New server leasing models promise cloud-like flexibility

IT hardware vendors, such as Dell and Hewlett Packard Enterprise (HPE), are pivoting their revenue models away from product sales toward service-based subscriptions. The objective is to make hardware appear more flexible and cloud-like so buyers can retain servers in their choice of data center while receiving the critical benefit of the cloud: scalability.

Much of the value of the public cloud is in its pay-as-you-go consumption model. Scalability is an application’s ability to consume more or fewer resources as needed (see Cloud scalability and resiliency from first principles). Scalability is only possible if the user is billed in arrears based on resources consumed. This model allows IT to address changing business needs without having to provision capacity far in advance. The provider, not the user, is primarily responsible for infrastructure capacity planning.

To provide this flexibility, public cloud providers provision far more capacity than is likely to be needed. This excess allows users to consume at will without needing to reserve capacity in advance. The aggregation of demand from thousands of users allows hyperscaler cloud providers to overprovision capacity and still make a profit.

Server utilization is a critical metric in the cloud business model. The hyperscale provider faces a balancing act: too many servers sitting unused equates to waste, and waste equates to sunk costs. Too few servers and the principal value of the cloud, namely the ability for users to scale spontaneously, falls apart.

Organizations using physical servers in their own or colocation facilities (including for reasons of compliance, data sovereignty or performance) face the same capacity-management problem. But unlike hyperscalers, they neither have the benefit of demand aggregation at scale, nor the budget to buy and host many empty servers on a just-in-case basis.

Server vendors are changing their business models to allow the leasing of hardware on a more flexible basis. In this hardware as a service or consumption-based model, the buyer commits to a monthly minimum capacity of resources, usually expressed in central processing unit (CPU) cores, memory and storage. The provider supplies a server (to the user’s data center or colocation facility) that delivers at a minimum this capacity, but also builds in a buffer of capacity — usually 10% to 20% above the user’s requirement. The organization is billed at the end of each month for its minimum commitment, plus any additional capacity consumed.

The vendor provides a software portal that tracks consumption and capacity. If consumption regularly breaches the user’s committed capacity, the user is alerted and a new server can be ordered and delivered to the organization easily. Server maintenance is included.

Leasing hardware in this way isn’t necessarily cheaper than purchasing upfront, but the key benefits for the user include being able to switch from capital expense to operating expense, plus a lower capacity-management burden. From the vendor’s point of view, as a service models provide a defense against the pull of the public cloud. They also help build a more relationship-led business by proactively responding to customers’ capacity issues.

HPE pioneered this model with GreenLake. It is pivoting to a services-first approach, away from its established reputation as a hardware manufacturer. HPE GreenLake includes computing and storage hardware plus integrations with software such as cloud stacks, container platforms and multicloud portals. The GreenLake portfolio now includes more than 70 products.

Cloud integration is a critical use case. HPE provides the hardware and software providers such as VMware, Microsoft, Red Hat and Google provide the cloud software, enabling pay-as-you-go private clouds. Public cloud integrations also allow organizations to build hybrid clouds that run across public and private venues using the same platform and are charged on a consumption basis.

This new approach appears to be working. In Q2 2022, annualized revenue run rate for HPE’s as a service offerings reached $820M, bringing the total number of customers to over 1,600. The company reports that Q2 2022 orders are up by 107%, compared with Q2 2021.

Dell, too, is pivoting to a services-first approach with its APEX portfolio. As with HPE, APEX will offer hardware owned, managed and maintained by Dell and billed using a subscription model. Launched in 2021, the success of APEX is not yet evident, but Dell is seeing the model as mission-critical to its future. Other major hardware vendors, including Cisco, Hitachi and Lenovo have also introduced as a service models (called Cisco Plus, Hitachi EverFlex and Lenovo TruScale).

Organizations should consider consumption-based servers. There is no (or little) capital investment, the provider takes responsibility for some aspects of capacity planning and maintenance, and physical hardware can be consumed flexibly in a cloud-like model. However, capacity isn’t guaranteed: if unexpected resource demands overrun the capacity buffer, there may be performance issues while more servers are delivered to the site.

Is a consumption-based server cheaper than a purchased one? It depends on several factors, such as the contract term, the server model, the commitment and the utilization. For example, if the user over-commits to a minimum capacity, it may pay more than if it bought a smaller server upfront. Furthermore, the vendor still owns the server at the end of the term. There is no resell or trade-in value, which impacts the buyer’s return on investment. Hardware leasing models could be good news for colocation operators because it removes the capital requirement to run servers in their facilities. The model opens new revenue streams for managed services providers: could partnerships and packages that unify pay-as-you-go data center capacity, hardware and software attract capital-stricken customers?