- Vendors like HP Enterprise, Dell, and Lenovo are pivoting their business models to embrace leasing — rather than selling — their hardware to vendors.
- Those vendors, and industry analysts, say that this is good for customers, because they use a cloud-like billing model that means that you only pay for the storage and computing capacity of the hardware that you use.
- The change is being driven in large part by changes to tax law in 2016 that allows customers to account for those leases as assets, rather than future payments.
- Proponents say that so-called hardware-as-a-service can also save the IT department from management headaches, because the vendors actually do the hard work of managing the hardware for customers.
- The potential downsides are that it may still be more cost-effective in the long term for some customers to buy their hardware — and that in some situations, using mega-clouds like Amazon Web Services may still be preferable.
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For the longest time, enterprises bought their IT infrastructure, and the concept of leasing was confined mainly to the mainframe, something IBM has offered for decades. But changes to the IT climate have forced the hand of server vendors to adopt a leasing model, and it is growing increasingly popular with vendors and customers alike.
The three major server providers — HP Enterprise, Dell, and Lenovo – have all adopted an on-demand consumption model in recent years, as has network giant Cisco with its Open Pay program. IBM has a more narrowly-focused service called Capacity on Demand, which is only available for its Power series of RISC processor-based Unix computers.
The numbers are tricky to come by because the programs are so new. Analyst firm Gartner indicates that by 2022, 15% of new deployments of on-premises computing will involve pay-per-use pricing, up from less than 1% in 2019.
Dell cites an IDC study that found customers of on demand consumption saw 23% lower average storage cost of operations per year, 25% lower storage acquisition costs 92%, faster time to deploy new storage capacity, and most importantly, $36,400 gain in business operations per 100 users as a result of increased revenue and productivity.
HPE's service is called GreenLake (launched in 2017), Dell's is On Demand (launched in 2019), and Lenovo's service is TruScale (also launched in 2019). None would say what percentage of their business comes from the leasing side versus outright sales but they are all placing greater emphasis on it. HPE has said it intends to offer its entire portfolio through GreenLake by 2022.
A shift away from the traditional pricing model, and towards paying-as-you-go
Two major events collided to bring about the shift towards paying for this kind of gear as you go.
The first was the advent of the cloud and the need to offer greater competitiveness in buying options. The big hardware vendors found themselves losing sales as enterprises increasingly moved to the cloud and stopped buying hardware. In response, the data center hardware industry adopted a pay-per-use model — where customers rent the hardware from the provider and pay for what they use, similar to Amazon Web Services, the market-leading cloud platform.
The other was a change in the US Financial Accounting Standards Board (FASB) leasing laws in 2016. The biggest change was in how leases are accounted for on corporate balance sheets. Instead of appearing as a table of future payments in the footnotes, they appear on the balance sheet as an asset and as a non-debt liability. This made leasing more palatable.
The result was a seismic shift away from the capital expenditure model (Capex) to an operating expenditure model (Opex). This, coupled with the desire to offer a cloud-like experience on premises, has led to the IT hardware industry shifting gears to the lease model.
In a Capex scenario, the hardware is purchased all at once, followed by ongoing maintenance fees. This is how systems have traditionally always been purchased. With the Opex model, you pay for your monthly use with no up-front acquisition costs, and maintenance is a part of the ongoing operating expense — so the customer avoids the huge upfront purchase expense and only pays a continuing fee.
"They want to be able to compete against the cloud and against [the cloud] model, but they also wanted to offer an Opex model. This was the only true way they could do it," Rob Brothers, program vice president for data center and support services at analyst firm IDC, told Business Insider.
A matter of accounting
The choice between buying the hardware you need and leasing it all depends on how you want to run your books, said Brothers. "There really isn't anyone who wouldn't like it. It's how they want to show their assets on their books," he said.
Financially, these so-called hardware-as-a-service offerings work much like the cloud: you pay for what you use. All of the firms involved have their own monitoring methods to meter how much a customer uses the hardware and they generate a monthly bill from that. This is far more palatable to many companies than the traditional upfront purchase because it can save millions in initial outlay.
Technically these offerings also operate like the cloud, in that if you need more capacity you simply spin up more hardware and virtual machines. One of the knocks on traditional, on-premises hardware is that it takes weeks to order, install, and provision new hardware, whereas you can spin up new virtual machines on the likes of AWS in minutes.
But one of the elements of the leasing programs is the vendors actually over-provision for the customer's needs. The hardware sits unused, and thus no charges incurred, until it is provisioned and needed.
"We insure customers always have capacity ahead of demand," Keith White, general manager of HPE's GreenLake program, told Business Insider. "They do have added capacity on-prem they can use if they need to. We do 24/7 monitoring, they can get capacity out if they need it. This is very comfortable for the majority of customers. They have extra capacity but are not paying for it since they are not using it."
"When we are sizing up a customer they choose minimum capacity and they can have 20% capacity and burst capacity overhead," Laura Laltrello, general manager of the Data Center Services group at Lenovo, told Business Insider. "The hardware is not used but they are not paying for it. We constantly work with you to manage the equipment. If we see capacity grow, we will say you need to add to your profile."
Leasing can lead to fewer IT management headaches
That leads to the second benefit of on-demand services. The providers manage the hardware for you, usually remotely but sometimes on site as needed, thus freeing IT staff for other projects. "We can provide that entire management for customers so they can focus on their own business. It's not just about consumption but offloading work they were doing internally," said Laltrello.
Another benefit of leasing is that the provider can, under the right terms, swap out gear during the lease period, so you can upgrade to newer hardware without having to deal with disposal of the old gear.
"Because we're constantly monitoring the environment, we can update the hardware to make sure they have the latest and greatest and update hardware to what they need," said White. "We're not going to swap out everyone's hardware but it would depend on what the customer is doing."
For Swiss robotics giant ABB, combining HPE GreenLake with its robotics business has meant it can better and more quickly serve the European automotive industry. The company combines its robotics as a service for automobile manufacturers with HPE hardware to sell its Secure Edge data center systems via the GreenLake model for end-to-end automation in smart factories.
"The automotive industry is going through a great deal of change. Clearly we are moving from tradition combustion engines to electric vehicles. At the same time you see shorter life-cycles and demand is getting more unpredictable. With all of these my customers need flexibility. Automation is a key part of this movement," Tanja Vainio, managing director of the robotics business at ABB, told Business Insider.
"[GreenLake] gives our customers flexibility because they have an ability to pay a monthly fee rather than up-front cost. That makes it more affordable and helps them adopt new services faster, like robotics as a service," said White.
Potential downsides
So is there a downside? Brothers notes that all three consumption models vary slightly, so it's difficult to get an accurate comparison between the three since they all measure consumption differently.
Another question is how you manage your IT assets. "Sometimes there are tax benefits from Capex where you can take all the depreciation in one year," Brothers said, and added if you think you might want to keep an asset for a long period of time you might want to acquire it rather than lease. "It becomes cheaper [over time]. If you keep on leasing eventually you pay the asset off. Just because you pay the device off, you don't own it. You keep paying."
Brothers also noted these models are new, so we're now just beginning to see what's happening with the assets when these terms end. "We haven't gotten a great answer yet," he said. Another issue Brothers notes is that the consumption models all vary between the three, making it hard to do an apples to apples comparison and determine which is the right fit.
The Link LonkJuly 30, 2020 at 03:10AM
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Dell, HPE, Lenovo pivot to data center hardware as a service - Business Insider
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