In my role at SoftLayer, I am asked by a number of people for our financial forecasts. Fortunately, we know our business well enough that our expectations for one year ahead have proven to be on target. For example, in December 2008, we told our bankers to expect 2009 net income (profit) to grow 254% over 2008 – and yes, this was at the worst point of the recession. When we closed out the books for 2009, net income actually grew 255%. Our forecasting error was one-third of one percent, and it was an error to the good side.

I can tell you right now that our profit projections will never, ever again be that accurate. Ever. Why is that? Well, after posting such a profitable year, the Taxman has showed up. You see, when you start a business, you usually post losses, not profits, for a while. SoftLayer was no exception here. After posting losses in 2006 and 2007, we turned the corner to profitability in 2008. So why were we not bothered by taxes in 2009? In a nutshell, the tax laws allow you to roll a portion of historic losses forward against profits before you must begin booking tax expenses. We had a meeting yesterday with our corporate tax advisor, and in 2010, we must begin booking tax expenses. Oh boy.

It’s one thing to look at your business model going a year ahead. We can look at macroeconomic indicators that are meaningful to our business and calculate the coefficient of correlation (R-square for you stat geeks) of our growth rate to those indicators and walk things forward. Then based on our anticipated sales growth, we can extrapolate how much datacenter space and power we will need to add, how many routers, switches, and servers to order, and how many people to hire.

Now, if you think that sounds complicated, just wait until you try to forecast how much tax you will have to pay. The biggest problem is the tax laws themselves. They are always moving and changing. In addition, they are sometimes changed retroactively. For example, in 2009, there was an allowance to take bonus depreciation on equipment purchased. (We purchase a lot of it, by the way.) This means that you are allowed to deduct a higher percentage of the dollars spent on equipment from your taxable income and thus lower your tax expense. Well, so far in 2010, there is no bonus depreciation available. BUT, there is a possibility that Congress will extend bonus depreciation into 2010, and make it retroactive to January 1. You tell me – how are we supposed to forecast that?

This is one of but many examples of the craziness of the tax codes that we encounter. As we open more locations in the future, I may blog a bit about some of the other craziness we find.

I have a friend who recently took a CTO position with a medium-sized company. The huge company that previously employed him moved their entire IT staff a long way outside of Texas to a rather unpleasant location as a cost cutting move. He and many others declined the relocation offer. I can’t say as I blame them.

The other day, he told me some of the interesting things he’s found at his new company. This company is not a technology company but a professional services company. Up to now, they have opted to be in the IT business by running their own data center. To keep this post to a reasonable length, I’ll just mention a few of the things he’s run into.

Keeping the room powered and cool – trust me, this is harder than it sounds. It involves things like redundant power, UPS devices, generators, CRAC units, dehumidifiers, fire suppression, etc. All this stuff must be tested and maintained constantly.

Ordering new servers – they have to go through an online configurator, and then wait to receive the shipment. Once it arrives, they have to unpack it, rack it, power it up, and install the software. The cycle time from ordering a new server to getting it into production can stretch from days to weeks.

Tracking assets – needless to say, he’s found several holes in the process here. Knowing how much RAM is supposed to be in each server vs. what’s really there is a struggle. Heck, even knowing what servers are supposed to be there is a challenge. It seems that as servers are moved, replaced, or disposed of that the asset tracking system and processes are not as solid as he would like. These loose operations also bring heat from accountants and auditors, especially if a server ‘s value is still on the balance sheet but it has actually been tossed out and they no longer own it.

Maintenance – they pay for a service agreement where a tech is guaranteed to be onsite in 4 hours to do anything up to a complete rip and replace to get them back in production. Once he asked why several servers, each north of $10,000 in value, were just laying around in a parts cage. He was told these were for spare parts in case of an emergency, just in case they couldn’t wait 4 hours.

Bankers and lessors routinely ask us who our biggest competitors are. We routinely tell them that they are not other hosting companies – they are companies like the one described above that insist on being in the data center business even though they are not IT infrastructure companies. Since these companies are our largest competition, let’s look at how SoftLayer beats the competition on the items listed above.

