A significant event is about to occur later today (14th September 2017) in the world of IT. Oracle, one of the biggest and most significant companies in the history of IT will report their first-quarter earnings for their 2018 fiscal year. In that report, they are going to tell the market that for the first time in their history, that revenues from cloud computing will exceed those derived from new software licences.
So, why is this significant? Consumers of IT have been marketed to and sold cloud solutions for some time now. This has changed the entire landscape of IT because instead of buying their hardware and software, businesses have been able to rent them for a fraction of the price and locate them in someone else’s datacentre. This has significant implications for the IT outlay and cash flow in the business. Oracle was and still are one of the industry’s largest players in new software licences, selling billions and also benefiting from a sizable volume of services built around those. So, for them, it is a seismic change to their business, but for the rest of us, perhaps confirmation that the ‘move to cloud’ has finally hit top gear.
What does this mean for business consumers of technology? Well, salespeople will always push the solutions to their customers that the company wants to sell. Oracle and others identified a sea change in the market and realigned their direction to remain major players in their markets. However, there are other issues here for business consumers of the technology.
Consumers assume that cloud computing is going to be cheaper than buying outright. That’s because buying outright usually involves capital expenditure (‘capex’), which takes chunks of money from cash reserves on an irregular basis – in some cases, this can be a real problem (for example when unbudgeted licences need to be purchased due to non-compliance). By renting licences in the cloud, the large lump of cash needed is smoothed out and turned into a rental – which is taken from operating expenditure (‘opex’), rather than capex, and there is, therefore, a cash flow benefit. However, is it cheaper?
Well, that depends on various factors, including how long the rentals will last, the size of the initial investment and what would have happened after the first few years if the investment was capex-based (bearing in mind there is usually a 20% annual support charge for such transactions). It’s a complex calculation to take into account all of these factors, including other costs, which will also differ in some cases – for example, staff costs which may be lower in cloud-based environments, due to smaller staffing requirements. However, most suppliers expect to derive the same revenues after 2-3 years, so in years 4 and 5, they are making MORE money out of selling the same licences, but in a cloud model.
At Expense Reduction Analysts, we recommend to our clients that they take a very careful look at proposed alternatives because what might seem cheaper today, may well cost a lot more in the long run, so it is important to have all the information, with which to take the smartest decision. Expense Reduction Analysts provide help with analysing these options and costs and can help clients to ensure they have the best value solutions for their businesses.