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Titsup 2e2's data centre dustup gave UK users the CLOUD FEAR

Vendors struggling to reinflate the bubble

When 2e2 Group suddenly collapsed earlier this year, owing over £400m to trade creditors and stranding a rake of customers from NHS trusts to the Bank of England, a gigantic question mark instantly formed over the cloud.

Many customers already had concerns about keeping control of their assets in the cloud. 2e2's rapid collapse seemed to justify every single concern a reasonably sentient end user would have had about off-premises computing. It's fair to assume many of those who were dipping their toes into the cloud are now are doing a rapid back-pedal.

The vendors, meanwhile, put out the line that 2e2’S collapse was specific to the company, that the company had overstretched itself by attempting to expand too far and too fast.

But beneath their surface corporate composure, there’s a lot of scrambling going on as vendors do their best to mitigate the effects of 2e2's implosion.

At a broader level, the firms are also trying to shore up their services partners with a raft of initiatives that can support them in the cloud marketplace. It’s clear that many vendors understand the current dynamics in the cloud industry - where the partners bear the capital and financial burdens for infrastructure builds - are not viable.

Dell, IBM, HP and Fujitsu, to name but a few, are ploughing millions into state-of-the-art builds and providing infrastructure and financial support for their cloud partners.

Some might say the factors behind 2e2's collapse were peculiar to the company. The integrator had loaded itself up with too much debt after expanding rapidly - it could be argued that few other providers might be expected to generate losses of a similar scale.

But Alistair Edwards of Canalys reckons that of the thousands of managed service providers that have moved into cloud computing, not all of them are going to make it:

“Within 18 months we’re expecting to see a lot of managed service providers go bust. Their business models are not viable and they’ve got lots of debt. Following from this we’re expecting a lot of consolidation in the market.”

So aside from chewing their nails when they realise their data could be exposed or hanging back from adopting cloud services, where does this leave customers?

Some industry voices will tell you it’s an element of the commercial world: you throw your hat in the cloud providers ring and you take your chances.

But with some 2e2 customers asked to stump up a collective £1m to get access to their data following the integrator's collapse, it is now clear just what those "chances" might be. So you can bet your bits, bytes and financial plans that many who were gingerly tipping their toes in the cloud pool have pulled them out quickly.

The warning signs were already there for some customers. The Broken Barnet blog pointed to what it claimed was a 2011 internal report at London's Barnet council, where the council allegedly acknowledged it was having trouble with 2e2. The report apparently spoke of the risks faced by the council after 2e2 told councillors it was no longer contractually obliged to fulfil its duties on the basis that equipment had reached the end of its life.

Not everyone can survive

Contractual disputes only fuel the larger issue of trust which has led to potential customers putting the brakes on their uptake of cloud services.

This, in turn, has had an impact on the vendors, who are ploughing millions into persuading the world and its dog that cloud is the way to go.

Edwards says: “Over the last two years vendors have really been leveraging revenues on the back of MSPs who have been trying to drive new cloud business models. But the reality is now kicking in, cloud is not taking off like predicted and this is a long-term transition. The industry needs to become smarter to support customers as they build out services.”

Getting vendors to actually talk about what they are doing to support cloud services is almost as difficult as finding an ex-2e2 customer with good things to say about their former "partner". They’re either nervous, unsure or don’t want to be seen to be commenting on such a clearly commercially toxic issue.

'Issues with customers?' You don't say...

That said, some are prepared to openly admit there are "issues" on the part of customers. EMC’s Jason Capitel, EMEA COO is trying to engage customers by offering them a number of partner options based on the best fit for their business.

“We’re not into having thousands of partners. Rather we’re focusing on hundreds of partners only across EMEA," he says. "We want to partner with people we know can deliver quality business services based on a customer’s needs. We’re taking the long view when it comes to the cloud.”

One of EMC’s criteria for choosing partners is transparency with the customer and this includes talking about how a customer can get out of a contract and what their migration path would be.

Capitel lays great emphasis on this: “The benefits of cloud are flexibility and agility, an IT environment that can quickly adapt to changes. This needs to be reflected in the contract. Customers don’t need to be tied into long-term outsourcing contracts. This undermines the cloud benefits of flexibility.”

The reluctance of other vendors to comment on their cloud position and how they are supporting the market probably has something to do with the fact many of them initially got it wrong. The market is moving more slowly than many originally anticipated and customers seem to be reluctant to adopt services that are based on price alone.

