What a pain in the aaS: HPE signs up just 1.125% of its channel to sell hardware delivered as a service

Forget software-as-a-hostage! Customers have more choice when it comes to servers, networking, storage

Hewlett Packard Enterprise's multi-year efforts to remain relevant against the onslaught of cloud giants hinges on convincing resellers to back its as-a-service (aaS) sales model, and yet progress continues to be painfully slow.

The entire portfolio of HPE will be available to buy aaS from next year, in fact the vast majority already is save for the Cray line of high-performance computers. aaS lets customers establish a base level service for compute, networking, storage, and so on, scaling up and then down when needed, with the client paying for what they use.

The consumption model is growing for HPE from a standing start, accounting for just 5 per cent of revenue in 2018. HPE recently reported annualised recurring revenues (ARR) of $796m in its Q4 of fiscal 2021 ended 31 October, up 36 per cent year-on-year. This follows $649m reported in HPE's Q1, $678m in its Q2 and $705m in Q3.

GreenLake is the platform for HPE's aaS products, and all aaS business will fall under that brand at some point in "early" 2022.

In fiscal 2021, GreenLake's contract value was $1.5bn, taking the total haul to $5.7bn.

Yet HPE has confirmed that just 900 of its 80,000 channel partners worldwide – or some 1.125 per cent – are currently selling GreenLake. This is despite HPE trying to smooth the way with a sales programme launched in June 2020 designed to lure more on board.

HPE CEO Antonio Neri, who was sat on a conference call with analysts last month to discuss its latest earning, said: "We added more than 300 new GreenLake customers during fiscal year '21, bringing our customer count to more than 1,250.

"New GreenLake logos represent an increasing share of orders with approximately one-quarter of Q4 GreenLake orders coming from new customers. Today, more than 900 partners sell HPE GreenLake, one of the largest partner ecosystems selling as-a-Service offerings in the industry."

Unlike its rivals, HPE is disclosing financial figures for its aaS biz. Cisco and Dell have similar initiatives launched years after GreenLake, which emerged in 2017 as an evolution of HPE's Flex Capacity model.

Neri said that "nearly" 70 per cent of annual sales are transacted via "HPE's channel ecosystem" – down from a firm 70 per cent previously, meaning the company is selling aaS directly to customers. It clearly has fewer channel partners helping out.

However, HPE has always relied on the channel to scale its business and with the company pursuing this model with GreenLake, it has a job of work to convince more to sign up.

"We are committed to growing HPE GreenLake sales via the channel," an HPE spokesperson told us via email. "We are conscious that for many partners the transition to selling as a service represents a shift in their business model and we are focused on supporting them through this process.

"We also saw a 47 per cent increase in the number of channel partners landing GreenLake deals QoQ in Q4. In FY21, the channel accounted for 29% of GreenLake sales, up from 25 per cent in FY20 and 18 per cent in FY19."

One sizable European channel partner that spoke to us on the condition of anonymity took the glass-half-full approach, saying aaS has a role to play where latency issues, regulatory compliance, and egress charges force customers to keep certain workloads out of the public cloud. "Some workloads need to be remediated and modernised to be cloud ready."

Another we spoke to pointed out that "this is a hybrid world."

A good whack of businesses in the channel are still set up for high volume, low value transactions and may view the training of sales staff on longer, more complex technical sales cycles as daunting. Plus there is the hurdle of moving to a different internal commission structure for aaS.

HPE told us: "HPE GreenLake allows partners to launch their own managed cloud services with limited upfront investment and allows them to elastically scale services in line with demand."

Despite its length of time on the market, it seems that HPE and those behind GreenLake might have to do a better job of selling it to clients. And even then customers may not buy into it.

"We're still finding customers that think GreenLake is a finance model and better education is needed," one told us.

At last year's Canalys Channel Forum in EMEA, some major resellers said customers were not asking to buy hardware as a service, viewing it as marketing hype from vendors running scared of public cloud rivals.

