bite-sized deals can delay implementations even as it helps regulate of cash flow. Unless very carefully planned, it may also increase the total costs of the completed project by a considerable amount.

As ever, we are keen to hear your thoughts and experiences in these matters. Is there a drive in your business to actively reduce capex spending and move to operational budgets? Have you used financing solutions to help get projects off the ground? Please give us your tips and warnings in the comments area. ®

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