Red Hat and Oracle: Two PE’s in a Pod

Last week, a colleague forwarded me this article on the recent financial results of open source software provider Red Hat:

“Red Hat: Bad economy is good for open source”

I’ve never really examined the business model of the open source software providers, so I decided to take a peak. We track the largest software providers in the Service 50 and we know that license revenues have been under pressure.  Is the open source model a shining star in this grey and gloomy economy? After comparing and contrasting the most recent quarterly results of both Oracle and Red Hat, I would make three key observations:

1. Despite Red Hat’s growth in revenue, Oracle’s business model remains substantially more lucrative.
2. Surprisingly, Red Hat’s business model is R&D intensive.
3. When all is said and done,  Oracle and Red Hat are actually executing the same service strategy profile.

These three observations have ramifications as the software industry continues to migrate from the traditional license model represented by Oracle to evolving software consumption models like open source, subscription, and advertising based (Google).

Bye Bye Cost Center: Refining the PS Charter

In my last entry, Defining the PS Charter, I discussed the process of setting the charter for an embedded PS organization and reported on the typical charter pursued by embedded PS organizations we benchmark. The data we have on PS charters shows that a majority of product companies have historically viewed PS as much more of a sales enabler as opposed to a stand-alone profit and loss center that drives revenue and margin.  As previously mentioned, this reality has led embedded PS organizations to sometimes sacrifice project profitability to achieve product adoption or account satisfaction. This leads me to make the following observations on the current trends impacting embedded PS organizations:

• A majority of product companies have a long heritage of viewing PS as an enabler for product sales, not a source of service profits.
• A vast majority of embedded PS organizations have no process in place to quantify the impact of service engagements on product sales
• Shrinking product margins are placing increased pressure to improve PS margins

These three factors are combing to create a seismic shift in the charter of embedded PS. PS managers need to prepare for the ramifications of this shift.

Defining the PS Charter

Last week, Bo DiMuccio posted a blog entry on the correlation between the charter of the PS organization and the billable utilization the PS organization achieves. The charter of the PS organization is a data point TPSA benchmarks. Over the past few weeks, Bo has become intensely interested in the correlation of the PS charter with key business metrics such as utilization and the shifting nature of the PS charter. I thought it would be helpful to make sure our readers understand how we define the concept of charter of why we believe it is a key data point to track for the industry.

The PS Capture Rate

My last two entries have centered on the theme of embedded PS and the service partners of the product company. This is a delicate dance that often ends up toes being stepped on. In “Understanding Partner Needs”  , I emphasized that one success tactic is for the embedded PS organization to clearly understand the needs of the service partners based on product maturity. In this entry, I want to introduce a second tactic embedded PS organizations can use to improve partner relationships: defining the “PS capture rate.”

Understanding Partner Needs

One of the greatest failure points in any relationship is the inability to understand the perspective of the other person. I would argue this is especially true regarding PS organizations and their partner relationships. Based on where product companies are in the product adoption life cycle, partners have very different requirements. Understanding the basic needs of the partner is the first step in crafting a successful partner relationship.

Can PS Partner?

Every services organization eventually establishes partnerships of one form or another with other services organizations.  For PS organizations, those partnership opportunities present themselves in three categories:

Sub-contractors: These are partners that help the services organization deliver services engagements. The services project is booked by the product company and these partners provide resources to help deliver the engagement. These partners provide skills that complement or augment the resources of the services organization.

Resellers: These are partners that resell the products and services provided by the company. They most likely provide their own value add services to help implement the products of the company. Their capabilities can overlap with the capabilities of the embedded services organization.

Influencers: These are partners that my not necessarily resell the products or services of the company but they can have a significant influence on what products companies purchase. Think large system integrators like Accenture which help companies decide what technologies to implement.

Last week I buried myself in the data we collected from our 2009 Partner Practices survey. Forty companies provided information on both practices and results surrounding their engagement with these types of partners. From my perspective, the results were a little disheartening.

IBM: The Services Margin King?

A TPSA member forwarded an article in which IBM CEO Sam Palmisano was quoted as saying “Services has been a terrific story — we now have the best margins in the service business of anybody.” Now, I don’t know if Mr. Palmisano actually made this statement or not. I do know we track the services margin performance of the largest providers of technology solutions in the industry. IBM is on that list. and the data does not support the statement.

The Services Dashboard

Right now I am working on a “services insight” paper for members titled “The Services Dashboard.” How to create an effective dashboard is one of the most common inquiries we receive. Every line of business eventually establishes a dashboard to communicate the health of the business. Service businesses are no different.  There is an entire industry composed of both software vendors and consultancies that support the creation of business dashboards.  These vendors and consultants cite common attributes for an effective dashboard:

• An intuitive graphical display that is easy to understand
• A logical structure to the information presented
• Little or no user training is required to interpret the dashboard
• Regular and frequent updates of dashboard information for accuracy and relevance to current conditions.
• A consolidated source of Information from multiple sources, departments, or markets can be viewed simultaneously.

With these design principles in mind, the leaders from all of our associations have worked with both member companies and leading industry consultants to craft a baseline services dashboard that can be used for almost any line of technology services (support, professional services, managed services, etc.)

The Bifurcation of Sourcing Strategies

Our closing keynote at TSW last week was Jeff Howe, author of the book Crowdsourcing. Fantastic presentation and a great Q&A followed. However, despite advances in technology, the concept of self-service, and the emergence of “crowd sourcing” problem solving, the delivery of technology professional services remains a very human capital intensive endeavor for product companies. Complex services solving complex customer problems require complex skills sets from delivery resources. The never ending challenge for product companies is that it is always easier to burn another CD or build another mother board than it is to hire, train, and deploy a competent services employee. However, product companies are becoming much more aggressive and creative in the tactics they are pursuing to increase their ability to scale services capabilities. To secure product adoption success or maintain account revenues, product companies needs service offerings to be available in a global and consistent manner. To guarantee services are available on a consistent, global, scale, product companies are turning to five key resource pools.

Investing in Services Innovation

First day of Technology Services World has come to a close. The conference dialogue has been excellent—from the TPSA advisory board meeting Monday morning to the hallway conversations after the opening keynotes. The common theme today is “investment in services innovation.” Or, more appropriately, the LACK of investment in services innovation.  Services executives from attending companies agree their companies do not dedicate much (if any) resources to innovating services offerings. Yet, we know services revenues and margin dollars are a significant component of profitability for the vast majority of these technology companies.  Before we get too frustrated with tech executives, I think we should bring the lens back and look at the bigger picture of services innovation investment.