Keeping the room powered and cool – as a customer of SoftLayer, you simply don’t have to worry about all this. Not at all. This is a huge savings of time, effort, and money.

Ordering new servers – Once you either run through the configurator or call your SLales rep with your order, your new servers are immediately provisioned. The cloud products are up in minutes, and you can have a few HUNDRED dedicated servers ready for production in a few hours. Not in days or weeks or months.

Tracking assets – From the accounting side of things, you just don’t have to worry about tracking the assets at all as a SoftLayer customer. They are an operating expense to our customers, not a capital expenditure. As far as knowing what assets you have to work with, you have access to the best customer portal in the business where every detail about every server is kept up in real time, right down to the individual sticks of RAM and drive configurations of each server. If you need tighter integration, SoftLayer provides an API to put all this information seamlessly into your environment. Disposing of a server is a simple cancellation ticket. It couldn’t be easier.

Maintenance – this is also a simple ticket submission, which is resolved in an impressive turnaround time. This service is included in SoftLayer’s monthly fees. There is no need to stockpile parts or entire servers for emergencies.

Bottom line, if your business’s core competency is not IT infrastructure, you are being beaten in the IT infrastructure business by SoftLayer. You are spending way too much time, money, and attention to run something that isn’t a part of your business. Hey, if you can’t beat us, then join us!

By the way, my friend is proposing a major project for his company in 2010. That project is getting out of the business of running a datacenter. He faces a lot of resistance to change “the way we’ve always done it” from the other senior executives. From my point of view, it’s a no brainer. But I’m biased I guess. I’d just tell them, hey, don’t run a data center – run your business!

Several of our bloggers have written about backups in The InnerLayer. This morning, I had an experience that makes me wonder how many recovery plans we need.

I walked out of the house to the driveway and saw that my left rear tire was flat. An enormous nail had punctured my tire right in the middle of the tread, and the slow leak deflated the tire overnight. To recover from this disaster, I needed to get my vehicle drivable and get to the Discount Tire location near my house so that they could fix the flat. Below is a log of how the recovery plans worked out.

Recovery Plan #1: Call roadside assistance. While waiting on them to change my tire, logon from home and get some work done before going to Discount Tire. I have leased four different brands of vehicles over the past 10 years, and roadside assistance was always included with the lease. So I call the 800 number and they tell me I don’t have roadside assistance. (Note to self: read the fine print on the next lease.) Result: FAIL

Recovery Plan #2: Inflate tire with can of Fix-a-Flat. I retrieved the can from my garage, followed the instructions, and when I depressed the button to fill the tire, the can was defective and the contents spewed from the top of the can rather than filling the tire. Result: FAIL

Recovery Plan #3: Use foot operated bicycle pump to inflate tire and drive to Discount Tire. I have actually done this successfully before with slow leaks like this one. It is third in priority because it is harder and more tiring than the first two options. So I go to my garage and look at where the pump is stored. It isn’t there. I scour the garage to find it. It is gone. Result: FAIL

Recovery Plan #4: Change out of office clothes into junky clothes, drag out the jack and spare and change the tire myself. This is number four in priority because it is the biggest hassle. I will spare you all the slapstick comedy of a finance guy jacking up a vehicle and changing the tire (finding the special key for the locking lug nuts was an interesting sub-plot to the whole story), so I’ll summarize and say RESULT: Success!

As a side note, I must give props to Discount Tire. Having bought tires there before, I was in their database as a customer and they fixed the flat and installed it on my vehicle for no charge. I recommend them!

All this got me to thinking about not only having backups, but having redundant recovery plans. Sure, you’ve got a recent copy of all your data – that’s great! Now, what’s your plan for restoring that data? If you have an experience like my flat tire recovery this morning, it might be a good idea to think through several ways to recover and restore the data. Our EVault offering will certainly be one good strategy.

From time to time, I have posted about my frustration with GAAP accounting and traditional credit analysis and how it is not friendly to the hosting business model. For a refresher, click here, here, here, here, and here. By GAHAP, I jokingly mean “generally accepted hosting accounting principles.”

