Not-So-Easy Money: Is Your Business Ready To Take On A Big Cloud Deal?

The pace of change in the IT industry seems to quicken by the day, and there's certainly no shortage of companies looking to make the jump to the cloud, whether it's head first and all at once, or gradually.

Companies that make the jump are also jumping into a new way of doing business, putting aside the high-dollar contracts that came with hardware-intensive capital expenditure deals and embracing a software-focused operational expenditure model that works more like a lease agreement.

For some companies, these changes deserve no more than a shrug. They've planned, they've prepared, and they're equipped to be successful using an op-ex model. Those who haven't prepared, though, are in danger of running headlong into trouble and out of business if they don't fully consider the dollars and cents of the new IT.

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It's not just the business model that's changing. The cloud doesn't just mean companies make money differently, it means they have to treat money, its sources and its allocation, differently too.

For the biggest players in channel finance, the cloud is a very comfortable place to do business.

Robert Wagner, head of supply chain finance at Wells Fargo Capital Finance, said cloud deals, despite their novelty in the IT industry, are very traditional from a banking perspective.

"A long-term managed service contract that's paid up-front is a challenge because the service is yet to be rendered," Wagner told CRN. "A solution provider that's offering cloud to a customer, and billing as [services are] consumed, that's standard billing. That's something we're very comfortable with."

Still, the speed with which all of this is happening can present challenges to solution providers and their sources of financing, and that's something Wells Fargo Capital Finance, one of the segment's very largest players, is trying to stay on top of.

"As quick as this industry is moving, as borrowers are building out cloud practices, it's something we're trying to solve for. Everyone is becoming more savvy, and we're learning right along with them," Wagner said.

Partners' relationships with their vendors are changing, and challenging, too, said Darren Federowitz, executive director of Dell Financial Services. Increasingly, partners are approaching Dell Financial Services saying large customers want a cloud build-out and want to pay as they go.

These deals have the potential to be very profitable, but the partner often doesn't have the capital for the build-out. "An increasing number of partners ask us to solve that," Federowitz said.

Dell and other large vendors have also had to make peace with the fact that partners work with multiple vendors on cloud deals.

"We know there are other products out there that customers want and need," Federowitz said, "and a lot of partners say, 'I'm trying to sell this, but it's only 60 percent, or 40 percent or 20 percent Dell. We look at the customer and product mix, and we do Dell and non-Dell financing. The only way to be successful is to be open."

Even though banks can be understanding and vendors can be flexible, channel partners that win big cloud deals can still find themselves in deep trouble. Balance sheets have perhaps never been more exciting, or more fraught with risk.

Big cloud deals, while very profitable, can leave channel partners without the capital necessary to support those deals until the cash starts flowing.

"Channel partners don't realize they're burdening their balance sheet, or burdening their operation until they reach a point where they say, 'Wow, I should've thought of this six, 12 or 18 months ago.' The project you thought was going to take three to six months is taking 12 months and you're over your head."

Dell Financial Services works with about 2,500 U.S. partners on project-based financing, up from only about 100 two years ago, and its biggest challenge is convincing partners before it's too late that they shouldn't rely on internal capital. They need financing, like a bank line of credit.

To meet other, stopgap needs, Wells Fargo, along with the industry's other biggest players, like GE Capital, will extend short-term financing for things other than big leasing arrangements.

Obviously, there's a lot going on, and it can seem complicated and haphazard even to the pros who do it every day.

"Over time, I think it will get more standardized," Federowitz said. "For now, what does cloud even mean? It's different to everyone. It's like in the '90s when people were asking, 'What is the Internet?' Cloud will also get to the point where it gets more standardized."

In the meantime, solution providers have to grapple with not only with a touchy financing situation, but the vagaries of a business that's still in its infancy.

"You buy a big chunk, and charge by usage. Somebody's paying for the extra capacity," said Steve Kaplan, a channel strategy vice president at Nutanix. "That extra capacity starts getting old as soon as it's purchased."

And what if a customer needs more capacity? An upgrade because its initial buy was insufficient? Traditional financing is becoming less and less available for that kind of patch-up, Kaplan said.

Lief Morin, president of Key Info Systems, said companies need more than just money. Many have little or no experience borrowing and little idea what that means for the soundness of their balance sheets. They need help.

Cloud, Morin said, "is forcing [companies] to get external investments. If they're growing, they need the injection of capital, but they also need guidance."

This article originally appeared as an exclusive on the CRN Tech News App for iOS and Windows 8.