Thought Leadership

Sponsored by Societe Generale Equipment Finance

CLEAR SKY FOR THE SHIFT TO CLOUD?

2018 Review

"Shift to cloud” is the new mantra. Technology manufacturers and IT service providers are closely monitoring the proportion of cloud business in their revenue mix. It is a serious trend consistent with new consumption models. How will equipment finance address these new features?

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Cloud computing is the delivery of on-demand computing services -- from applications to storage and processing power -- typically over the internet and on a pay-as-you-go basis. There are three main services:

  1. Infrastructure as a service (IaaS) for internet-based access to storage and computing power (servers, storage, networks, operating systems)
  2. Platform as a service (PaaS) allowing developers to access components to develop and operate web applications
  3. Software as a service (SaaS) delivering software applications over the internet.

The shift to cloud means that a larger part of IT systems, licenses, data centers and infrastructures will be internet based rather than “on premises”.

This shift is now a key element of the technology landscape. It has profound reasons and benefits which will sustain the expected growth of cloud revenues in the coming years. It will call for adapted financing solutions.

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Profound reasons:

End customers, whether individuals or companies, are all gradually evolving towards consumption models reflecting their demand to pay for the usage of the assets rather than the assets themselves.

Owning the equipment is no longer a must: you may need a hole and not a drill.

More end-users prefer to allocate their resources on their core business rather than investing into asset ownership. They are also less willing or don’t need to take the risk of technology obsolescence.

Of course, the pace of those changes varies greatly depending on the sectors of activity of the users, on the assets, on the countries. Culture is also a key parameter for those structural changes. The arrival of new generations to leadership positions will accelerate the trend.

Beyond these new models of consumption, the shift to cloud is also consistent with changes relating to more connectivity and integration through IoT, open platforms and API.

This shift is not questionable. It is even more obvious for technology especially because the risk of obsolescence is higher and faster.

Benefits:

Cloud services allow the end customers to pay for the resource usage they need while taking advantage of scale and reliability. The main benefits are the reduction of TCO (total cost of ownership) of the IT systems and environment, the capacity to streamline processes, the mobility potential, the integration with everything, the reliability and the shift from capex to opex. This should allow greater cost agility.

Expected growth:

US cloud market grows by double digits. Gartner predicts that cloud computing and services will be a $300 billion business in 2021. The IT services category is growing 3% per year while cloud growth is expected to grow at six times that rate, at roughly 18%. Gartner calls it the “cloud gold rush”.

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This means for our technology vendors significant growth of wallet share in the coming years, and not only for the US (see recent annual results releases from the major technology manufacturers). Most of them have high targets in terms of the cloud share in their business mix.

This should last if the additional vulnerability with respect to data protection, data storage and potential leakage can be properly addressed through an adequate cloud security strategy. The slow transition in the financial industry illustrates the concerns this shift to cloud is raising.

Adapted financing solutions:

What does it mean for SGEF as a finance solutions provider? our vendors and our clients expect us to support them in this new environment.

Adaptability is intrinsic to technology financing as the underlying is evolving continuously. Although it sounds like history but we already had to adapt when considering software financing (leasing 2.0) and it was not that obvious nor easy at a moment when our historical technology portfolio was composed of hardware only.

How will we build leasing 3.0?

As a company, our strategy is to make sure than we finance essential use assets for our clients and or the clients of our vendors. The critical value of the investment in the business process of the end user is our best insurance for timely payments. Switch off rights could be more effective with cloud solutions.

We can already identify two main impacts of this shift to cloud: shorter terms and more services

Financing cloud solutions mean shorter term transactions as the end user usually benefit from termination rights and the financing must reflect the offered flexibility. At which point will short term transactions be so short that the clients will no longer look for a financing? Vendors are likely to be willing to secure the loyalty of their customers, financing is a smart way to do so. Looking at the US market, payment solutions are still required.

Financing will also include services as the migration to cloud is rather a journey calling for consulting and implementation services before reaching the cruising speed. This link to the right assessment of the performance risk of those services providers and how this risk is allocated.

We are addressing these new needs by staying close to our vendors and clients, understanding their business models and addressing their needs.

Fitch Ratings

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Florence Roussel Pollet

Deputy Chief Commercial Officer of SGEF

Head of Technology Management

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