Mike Jones came in my office after a frustrating phone call with a credit analyst. They were trying to talk through collateral possibilities. He told me that the credit analyst has a problem because we carry hardly any accounts receivable. The credit analyst wants something that he can collect in case of default. In GAAP (generally accepted accounting principles), accounts receivable is the total amount that you have billed your customers but have not yet collected from them. Common sense hint: the accounts receivable balance won’t pay your bills – they won’t get paid until you collect the cash.

SoftLayer includes this common sense in its business model. Rather than send out invoices and bug people to pay us later, we choose to have our customers pay us in advance of their use of products and services. Many other hosting companies do the same. There are many advantages to this: we save costs that we would incur collecting the cash, we reduce the amount of abusive accounts that would sign up for a few days of malicious activity and never pay us, and it helps facilitate the on-demand billing side of the cloud computing model.
Again, the disadvantage of this practice comes about when trying to educate a set-in-his-ways credit analyst about our business model. Here is the basic gist of a mythical conversation between a credit analyst and a hosting company:

Credit Analyst: “I see you don’t have any accounts receivable to speak of.”

Hosting Company: “I know! Isn’t that great?”

Credit Analyst: “But if you default, what can I collect?”

Hosting Company: “You’d simply continue to bill the customers for their continued business. Because our customer agreement is month-to-month, you just collect for their next month of service over the next 30 days and you’ve essentially done the same as collect receivables. In fact, that is far easier than collecting past due receivables. We’d be happy place the anticipated next month billing to our customers on the balance sheet in an accounts receivable type of account, but GAAP does not allow this.”

Credit Analyst: “Oh my…you don’t have long term contracts? So all of your customers could leave at once? Isn’t that risky?”

Hosting Company: “We have several thousand customers who trust us with mission critical needs. They will not all leave at once. Our statistics show only a very low percentage of customers terminate services each month. Even through the depths of the recession, we had more new customers joining us than we had customers leaving.”

Credit Analyst: “But conceptually, they could all leave at once since they have no contracts.”

Hosting Company: “That is statistically impossible. The odds of that event are so low that it’s immeasurable. As I said, we provide mission critical services to our customers. To think that they will all no longer need these services simultaneously is paranoid. And if they did, would a contract keep them paying us? That’s doubtful. Let me ask you – do you lend to the electric company or the phone company?”

Credit Analyst: “Of course.”

Hosting Company: “Do their customers sign long term contracts?”

Credit Analyst: “Some do for special promotions. But for the most part – no.”

Hosting Company: “So why do you lend to them?”

Credit Analyst: “Why, the customers can’t live without electricity or phones. That’s a no brainer.”

Hosting Company: “It is exactly the same with our business. In this information age economy, our customers cannot live without the hosting services that we provide. You should look at us in a similar way that you look at a utility company.”

Credit Analyst: “But we classify your business as a technology company. Can’t you just have your customers sign contracts?”

Hosting Company: “Well, wouldn’t that conflict with the on-demand, measured billing aspects of cloud computing?”

Credit Analyst: “I guess there’s not much hope of you building up a sizeable accounts receivable balance then.”

Hosting Company: “It really makes no sense for us to do that.”

Credit Analyst: “We may not be able to do business with you. Do you have any real estate?”

Conclusion: Most credit analysts are so wrapped up in GAAP that they’ve forgotten the laws of statistics and many have even lost touch with common sense. Is it any wonder we’ve had a big banking crisis over the past couple of years?

When talking to a wide variety of outsiders about SoftLayer, one question inevitably comes up. “Who are your customers?” It always takes a bit of explaining – it’s a bit like asking the power company the same question. In the power company’s case, the answer is “anyone who needs electricity.” SoftLayer’s customers run the gamut. There is no one particular industry vertical that dominates our customer base. Pretty much anyone who needs dependable, robust, hosted IT services is our customer, or potential customer.

Now, if we look outside of the silos of industry verticals, there is one type of customer that stands out more than others. That is the entrepreneurial small business. Small businesses are the backbone of our economy and the engine of economic growth, and thus I need to keep up with what is going on with things that affect small businesses.

