Product-Centric Cloud Computing: A Race to the Bottom

Earlier this week I pronounced death of the 99.9999 value proposition with the advent of cloud computing. This week alone, there has been a flood of announcements and activities by EMC, Cisco, HP, Intel and others as they craft new alliances and offerings to position themselves as technology players in the cloud. Just look at some of the headlines:

• If the Data Center Is the Computer the Fight Is on to Control the Ecosystem
• Intel, EMC Partner on Cloud Storage
• IBM Unveils Cloud Computing Software Tools
• Microsoft, Taiwan Team up on Cloud Computing
• Dell Eyes Cloud Computing
• Tech titans unite for private cloud push

In the midst of all these announcements from the big boys, a small startup named Liquid Computing made this announcement:

Liquid unveiled its Liquid Elements software that will work with Intel-based servers and NetApp storage gear. The software and Liquid’s switch can be combined to deliver the same sort of unified fabric computing that Cisco has been selling. Liquid differs from the Vblocks on offer through Cisco/EMC/VMware in that the software can run on any Intel-based server, either virtualized or in a bare metal implementation, said Vikram Desai, CEO of Liquid Computing. Cisco’s servers use Intel chips, but they are all about running virtual machines.

This is a perfect example of where the technology of cloud computing is heading: low margin, commodity infrastructure. Mark my words: The big money in cloud computing will be made by companies that provide both the infrastructure and services customers require to successfully run their businesses in a cloud environment. For example, the new Vblock offering by Cisco and EMC bundles the hardware, software, and maintenance services required to create cloud infrastructure. This is interesting, but not enough to drive the adoption of cloud computing by corporations. And it will not be long before companies like Liquid Computing create cheaper product bundles that undercut the margins of the Cisco/EMC offering.

Who Can Help?

The real question on the table is who will create the service offerings that allow companies of all sizes to easily and cost effectively migrate from a CPE (customer premise equipment) model to a cloud model. Today I googled the following search string:

help migrate to cloud computing

Look what companies pop up in the paid advertising:

• IBM
• HP
• Advanced Consulting Group (regional consulting firm from Long Beach CA.)

The two largest computing companies on the planet and one regional consulting firm. Interesting. If Cisco and EMC and Netapp and VMWare and all the other product companies want to secure significant revenues from cloud computing, I recommend they start be answering one simple question: how can they help customers actually migrate to this new model?

Death of the 99.9999 Value Prop

At the recent Technology Services World Conference, I attended a breakout session hosted by Jason Carolan.  He is a Distinguished Engineer at Sun Microsystems and an expert in cloud computing. Afterwards, we briefly spoke about the significant impact cloud computing will have on the services portfolio of product companies. In Bridging the Services Chasm  , I identify cloud computing as one of the key industry trends that will force product companies to refresh their services strategy. In this post, I want to explore the impact cloud computing will have on the services mix of hardware companies.

The TSIA Service 50

This Thursday, I will be hosting our quarterly Service 50 webcast. It is open to the public.  Follow this link to register:

http://webcasts.tpsaonline.com/event/v12hg2c78k

For those readers that have not attended in the past, I host a webcast every quarter that reviews the financial performance of fifty of the largest providers of technology services. The analysis is designed to answer the following questions regarding trends in tech services:

1. Who are the best performing providers of technology services?
2. Are technology service margins trending up or down?
3. Are net incomes trending up or down?
4. Are hardware and software companies becoming more or less service intensive?
5. What is the product service mix for the most profitable companies in the Service 50?
6. What is the product service mix for the largest companies in the Service 50?

As I review the Q3 data, I can tell you the global downturn clearly caught up to the tech companies this past quarter. However, there are some surprises. Also, service revenues and margins are continuing to play a critical role as product revenues and margins lag.

Join me Thursday for all the key trends.

My New Mission

Yesterday, I resigned as the Executive Director of The Technology Professional Services Association. After four years, it was time for a change. And I have found my next calling.

Why Solution Centers?

