Cloud on credit: how a service provider's cash flow can threaten your organisation's business continuity

With well-known brands, choosing a cloud provider usually comes down to comparing features and price, while we very rarely look at the provider's financial foundations. That comes from trust in the brand and the assumption that global leaders are stable and reliable business partners. It turns out that, used to certain standards, we project the same trust onto other cloud providers too, including SaaS application vendors and local data center operators. Unfortunately, this trust can lead to serious disruptions to our organisations' business continuity.

A public cloud provider's liquidity#

Anyone who runs a business knows that cash flow problems can bring down any company. It is also clear that sensitivity to liquidity problems depends on the type of business. Put simply, where the initial investment is large, the ROI is spread over time and operations generate high fixed costs, sensitivity to liquidity problems rises dramatically.

A typical public cloud provider (service provider) is particularly sensitive to disruptions in its liquidity. Several factors make it so:

• Large up-front investments in infrastructure have to pay for themselves over many years, because they are the foundation of every service. These investments are usually financed with bank loans, which means fixed monthly payments.
• High fixed costs come from running the facility and a sizeable team of engineers, including a 24/7 help desk, as well as licence fees, uninterrupted power supply – a significant cost item for data centers – maintaining certifications, and so on.
• A multi-tenant architecture does not deliver economies of scale when there are few customers. Profitability comes when customers number in the hundreds (with a high ARPU) or in the thousands when the average monthly revenue per user is rather low.

I know the points above do not cover the topic exhaustively; the aim was only to outline the more important areas.

The worst-case scenario: what happens when a cloud provider stops paying its suppliers?#

Let's say that every month – like most honest customers – you pay the bill for your service. Meanwhile, because of some problems, or simply negligence or poor financial management, your provider stops paying its own bills. Of course, the problem will not surface right away. The consequences will also depend on what exactly has not been paid. There are, however, several areas critical to an "as a Service" provider's operations that, without funding, can lead to services being shut down.

• Licence fees. Typically for cloud services (multi-tenant architecture), your provider also settles with technology vendors based on actual monthly licence usage. This applies to many different technologies needed for the service back end to work properly. Settlement usually goes through local distributors, who pass the money on to the vendors. Typically, failing to pay for three consecutive billing periods ends the contract. Depending on the programme, this may mean immediate or delayed deactivation of licence keys. For the provider, that means losing the technical ability to deliver services; for customers, an unexpected service shutdown. There is usually no easy way back into the partner programme either, even after the overdue amounts are paid.
• Salaries. Failing to pay salaries on time starts a spiral of very damaging changes in any organisation. Team morale drops quickly and uncertainty sets in. Constant or recurring fear about their livelihood eventually triggers survival behaviours – conflicts, avoiding responsibility and so on. This affects the quality of every process in the company, including resource management and customer service. Over time the most valuable people leave, taking their know-how with them and making some processes impossible to maintain.
• Electricity. A very important item, because it effectively determines whether the business can continue. At the same time, bills in this industry often run to six figures. When a service provider fails to pay for two billing periods for whatever reason, the energy supplier starts a collection process. The procedure will vary depending on the supplier and the contract terms. In practice, cutting off the power supply is the last resort. Usually both parties try to find a solution that avoids this scenario, for example by spreading the arrears into instalments. The energy supplier understands that disconnecting a service provider means it will never recover its money, because its customer will lose the ability to operate and earn.

To sum up, a service provider that stops paying its obligations will feel the effects first in the licensing area. You can assume that terminated partner programmes will make themselves felt after about four months. In some partner programmes this also means immediate expiry of licence keys, and therefore services stopping.

How to protect yourself from an unreliable provider?#

One of the most often overlooked practices when choosing a service provider is vetting it. The old rule "trust, but verify" is crucial here. Fortunately, in the digital age we have a whole range of tools that make this easier. The sources below are Polish registries and services, useful when checking a provider operating in Poland; most countries have their own equivalents.