So I ran across a study worth passing along via a blog post. It is produced by Kauffman: The Foundation of Entrepreneurship and is entitled “The Anatomy of an Entrepreneur: Family Background and Motivation.” It contains some valuable insights into some traits of the majority of our customers. These traits below are taken straight from the report:

Company founders tend to be middle-aged and well-educated, and did better in high school than in college

• The average and median age of company founders
  in our sample when they started their current
  companies was 40. (This is consistent with our
  previous research, which found the average and
  median age of technology company founders to
  be 39).
• 95.1 percent of respondents themselves had earned
  bachelor’s degrees, and 47 percent had more
  advanced degrees.

These entrepreneurs tend to come from middle-class or upper-lower-class backgrounds, and were better educated and more entrepreneurial than their parents

• 71.5 percent of respondents came from middle-class
  backgrounds (34.6 percent upper-middle class and
  36.9 percent lower-middle class). Additionally, 21.8
  percent said they came from upper-lower-class
  families (blue-collar workers in some form of
  manual labor).
• Less than 1 percent came from extremely rich or
  extremely poor backgrounds

Most entrepreneurs are married and have children

• 69.9 percent of respondents indicated they were
  married when they launched their first business. An
  additional 5.2 percent were divorced, separated, or
  widowed.
• 59.7 percent of respondents indicated they had at
  least one child when they launched their first
  business, and 43.5 percent had two or more
  children.

Early interest and propensity to start companies

• Of the 24.5 percent who indicated that they were
  “extremely interested” in becoming entrepreneurs
  during college, 47.1 percent went on to start more
  than two companies (as compared to 32.9 percent
  of the overall sample).
• The majority of the entrepreneurs in our sample
  were serial entrepreneurs. The average number of
  businesses launched by respondents was
  approximately 2.3; 41.4 percent were starting their
  first businesses.

Motivations for becoming entrepreneurs: building wealth, owning a company, startup culture, and capitalizing on a business idea

• 74.8 percent of respondents indicated desire to
  build wealth as an important motivation in
  becoming an entrepreneur. This factor was rated as
  important by 82.1 percent of respondents who
  grew up in “lower-upper-class” families.
• 68.1 percent of respondents indicated that
  capitalizing on a business idea was an important
  motivation in becoming an entrepreneur.
• 66.2 percent said the appeal of a startup culture
  was an important motivation.
• 60.3 percent said that working for others did not
  appeal to them. Responses to this question were
  relatively evenly distributed in a rough bell curve,
  with 16 percent of respondents citing this as an
  extremely important factor and 16.8 percent of
  respondents citing it as not at all a factor.

Not only do the traits above describe a big chunk of SoftLayer’s customers – they also describe the people of SoftLayer.

If you are an entrepreneurial small business and you need a hosted IT service provider who understands your needs, you will find a likeminded partner in SoftLayer. Many of the small businesses who joined with us two or three years ago aren’t so small anymore, and that’s fine! When our customers succeed, we succeed. We get that.

I keep my ears perked for businesses that leverage Internet infrastructure – mainly because such businesses are potential customers for SoftLayer. Occasionally, I become a customer of the businesses that I hear about.

I took the plunge with one such company after loosely watching it for a year. In the summer of 2007, a friend of mine moved his home phone service to Ooma. Basically, it is local phone service with no monthly bill. Zip. Nada. $0.00 per month. To top that off, the quality of service is very high.

Now, it’s not totally free phone service because you have to have a high speed internet connection to run it. I suspect that if you are reading this, you do. By the way, I have fiber going to my house, and I have 20 Mbps download and 5 Mbps upload speed. I can get 50 down and 20 up should I ever need that much bandwidth. If I wanted local phone service from my local phone company, they would provide it through this fiber (not copper) at a price of about $45 per month plus taxes and fees. That means the monthly bill would be about $60 when it’s all said and done.

We yanked our landline when the fiber arrived 4 years ago since each family member at that point had a cell phone. Going all cellular has been pretty much fine except for a few minor hiccups. Sometimes, one of us has been unreachable at the house because of either a dead battery, phone set to silent mode, cellular network congestion, or the fact that the ringer just can’t be heard throughout the whole house, even at full volume. None of these, however, was worth an additional $60 per month to solve.