Those attitudes towards aaS don't seem to be softening, at least among some of HPE's resellers.

One senior source at a big HPE house was pretty damning, telling The Reg that with software as a service, the bigger vendors tend to have a monopoly. "It's not software-as-a-service, it's only ever software as a hostage. You are tied in."

Yet with hardware, there is more choice for customers and some financial directors don't see the sense or commercial logic, preferring to pay cash upfront and let the hardware depreciate on the balance sheet.

"If a customers buys a £10,000 server, they let the cash go on day one and the server will depreciate over four years, roughly speaking. The FD charges £2,500 to the p&l for four years in a row. If you buy as-a-service, the £10,000 doesn't disappear but the customer is charged each quarter for the service – the cost of the hardware – and interest is charged because they are taking a lease. They still have the £10,000 in the bank but that is not making much interest, so using their own money upfront is cheaper than using HPE's money."

The talk of customers all wanting to use operating expenditure rather than capital expenditure wasn't resonating with as many customers as the hardware vendors would like us to believe, our source added.

"As-a-service for hardware makes no sense to any customer that has cash. It is not economically viable."

Back at the last month's earnings conference call, Neri said it had an "advantage" over hardware rivals by launching GreenLake years earlier – Dell's APEX was released in October 2020 and Cisco's Plus programme came out in April.

However, HPE doesn't have the same upper hand when compared to hyperscalers AWS, Microsoft or Google – and those companies perhaps should be the ones that HPE measures itself against as they are quarter-on-quarter growing like weeds, onboarding new customers.

Caught between the old way that technology is consumed and the new, HPE needs to return to double-digit revenue growth.

In fiscal 2021, HPE group revenue [PDF] grew 3 per cent to $27.8bn, with the Compute division flat versus the prior year at $12.29bn, HPC and AI up 2.7 per cent to $3.18bn, Storage up 1.6 per cent to $4.76bn, Financial Services up 1.4 per cent to $3.4bn, and Intelligent Edge bucking the trend, growing 15.1 per cent.

By way of contrast, AWS turned over $44.4bn in sales in the nine months to 30 September, and Microsoft's Intelligent Cloud division reported sales of $16.9bn in its last quarter alone.

Alastair Edwards, chief analyst at Canalys, told us that in the world of aaS, GreenLake has "had most traction so far as an enterprise-level offering." The majority of customers are medium and large enterprises and the "biggest share of that is still sold directly by HPE."

To maintain momentum, HPE "needs to scale more effectively through the channel," he told The Reg.

"It's been working hard to simplify offerings for the channel, to push it through distribution, to increase incentives and make it accessible to a broader set of partners. That is starting to happen, and indirect growth is now outpacing direct growth (although from a smaller base)."

Less than 5 per cent of HPE's partner base have top tier accreditations and they are the ones doing the biggest sales volumes with HPE, he said. GreenLake rebates are only available to those with service specialisations, which "limits the attractiveness to smaller partners."

"However, many partners remain sceptical, particularly in EMEA and APAC. GreenLake can be expensive, and remains a complex sale, with long sales cycles, even with the simplified offerings. Selling it requires a lot of upfront consulting to make sure it’s the right fit. Another issue is that risk lies with the partners (or distributor) if a customer stops paying."

Edwards said GreenLake is being pitched as an alternative to public cloud, but it's "not about pure consumption", so is not directly comparable to AWS and the like.

"The customer is typically committing to a minimum level of spend, so true flexibility is limited. But this can create confusion in the channel – and among customers – when HPE calls it a cloud model. A lot of partners just see it as alternative form of financing.

"Most customers still want to buy upfront, but a growing proportion want more flexibility and the ability to pay on a recurring basis. HPE definitely still has the upper hand over Dell, Cisco and Lenovo, but as all of these vendors engage in battle for the as-a-service opportunity, the winner will be the one that figures out how to make this work most effectively through the channel." ®