• Start by checking the company's registration data in KRS or CEIDG.
  • National Court Register (KRS). If the company is a partnership or a corporation (e.g. a limited liability company or a joint-stock company), you can check its details in the KRS online. You will find information about the company's status, management board, share capital and any bankruptcy proceedings.
  • Central Register and Information on Economic Activity (CEIDG). For sole proprietorships, check the details in CEIDG.
• Next, look into the debtor databases of several business information bureaus, whose official list is available on the government website.
  • National Debt Register (KRD). Here you can get a summary report on a potential business partner with a credit score generated from public registers. The report includes information on payment arrears and debt. You can do it online on a dedicated website. The basic report costs PLN 49. You can also order an extended report with the detailed number of liabilities, creditor names and the amounts the company owes.
  • EBOF debt exchange. A platform for trading receivables and monitoring debtors. It offers access to a database of companies with payment problems and lets you check potential partners for solvency. Businesses can also put their own receivables up for sale here. EBOF provides different levels of reports with information on debt, payment history and cooperation risk. A basic report costs PLN 39. Notably, EBOF works with other registers, which gives a comprehensive view of a company's financial condition.
  • Business Information Bureau (BIG). Like KRD, BIG can provide information about a company's unpaid receivables. Credit information bureaus list liabilities that are more than 30 days overdue. Note that entries in BIG are made by the original creditor, so the register may include disputed liabilities – these are marked accordingly, which is worth taking into account.
• If that is not enough information, there are reports from business intelligence agencies. Companies such as Dun & Bradstreet, Coface or Bisnode Polska offer detailed reports on a partner's financial situation. These reports may include data on turnover, debt, payment delays and a credit score. A much higher price also means a much better quality of research and influence on the scope of the report.
• It is also worth checking the Court and Economic Monitor (MSiG). MSiG publishes information about bankruptcies, restructuring proceedings and other important changes to a company's status and structure, so you can verify whether a partner is subject to such proceedings.
• Good practice is also to ask the company for certificates confirming that it has no arrears with social security (ZUS) and the tax office. Many companies always have these certificates "at hand", because they are mandatory documents in most public sector tenders.
• If the company is a limited company, you can analyse its financial statements, available in the KRS or KRS data search tools (e.g. Rejestr.io – a basic subscription plan with access to company financial statements costs PLN 99 net). You can analyse these statements yourself or have an accountant or financial adviser do it, and I can assure you they can reveal very interesting things about a company.

With these steps you can assess whether working with a given cloud provider carries the risk of the service stopping because of the provider's liquidity problems.

What to do when my provider has lost liquidity?#

If your checks show that your provider has financial problems, and the service you use supports critical processes in your organisation, you need to act immediately. Even if you only subscribe to a cloud CRM or Backup as a Service (BaaS), you still need to plan a migration. Fortunately, most service providers use the same technologies, which should make the task much easier.

Put simply, you start by finding a new provider whose cloud service meets your functional requirements. For example, if you use a backup service based on Commvault or Veeam technology, you check the vendor's website for a list of certified cloud providers in your country. From these providers you choose your new business partner. But remember to check its financial standing! Once you have chosen a service provider, you buy the service – sign the contract and start the configuration. For BaaS, this usually comes down to replacing the licence keys in the application and switching the cloud repository.

You will also need to modify all backup copy jobs and point them to the new cloud repository. "And what about the backups stored with the previous provider?" you may ask. As long as the service works, you have access to them. What matters is to start creating new backups with the new provider as soon as possible, so that you keep following the 3-2-1 rule, that is, keep a protected off-site backup.

What if your critical services run on Infrastructure as a Service? You have more work ahead. Fortunately, there are countless providers working with the same technology, and migration tools are available on a subscription basis – you can, for example, rent them for a month, use them and not renew. The whole thing needs to be planned carefully, including the least disruptive date for switching to the new provider, which will most likely involve some downtime of your IT environments.

In business, as in the kitchen, what matters most is what the customer doesn't see*#

I don't know about you, but I am often surprised by how much business decision-makers are in denial when various threats materialise. Each time, to rationalise it, I have to remind myself that we are only human.

Building service offerings at various service providers in Poland, I have seen a lot. I can also assure you that some "views from the kitchen" could put you off "as a Service" offerings for good. Most often, in our eyes a cloud provider rises to the rank of a restaurant with one or even two Michelin stars. Unfortunately, reality is often far less glamorous, and I will spare you the details so that you don't lose your appetite. 😉 To continue the analogy, here is one more hint. I think the best restaurants are the ones where the chef is not afraid that a customer will look into the back of house – hence the idea of open kitchens. 😊

And you – when did you last check the financial health of your cloud provider?

* quote: Anthony Bourdain