OK, back to Ooma. My friend has had it for a year with no problem. He loves it. It works perfectly with high quality. On top of that, Ooma is now sold at Costco for one-third lower than what he paid for it. You buy the device for a one-time fee up front and never have a phone bill. After three months (usually), you’ve made your money back in savings.

So a month ago, I bought it. It took 20 minutes to set up, and I’m a finance guy. If you’re a techie, I’ll bet you’re running in 10 minutes or less. It has worked flawlessly since. The sound quality is fantastic. There are more features and add-ons than I can mention here – go browse their website for more. The snarky ad video is worth the 45 seconds to watch it. In short, I highly recommend Ooma.

To keep things balanced, the ONLY advantage I see to a copper line is if there is a power outage and your broadband modem/router is down, the local phone is down. But if your home phone is cordless with a powered base unit, the copper line is down in that case too. And if the aliens from District 9 show up, the copper lines will be flooded too I’ll bet.

Ooma is just another example of how the Internet and its supporting infrastructure is not only here to stay, but to keep growing as traditional telecom infrastructure slowly dies. At SoftLayer, we’re here to make sure our innovation supports businesses that grow by leveraging Internet infrastructure.

Let’s say you worked for years to become a world class athlete. As a kid, you were in the gym while other athletes were at the movies. You were in the weight room on Saturday nights when no one else was there. You shunned pizza and soda in favor of grilled fish and fresh fruit. By the time Letterman hit the evening airwaves, you were well into restorative sleep. You were out the door for your morning runs while other athletes snoozed. As a result of all this, now you perform at an elite level and are very successful at your sport. Suddenly, you find that there are people who have a vested interest in helping you maximize your athletic potential. Your coaches, your managers, and companies who pay you to endorse their products all want to see you do your best. Why? Because doing your best helps them be more successful.

So, they provide you with all the things you need to maximize your potential. You get the best training gear and training regimens. You get the best nutrition. You get the right amount of rest. All these things help you maximize your potential. Thus the relationship is a nice symbiotic cycle – the more success you experience, the more success your coaches, managers, and endorsement companies experience. Win-win. Makes sense, right?

So, imagine the silliness if your coaches, managers, etc., made the decision that because you were so fortunate in your success that you had to “give back” almost half your resources to train the athletes who loafed, stayed out late, partied and gorged on pizza. Because you’re such a hard-working and smart athlete, you don’t need all those resources to participate adequately in your sport, they rationalize. Consequently, you don’t hit your potential, your coaches and managers don’t distinguish themselves, and endorsing companies don’t call you. You then feel that you’ve been punished for your hard work and success.

Sadly, much of our government policy falls under this flawed logic. The IRS just released their latest income tax stats for the year 2007. For that year the top 1% of earners paid 40.4% of all income taxes collected. We all know that right now we’re coming out of a recession and we really folks to invest in businesses and hire people to get the economy moving. So how do the 2007 numbers compare to, say, the 1980’s? During the ‘80’s, we managed to shake off the “stagflation” of the ‘70’s and get the economy rolling again. It was during this time that many technology juggernaut companies were spawned – Microsoft being a good example. So, how much of the income taxes in the ‘80’s were paid by the top 1% of earners? The average for the 10 years from 1980-1989 was 22.2%.

Let’s do some quick math. $1.116 trillion in income taxes was collected in 2007. Of that, $455.3 billion was paid by the top 1% of earners. If they paid 22.2% as in the ‘80’s, they would have paid $247.8 billion in taxes, and right now we’d have $207.5 billion MORE dollars invested in our economy. That would be quite a stimulus package! Our current policy punishes success and chokes off fuel from our economic engines while we’re trying to climb out of a worse recession than we had in the ‘70’s. Not smart.

Some may think that this would simply mean that our government deficit would be $207.5 billion higher. This is not the case at all. These folks that make up that top 1% didn’t get there by being lazy or not putting their money to work. I know some folks in that group, and they WANT to put their money to work! I know one gentleman who had to be told some legal docs for a deal could not be prepared over the weekend because Christmas was on that weekend. These folks are like the world class athlete I mentioned above – by and large they’re disciplined and hard-working. Their money will build new businesses and create more jobs, and the government will collect far more revenue from this new economic activity than it would give up in collections from these top 1% folks. Think about it – how many of us have ever been hired by a “poor” person? Instead of punishing economic success, we should encourage it!

