When to Use a Utility-Based Consumption Model for On-Premise Solutions
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Organizations today have options to consume private cloud but need better alignment of capital outlay to infrastructure use. Simply stated, organizations are seeking public cloud-like consumption for on-premise infrastructure.
Traditionally, organizations paid for on-premise IT solutions as capital expenditures. This means they outlaid cash up front, long before they got any use out of their solutions, which take time to ramp up.
These days, most organizations enjoy the flexibility of public cloud consumption, including pay-per-use, operating expense treatment from an accounting perspective (OpEx), and scale; yet, many prefer to keep some of their IT on-premise for reasons including regulatory issues and control.
To get the best of both worlds, they desire a cloud-like billing mechanism to help them pay by use for their on-premise solutions. You have a number of options to consider for consuming on-premise, cloud-like solutions.
Traditional capital purchase (CapEx)
The benefits of this traditional model include:
- Low total cash outflow over the assets' life
- Easy and familiar acquisition process
- Full asset ownership
- Tax benefit of depreciating assets
The downside is that you have a high outlay upfront, and then you continue to pay for the assets and maintenance even though it can take a long time before you use them.
Traditional finance package
Options in this category can no longer be considered as OpEx under new accounting regulations.
While traditional financing arrangements for acquiring private cloud infrastructure lower your upfront investment, they differ from traditional capital purchases only incrementally in terms of total cash outlay over the expected life cycle. This is especially true for creditworthy organizations during times with lower interest rates. However, a recent change in accounting practices means operating leases are now considered CapEx — even if you are paying it over time.
Benefits of operating leases include:
- Low upfront investment
- Easily understood acquisition process
- Potential to return the asset after the lease term expires
On the other hand, you commit the expense stream for the term of the agreement; you still can waste maintenance dollars and have idle assets if you don't deploy them in a reasonable amount of time; and you need to ensure you follow an IT decommissioning process that includes returning the assets to avoid penalties.
Even though options in this category are no longer considered operating expenses, they are still a good choice for managing cash flow.
This model offers the same flexible payment structure delivered by the public cloud, but for a private environment, although you will often commit an expense stream for base capacity for a defined term. Just about every original equipment manufacturer (OEM) has its own particular flavor of this, including HPE GreenLake, each with their own set of terms and conditions.
The benefits of this model include:
- No or low upfront investment
- Capacity on demand
- Flexibility of payment or invoicing methods
- Alignment of revenue to expenses
- OpEx accounting treatments
- Ability to return the asset after your term expires
Overall, utility-based consumption methods are compelling when you don't have — or don't want to use — cash for a significant upfront outlay; if you want a financial solution that is treated as OpEx; or when you need to line up IT expenses with revenue within a given financial reporting period; or there is unknown demand for capacity utilization.
The decision about which consumption model and solution are best for your organization depends on your priorities, the financial needs and strategies of your company, and cash flow over its usable life.
In general, utility-based consumption model solutions work best when you have some level of unknown that introduces a level of risk. These unknowns could include:
- The timing of utilization
- Overall demand
- Amount of storage or computing capacity you need
- Exact timing of your needs
It is not the best financial vehicle if you know and can control all of these factors.
If you are providing an as-a-service to one or more business units, it is easier to fund these solutions, and getting capacity requires less capital upfront. In fact, the best tech solutions will enable you to eliminate cost upfront, remove your old equipment and bring in new equipment, provide more visibility, and make it easier to report back to the organization on usage.
By adopting the following principles, you can leverage your consumption model solution for maximum benefit.
Understand what you're solving for
Are you trying to move from a CapEx model to an OpEx model? Are you hoping to align usage to revenues, by business units? Are you managing volatility or solving for scale? Your decision will differ in terms of what you are trying to achieve for your organization. Make sure you are clear on the objectives, and that you communicate with other interested parties in your organization so that you are all on the same page with your decision.
De-couple the consumption and placement discussions
Consumption decisions should not impact how you architect your environment. The decision on the best way to financially consume a given solution should be based on overall business and financial decision-making criteria. Compare and contrast alternatives and make the right financial choice that is aligned with business objectives. There is a time and place for all of the options contemplated in this article.
Recognize there is no free lunch
That's right. It doesn't exist! If your objective is only to drive expenses as low as possible, utility-based consumption model solutions are not the breakout answer you are seeking. In fact, cash flows from financing private cloud will run at a similar level. Although you may not rake in the big bucks by choosing this option, you do get flexibility and more freedom.
Use utility-based consumption model solutions as a financial strategy, not as a silver bullet to avoid fixing underlying issues.
You can't solve everything with a financial model.
For example, a consumption model won't improve physical supply chain constraints of shipping, integrating and configuring equipment to make it available for use. Optimize those processes, including the overall purchasing cycle. Shortening the time between when you acquire a solution and when it goes into use by improving your supply chain process could impact your consumption decision.
These issues will show up in your price point no matter what consumption model you choose. Understand that your choice of financial strategy must exist in combination with addressing your ongoing challenges.
HPE GreenLake is an ideal solution if a consumption model fits your use case. For example, if you're comfortable with a committed capacity and you want a cloud-like payment experience for your on-premise private cloud.
If you currently have an all-HPE stack, HPE GreenLake is a no-brainer. Even if you don't, HPE GreenLake is a market leader in consumption-based offerings, providing technology-as-a-service, but on your terms.
Ultimately, consumption-based services are the way of the future. Solutions like HPE GreenLake can give your organization the choice, flexibility and control you need to continue to succeed.