Business-Driven Architect

Brenda Michelson

Is the credit crisis a boon for cloud computing?

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There is an interesting article in the WSJ by Ben Worthen and Bobby White on the state of the technology financing business, which frankly  isn't good.  The article begins by citing an increase in tech financing defaults:

"Defaults on tech financings, loans that allow companies to purchase computers, software and other products, have spiked this year. The problems are surfacing after years in which such loans flowed freely..."

"...In September, 0.86% of equipment loans -- which includes a range of office equipment -- were written off as losses, up from 0.48% a year earlier, according to the Equipment Leasing and Finance Association, an industry group for 700 lenders.

While the numbers appear low, it's about the same as the percentage of real-estate loans -- around 1% -- expected to be written off in the third quarter by the top 100 U.S. commercial banks, according to research firm Aite Group. Tech-financings will reach $88 billion, about 14% of the total amount spent on computer hardware and software this year, estimates research firm IDC.

Businesses are now defaulting on loans for tech purchases "all the time," says John Dondey, national sales director for Baytree Leasing Company LLC, a Lincolnshire, Ill., unit of Baytree National Bank & Trust Co. that does tech financings.

While Baytree's default rate used to be less than 0.5%, it's now between 1% and 1.5% for commercial businesses, he says."

Naturally, this increase in defaults has led to an increase of rates:

"Lenders are responding by tightening their tech-financing terms. While some businesses were once able to get loans for software that required no money down or had 0% interest, some tech-financing operations are now offering rates to small businesses of around 8.25%, according to lenders."

And, hold on to your hats, some creative financing options by big tech companies:

"IBM, which has its own financing arm, says it has seen an "uptick" in the number of customers looking for credit. The Armonk, N.Y., company has responded by launching a new program this month that offers loans at below-market rates with no payment or interest due for 90 days.

Underwriting customer purchases "gives us a competitive advantage," Mark Loughridge, IBM's chief financial officer, said during a call with analysts on Oct. 16. IBM's financing unit had $24.5 billion in loans outstanding at the end of 2007.

Still, IBM has seen its default rate rise from 1.1% in the June quarter to 1.3% in the September quarter. A spokesman says IBM is able to sell repossessed equipment at a higher price than other lenders because it can refurbish and warranty it.

Cisco also uses its own cash reserves to drive sales. The networking giant financed more than $4 billion in customers' purchases, or about 10% of sales, in its fiscal year ending July 26. That's up from $2.7 billion the previous year. Oracle tapped its reserves to finance $1.1 billion, or about 15%, of new software sales in the year ended May 31, up from $891 million the previous year.

Collecting on these loans when the economy sours can be a problem. Cisco was forced to set aside almost $900 million for bad loans in 2001 after lending to dozens of telecommunication and Internet start-ups during the dot-com bubble.

A Cisco spokesman says the company is conservative in its lending practices."

Still though, some organizations are delaying or canceling spending because of the unfavorable credit environment:

"Nearly 20% of chief information officers say unfavorable credit terms caused them to recently delay or cancel purchases, according to 31 companies surveyed in October by the CIO Executive Council, a professional organization."

And, as the article points out, tech financing carries different risks than say housing:

"Tech-financing loans carry special kinds of risks. In the case of hardware like computers, the equipment itself -- a rapidly depreciating asset -- typically serves as collateral. In the case of software, the loans are often unsecured because it is illegal to resell used software."

Finally the cloud part...

What do people and organizations do when they can't secure a loan to buy a core (critical, foundational) asset?  They rent said asset (housing, office space, transportation, machinery, computers, etc.) from someone else.  This allows the person or organization to access the assets they need, and benefits the supplier who receives an income stream on assets that remain in their control.

So, I can't help but wonder aloud 'does the convergence of the credit crisis and the spate of cloud computing articles, offerings and announcements provide the perfect storm for cloud computing adoption?'  Will financial market conditions rocket cloud computing through the hype cycle to adoption?  Or, might organizations choose stagnation over the risk of early adoption?

As I said, I'm merely wondering aloud, but I'm sensing a correlation here.  What do you think?  Is the credit crisis a boon for cloud computing?

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Brenda Michelson, Principal of Elemental Links, shares her view on architectural strategies, technology trends, business, and relevance.

Brenda Michelson

Brenda Michelson is the principal of Elemental Links an advisory & consulting practice focused on business-technology capabilities that increase business visibility and responsiveness. Follow Brenda on Twitter.

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