Bottom line, if government policy were to make sense, it would encourage these folks to maximize their economic potential and find the correct balance of revenue to collect and yet still promote economic growth. What would we prefer? That the government collects 50% of $1 trillion or 30% of $2 trillion? Hint: 30% of $2 trillion is a WAY better deal.

At SoftLayer, we think very differently about things. We simply do not punish our customers for succeeding. We empower them to be more successful – why? Because if our customers succeed, we succeed. We get this.

Can we prove this? Perhaps a look at how customers vote with their feet is an indicator. For the past few months, SoftLayer has seen the lowest percentage of customers terminating business with us in our history. If we punished our customers for their success, they would go elsewhere.

Recently I had the chance to attend the annual Beyond Budgeting Round Table (BBRT) conference to help me keep up on my CPE credits. Those darn accounting licenses have to be maintained, ya know.

I was pleasantly surprised at the conference that SoftLayer was already doing the crux of what this group preaches – namely, that assembling an annual budget and trying to live by it is a colossal waste of time!

One speaker pointed out that budgeting originated back in medieval times long before the Industrial Revolution. During those days, the feudal system was the order of the day. Landowners allowed people to live on their land and raise crops. Once per year, when the harvest came in, the landowners received payment from the people living on the land in the form of a share of the crops or a share of the gold for which the crops were sold. Since the landowners were paid once per year, they had to plan how to make their annual payday last for a whole year. You guessed it – this plan was called “the budget.”

Unfortunately, most companies and organizations today use this horribly outdated financial management technique to run their business in the fast-paced information age economy of today. In most cases, this just flat doesn’t work.

For example, one of the speakers was the CFO of a very large healthcare organization. He said that back in the days when they produced an annual budget, there were 240 budget managers that spent 90 days of full-time effort to produce the annual budget. That equates to 60 man-labor years of total time to produce that budget. If you assume that each of those managers averages $50K per year in compensation, the cost of producing that budget is $3 million. What’s worse is that the CFO said it was worthless before the final version was printed because it was built on stale fundamental assumptions that were several months old.

Once these obsolete documents are produced, they become static financial contracts. They limit spending for each department, and this isn’t always a good thing. Some departments may see some fantastic market opportunities develop halfway through the year, but they can do nothing to take advantage of them because they would exceed their budget. On the other hand, some departments can be allotted too much money, so they go on wasteful spending sprees at year end to be sure and use up their budget or else lose that funding next year. People often ask for permission to exceed budget, but usually no one gives back any unused budget dollars. Even worse, management compensation is often tied to these obsolete financial contracts. Business schools are awash with case studies of bad business decisions that were made to maximize bonus compensation in relation to the budget.

From the beginning, SoftLayer realized the futility of producing an annual budget. In the rapidly developing business of web hosting, the landscape can dramatically change much more quickly than an annual cycle. So we implemented the policy of maintaining a rolling forecast that is updated to the best of our current knowledge each and every month. This practice has served us well, and is one of the “best practices” adopted by the BBRT.

Another best practice recommended by BBRT is to maintain multiple forecast scenarios that factor in macroeconomic possibilities. Then as reality develops, you have a better handle on the tactics to implement because you now know what most of these decisions should be in advance. At SL, we will be implementing the multiple scenario practice over this summer.

Last week, more rumors about the valuation of Facebook were flowing. So, is Facebook the real deal? Or will it go the way of the CB radio “social networking” experiment in the 1970’s?

Last weekend, I attended an event that indicates that Facebook has more staying power than those old CB radios. It was a quasi high school reunion. Since a lot of graduates of Brownwood High School (my alma mater) wind up in the Dallas-Ft. Worth area, a 2-3 hour drive away from Brownwood, we had a get-together in Grapevine, TX for Brownwood High grads living in the area.

At the event, the oldest grad I bumped into was from the Class of ’81 and the youngest I saw was from the Class of ’90. Yes, there’s a “19” in front of those graduation years, making the age range of people I saw between ages 37 and 46 years of age. I won’t disclose where I fit in that group, but in the world of Facebook, we’re all pretty much “geezers” I imagine.

