News for the Hospitality Executive
Cloud Based Computing:
|By Jim Plautz
July 14, 2010
Where have all the lenders gone? 2010 is an awkward time for the financial industry. It used to be so easy to obtain equipment leasing, even for new hotels. Several lenders specialized in offering midsized and large, branded hotels all the FF&E leasing they required. Sure, the lease docs read like a second mortgage, but the rates were good. It was a great way to reduce the owner’s out of pocket cash required for new construction or renovation. These lenders have disappeared and to make matters worse, hotels are now faced with cash demands resulting from new technology and the need to keep up with guest expectations. Hoteliers want managed service agreements for Cloud Based Computing, but vendors want the money up front. How can these requirements be reconciled?
Cloud Based Computing, also known as software as a service, above property, or web-based software, is the current craze for VoIP providers; the number one trend at the Hospitality Industry Technology Exposition and Conference (HITEC 2010) in Orlando according to one industry analyst. Why invest in clunky hardware and litter the basement with racks of unsightly servers when most of your daily operating applications can be hosted elsewhere and accessed on the World Wide Internet. Cloud Computing and Triple Play services are everywhere, and here to stay.
Let’s take a look at the new challenges offered by Cloud Based Leasing using a phone system for a 100 room hotel as our example. The hotel has decided to purchase a new Cloud Based VoIP Telephone System that will interface with existing property management and call accounting systems. The hotel will receive a monthly license fee covering the cost of the services they use. This begs the following questions that hoteliers must ask themselves;
1. What can be leased? Traditionally, the hotel would lease hardware, software, installation and training expense. Some leasing companies also allow you to roll in the cost of the service contract. Now, it’s unclear as to what the hotel owns and what they can lease. Certainly they can lease the telephones, console and other on-site equipment, but what about the rest? On-site equipment might be only 30% of the total system. Will the vendor finance the remaining 70% or will hoteliers be required to pay cash?
2. Is vendor financing competitive? Vendors want to be paid up front, but some vendors will also offer service contracts covering most of Cloud System costs. This helps vendors increase sales, but are these service contracts cost-competitive? Hotels will want to compare prices.
3. Are small leases available for on-premise equipment? Depending upon what parts of the Cloud System can be leased; it is more likely now that the lease size will be smaller. Many lenders have stopped doing leases under $50,000; one lender has increased the minimum size to $250,000. Some lenders are still doing small leases, but lease rates are often expensive.
4. Who will host the Cloud Based System? What are their qualifications? Today, lenders want to know about the vendor. How long have they been in the business? Will they be around to provide hardware and software support? Lenders will still want to look at the vendor, but now they might have an additional party involved, particularly for Hosted Services. What are the qualifications of the company hosting the service? Have they done this before?
5. What if the central system crashes, for whatever reason? Equipment failure, software glitches, storms, virus, whatever; what if the system doesn’t work for an extended period of time (as defined by the lessee)? This can happen today, but there are more culpable parties with a Cloud Based System. Hotels should take a close look at what happens if the system goes down. Is there is a backup plan?
6. What happens when the lease expires? Hotels currently own their entire phone system and for $1.00, or the Fair Market Value if an operating lease, can purchase the system. They are entitled to service and maintenance as long as the system is upgraded to current software levels. Is this true with Cloud Based System? What about the portion of the service contract that covers trunk charges? Who pays for future software upgrades? Who owns the Cloud System after the lease expires?
7. What type of lease is appropriate for Cloud Based Systems? Most leases today are Capital Leases; 36-60 month $1.00 or 10% buyout at lease expiration. This means that the asset appears on the balance sheet for tax purposes, the lease term is 75% of the equipment life and the lessee owns the equipment for tax purposes. Is this still true? If not, are Fair Market Leases more appropriate? If so, how does the lessor calculate residual value? Hotels will want to take a closer look at FMV leases.
8. May I combine Cloud Computing and Triple Play into a single lease? The answer should be yes, particularly if the components of the Triple Play are from the same vendor. Lease rates should be better. Hotels should request a single, integrated lease.
Conclusion: The purpose of this article is to identify some of the issues that must be addressed if hotels can successfully use equipment leasing to seize the opportunities created by Cloud Based Computing and Triple Play services. Successfully meeting these challenges is important to both the leasing industry and growth of Cloud Based Computing. The author is currently working with major vendors to develop programs that address these issues as well as the functional issues of Cloud Based Computing. These issues are solvable, particularly if the vendor’s delivery model is initially established with these issues in mind. There is nothing more beautiful than cirrus clouds forming a halo around the setting sun. It can be that way for the Hospitality Industry.
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