For the thousands of companies now offering cloud services, one of the key selling points is price. In fact, the cost-effectiveness of cloud services is one of the central marketing premises that have been consistently thrust in the face of customers.

Users have to want to buy those services...

But Canalys’ Edwards says the buyer should beware: “We’re seeing a lot of untested business models based on price. But anybody who is making a business based on high revenues and projected growth is going to end up financially stricken.

"A price-led, high volume infrastructure as a service is not going to cut it. These companies will struggle to survive. Differentiators need to be built on services such as storage capacity. Services actually need to meet a business need.”

However, to date, this has largely not been the case and it seems most vendors have been chucking their eggs in the "cloud is going to grow phenomenally fast" basket - based on the premise that customers will rush to buy the services once they understand the cost-savings.

But that said, the flurry of data centre builds also indicates recognition that for cloud adoption to grow, data centre infrastructures need to exist so that partners can sell capacity, rather than having to carry the financial and capital risk of building their own infrastructure.

There are already some pretty significant investments in cloud providers who have unproven business models. It’s clearly not in a vendor’s interest if any of its partners go out of business, so they’re seeking to minimise the risk and are looking for ways to ensure the financial viability of partners.

Would your vendor vouch for you?

Behind the scenes vendors are exploring a number of models that can help shore up partners. One of these is financial attestation, that is, the idea that a vendor vouches for the financial viability of a service provider. However, this is not without its problems.

In the first instance, it requires a partner to open up its books to vendors, displaying profit and loss going back several years, the full whack. Attestation is essentially legal testimony and the vendor "bears witness" to the partner’s financial health. To put its head on the legal block, a vendor would need to carry out a full book-scouring exercise. However, it’s unlikely to be used too widely, simply because this would be an administratively heavy burden, requiring new staff, a new department and considerable new expenses.

Financial accreditation is also getting more air-space. It’s different from attestation in that the vendor puts its money behind the partner’s service or relevant service components. For example, vendors are now coming forward with financing linked to specific offerings such as hardware, storage and back-up environments. Some are leveraging their own books to finance these initiatives.

Another model that is gaining rapid ground is pay-as-you-grow. A partner takes services according to its need and adds more when required. EMC has something it calls buffer capacity, which is the opportunity to pay later, so a partner can grow its cloud service without financial impediments.

A lot of the partners are also financing their business with straight loans, but as a result, warns analyst Alistair Edwards, a lot of debts are building up.

This view is echoed by Bill Milligan, managing director at consultancy Frontline, who admits his company is relatively small but more importantly it is profitable and not in debt. He has a wary eye on the explosion in cloud service providers and reckons that 2e2’s demise won’t be the last word in MSPs going belly up.

To protect customers and bolster the industry’s reputation, analyst outfit IDC recently floated the idea of a voluntary crisis fund with hosting companies contributing into the pot. A sort of ABTA for the cloud if you will. If a service provider hits the wall, the customers can use the money to ensure they can still access their data by paying for transition to a new provider.

Edwards reckons it’s a nice idea in principle but in practice a bit of a non-starter. For one, it sends out the wrong message in an industry that is still wobbly on its legs and secondly it also highlights an anxiety that customers already have.

He says: “A common fund makes little sense. To take a cloud service and make an insurance payment on top of that undermines the whole principle of moving to the cloud. One of the issues for customers about moving to the cloud is maintaining control of their assets. By making an insurance payment you’re exacerbating that anxiety by admitting that you just might lose your assets anyway.”

There’s also the issue of size. Many start-up businesses today source their IT from the cloud. It’s a great way for a company to get up and running while keeping costs down. But many small businesses want a service provider that is going to provide the TLC they need. They don’t want to become an unseen minnow swimming with a shoal of big fat fish. In short, they want providers relevant to their needs.

Within this context, vendors are sending out a very strong message to partners about planning viable routes into new cloud opportunities and not exposing them themselves to financial risk. In short, they’re "educating partners" about the right way into the market.

As for the customer, there’s an unstated understanding that they will move to the cloud eventually but perhaps not in the droves that vendors initially anticipated. Rather than persuade customers that all is well in the world of cloud, their endeavours are directed to ensuring partners can sustain their cloud offerings... For now anyway.

It just might be, following the collapse of 2e2 and as the dust still settles on new data centre builds, they might just be quietly contemplating offering cloud services directly. ®

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