Partners: HP Flexible Capacity Is Cloud Computing Game Changer

Hewlett-Packard has done the next-to-impossible with its new pay-as-you-go Flexible Capacity channel model, solution providers said.

The new offering, which is being announced Tuesday, provides the framework for both customers and partners to take advantage of breakthrough cloud computing economics without the pain normally associated with making the transformation to the new style of IT.

Flexible Capacity opens the door for customers to free up a significant amount of working capital by putting in place minimum three-year, private-cloud Infrastructure-as-a-Service deals with flex-up bursting or flex-down capabilities. The services agreements, under which HP Financial Services arranges the financing and HP Technology Services holds the sales contract, are based on the same monthly fixed-fee, pay-as-you-go model that has fueled public cloud adoption.

[Related: 11 Reasons HP's ServiceOne 2.0 Powers Partner-Customer Cloud Transformation]

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The outsourcing agreements allow partners to deliver that cloud computing customer transformation with the same sales compensation structure associated with a traditional up front, net margin, capital expenditure-based infrastructure sale. That saves sales reps from taking the huge financial hit usually associated with multi-year, recurring revenue cloud deals.

HP kicked off its Flexible Capacity offensive -- rolled out as part of the ServiceOne 2.0 channel program -- with road shows last week for about 60 HP Platinum Partners who called the new program a turning point in the battle to win cloud market share against competitors like Cisco, Dell and IBM.

"This is a game changer that is going to create a lot of market momentum around the new style of IT," said Mark Dallmeier, vice president and CSO/CMO at Tempe-Ariz.-based HP Platinum partner IT Partners, No. 424 on the CRN Solution Provider 500 list. "HP is rewriting the rules by solving business problems and driving business outcomes for customers with a technology and financial architecture that provides cloud economics with the safety of on-premise infrastructure. I don't see anybody else architecting agreements like this. This is a huge market opportunity that HP is creating for the channel ecosystem. We are all over it."

Dallmeier said he expects the large Flexible Capacity deals -- some as large as several million dollars -- to drive a whopping 30 percent to 50 percent sales growth for IT Partners over the next 18 to 24 months.

"This is absolutely a transformation accelerator for us," he said. "The goal here is to do a handful of these deals a year. If we do that, it dramatically changes the face of the business. That is why we are so excited about it."

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The program strikes at the heart of the economic pressure hammering CIOs that seek to provide agile IT service delivery under budget constraints even as lines of business increasingly swipe credit cards to tap into public cloud computing providers.

An IT Partners survey of large enterprise customers found that 97 percent of customers are seeking alternative IT-purchasing methods.

What's more, the survey found that 77 percent of those customers are interested in exploring multi-year agreements to improve cost visibility, while 45 percent are looking at cloud computing as an IT asset reduction strategy and seeking ways to move to an operating expense-based IT model.

"There is a double-digit impact on working capital for customers that move the customer discussion from how do I get the best price on compute and disk to how do I fundamentally change the architecture of how I operate and fund IT and how can I use that excess capital I have saved to launch a new line of business or build a new manufacturing plant," Dallmeier said.

He expects the average annual savings for customers to run from 10 percent to 20 percent.

"We are freeing up potentially two years of capital expense for customers to reinvest in the company. This program is a growth enabler for the customer," Dallmeier said. "We want to be part of that as a channel partner."

Solution providers predicted the Flexible Capacity deals -- which are complex three- and four-year strategic agreements -- will drive more strategic, business outcome-focused customer relationships and even significant recurring revenue opportunities from the services associated with the outsourcing agreements.

Mike Strohl, CEO of Concord, Calif.-based HP Platinum partner Entisys Solutions, which ranked No. 253 on the 2014 Solution Provider 500 and helped HP put the final Flexible Capacity program together, said he sees the new offering as the right program at the right time for customers and HP partners.

"This is a program that is going to drive sales revenue, margins, customer success and partner success upwards and upwards very, very quickly," said Strohl, who expects to see a 20 percent sales kick from Flexible Capacity deals. "Many customers today are unsure of where they are going from an infrastructure standpoint because they are transforming into the new style of IT. What they need is systems that can expand and contract as their requirements change."

NEXT: Flexibility Gives HP A Leg Up

The flexible capacity model allows customers to cost effectively build private clouds and combine them with HP's Helion public cloud, moving workloads back and forth as needed to drive line-of-business agility, Strohl said.

"Having a flexible system that allows customers to burst and unburst is critical to the way people do business," he said. "When you add on the fact that this is an op-ex and a services-driven model you have a combination that drives opportunity for everybody."

Strohl predicted that HP cloud computing competitors will be forced to respond to the new Flexible Capacity model.

"HP is the big winner here," he said, "This is designed to deal with the real business needs customers have today. I think everybody else will get into this game in one capacity or another."

What separates the HP program from other offerings that competitors have brought to the table is the no holds barred partner commitment, Strohl said.

"HP has made it so partners don't lose anything in this process," he said.

He stressed that the Flexible Capacity deals are not comparable to old school leasing agreements.

"We have seen things in the past that were more direct models or models for one-time payment," he said. "HP is making this a partner-driven model."

Dan Molina, CTO at San Diego, Calif.-based Nth Generation Computing, No. 352 on the CRN SP500, called the HP offering one of the most creative channel offerings he has seen in nearly 25 years in the IT business. He sees the program as a breakthrough opportunity to refashion IT service delivery for cash-constrained IT departments.

"This is going to help IT departments gain back control of the shadow IT public cloud operations that have been putting businesses at risk," he said. "This allows customers to gain the benefits of public cloud and still maintain control of IT. We are eager to bring this into the field. It's a very powerful tool for cash-constrained customers to make a major IT project a reality. It's a win-win-win for the customer, HP and the partner."

Molina expects Nth Generation to add at least $6 million in sales from Flexible Capacity deals in 2015. He said the flexible capacity deals even provide the opportunity for customers to sell the infrastructure back to HP after the three-year minimum deal.

"That provides even more flexibility and makes it an even more compelling deal for the customer," he said.

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HP Vice President of Global Channel Services Dave Twohy said the Flexible Capacity offering is an "on-ramp to the new style of IT for both customers and partners. The deals are running an average of four years at about $2 million, Twohy said.

"I am fired up about this because it changes the discussion partners can have with customers," he said. "Instead of talking about speeds and feeds, partners can go have a business level dialogue with customers. It's a discussion about having customers pay by the drink so they can use their capital to build a new factory or do a stock buyback. You can imagine the power of that discussion with a customer."

The beauty of the Flexible Capacity model is partners get paid just as it was a traditional infrastructure deal through HP PartnerOne, Twohy said.

HP Technology Services buys the equipment through an "embedded lease structure," he said, with the customer signing the final agreement with HP Technology Services.

"Partners get full compensation, both front end and back end, on the hardware and with agent fees also paid up front for services," he said.

Twohy called the Flexible Capacity offering the ultimate win-win-win for customers, partners and HP.

"The customer wins because they are no longer in a traditional capacity consumption trajectory, overbuying by as much as 30 percent to compensate for maximum workloads," he said. "The partners win because they get paid up front for the solution. And HP wins because it is an on-ramp to the new style of IT for customers and partners with long term contracts that put us in a position to have what we call customers for life."