I wish I had counted the number of times I heard Facebook mentioned at the party on Saturday night. Many times people told of who they had found on Facebook that couldn’t make it to the party. Some of the comments I overheard went like this:

“I saw those pictures of your kids on Facebook. Man they’ve grown!”

Q: “So, is that crawfish boil you posted on Facebook an annual event?”
A: “Yeah, it got kinda wild this year.”

“You said in your Facebook status a while back that your daughter got hurt. How’s she doing now?”

You get the drift, I’m sure. Most everybody there in this age range was active on Facebook and was already connected to several in attendance on Facebook. Since the event, I’ve received friend requests from folks I saw, and I’ve also sent out a few friend requests.

After we all made it home early Sunday morning (hey we’re not THAT old – at least we think we’re not), the Facebook fun continued. My email account pinged all day letting me know I’d been tagged in a photo here, someone commented on a photo there, etc. Yes the cameras were out Saturday night, and the contents of those cameras got uploaded, tagged, and commented upon all day Sunday. In fact, I was tagged in one photo that had the caption “Brownwood High School geezers from class of __.”

As far as Facebook goes, I’ll bet stories like this occur all over the country by the thousands. Provided that Facebook keeps its financial house in order, they’re here for the long haul I think.

So, what’s the connection to SoftLayer here? Easy. We have a lot of customers who provide apps on Facebook. The infrastructure for those apps is hosted at SoftLayer. Consequently, we’re big cheerleaders for Facebook and the apps that run upon it. Go go go!

So far in 2009, there’s been a fair amount of discussion pro and con regarding the financial benefits (or lack thereof) of cloud computing. It’s very reminiscent of the whole “do-it-yourself” or “outsource it” debate. Blog posts like this and articles like this are samples of the recent debate.

One thing I have not yet seen or heard discussed regarding cloud computing is the concept of EVA, or Economic Value Added. Let me add at this point that EVA is a registered service mark of EVA Dimensions LLC and of Stern Stewart & Co. It is the concept of economic income instead of accounting income. SoftLayer subscribes to software from EVA Dimensions LLC. Get more info here.

For you to buy into the premise of this post, you’ll have to be sold on EVA as a valuable metric. Bottom line, EVA cleans up the distortions of GAAP and aligns all areas of the business so that more EVA is always better than less EVA. Most other metrics when pushed to extremes can actually harm a business, but not EVA. Yes, even bottom line GAAP net income when pushed to an extreme can harm a business. (How that can happen is fodder for another blog post.) Several books have been written about EVA and its benefits, so that’s too much to write about in this post. This is a good summary link, and for more info you can Google it on your own. And if you do Google it on your own, be warned that you may have to wade through links regarding Eva Longoria and/or Eva Mendes .

Part of the Cloud computing debate revolves around “capex vs. opex.” Specifically, this involves paying for IT infrastructure yourself using capital expenditures (“capex”) or employing Cloud computing and buying IT infrastructure with operating expenditures (“opex”). Geva Perry recently said, “There is no reason to think that there is a financial benefit to making an OpEx expense vs. CapEx expense. Period.” I disagree. When you look at this in terms of EVA, whether you use capex or opex can make a big difference in creating value for your business.

Let’s look at the effect of switching capex to opex on EVA. Coca-Cola is a company that employs EVA. Years ago, they decided to ship their beverage concentrate in single-use cardboard containers instead of reusable stainless steel. This made GAAP measures worse – profit and profit margins actually went down. But EVA went up by making the move from capex to opex. How can this be? Grab something caffeinated and check out some numbers here if you dare.

OK, that’s all fine. But how would shifting IT spending from capex to opex affect EVA? Glad you asked. Last summer, I modeled some full-fledged financials to illustrate financial benefits of outsourcing IT vs. doing it yourself. I’ve taken those and added the EVA calcs to them. Take another swig of caffeine and check them out here and here.

Assuming that EVA is a worthwhile metric (and I think it is), moving capex to opex is possibly a very good financial decision. Any questions? As always, your mileage may vary. Model carefully!