Earlier this year, I wrote about the bifurcation of sourcing strategies  within embedded PS organizations. In this post, I discussed the fact that results from a new TPSA survey showed an emerging class of product companies that are deploying a much more leveraged model for sourcing services engagements. A model where centralized solution centers, local partners, and global partners play a key role.

We believe the trend to create leveraged delivery models will continue. Specifically, we expect PS organizations within product companies to aggressively leverage centralized solution centers, where a pool of delivery expertise is established in a centralized location and leveraged across multiple geographies. Embedded PS organizations are creating these solution centers for several reasons, including:

1. To increase the ability to provide service offerings to low volume geographic locations, where it does not make sense to establish a large local delivery presence.
2. To support low volume service offerings that are important to product adoption but not demanded enough to warrant training local delivery staff in delivering the offering.
3. To drive consistent delivery methodologies across engagements throughout the world
4. To accelerate the creation of unique expertise around emerging solutions.
5. To provide a resource buffer for lumpy demand within each geography

Moving forward, we will be trending the resourcing mix of embedded PS organizations. We know from a multi-member study conducted this year, that a majority of embedded PS organizations have less than 5% of their delivery cycles being sourced from centralized solution centers. The image below shows results from that study for various peer groups.

Resourcing Mix for Embedded PS Organizations

In November, we will be launching an updated industry benchmark study that collects thirty new data points related to the practices and results of PS organizations.  One of the new questions will capture data on the resourcing mix as shown below.

New Benchmark Question on Resourcing Mix

At the Technology Services World conference next week, I will be reviewing the entire update to the TPSA benchmark study in the breakout session titled Comprehensive Update of the TPSA Benchmark Survey and Database:

Hope to see you in Vegas next week. If you are a fan of the blog and you are at the conference, make sure to introduce yourself.

Brocade: Product Provider Perils

Today, the Wall Street Journal announced storage and networking company Brocade Communications has quietly put itself up for sale

A quick analysis of Brocade’s financial results verify three key trends impacting hard core product providers such as Brocade. The image below compares Brocade’s most recent quarterly results to the same period one year ago:

Brocade Financials

 The three trends relevant to these numbers that have been telegraphed in this blog over the past year are:

Xerox and ACS: I Feel Sick

I’ve been reading the business press regarding the recent acquisition of services company ACS by Xerox. I must say, the more I read, the more uneasy I become. It’s the type of feeling you have when you can see the train wreck coming, yet you can’t do anything about it.

Third Book: Bridging the Services Chasm

My third book is hot off the press. Bridging the Services Chasm: Aligning Services Strategy to Maximize Product Success

It is not yet available on amazon, etc. but you can order it directly from the printer:

http://www.bookmasters.com/marktplc/10355.htm

You can dowload the first chapter here:  Ch1: Pattern of Failure

Thanks so much to all the folks that were involved in maturing the concepts found in this book, including Geoffrey Moore, Bo DiMuccio, and J.B. Wood.

Book description:

Bridging the Services Chasm provides a comprehensive framework companies can use to make critical service strategy decisions that have rapidly become the difference between product success and market failure. Based on the analysis of both large and emerging technology providers, this book leverages a combination of public record, unique survey data, and direct interaction to clearly define the critical role services in now playing in the success of product companies. In 1991, Geoffrey Moore published Crossing the Chasm. This seminal work framed and defined the specific challenges that companies face as they attempt to drive new product offerings to market. Since then the technology marketplace has significantly matured, and a new set of strategy challenges for product-centric companies becomes evident. And of course, there is a new chasm that companies must decide how to cross: The Services Chasm. A majority of product companies analyzed for this book are hesitant to pursue emerging services opportunities, thus sacrificing badly needed margin dollars and creating confusion for service partners and customers alike, ultimately crippling product success. Bridging the Services Chasm frames the services strategy decisions product companies can no longer afford to defer and provides a clear path for action. A must reference book for the next generation of business leaders tasked to successfully drive technology solutions to the marketplace

Industry Alert: Dell, Perot and a Real Trend

Back in July of this year, I wrote an entry titled “Dell Hits the Services Chasm.” 

The article calls out the fact that Dell was thrashing in a place called “The Services Chasm” where product and service strategy are not effectively aligned to meet market requirements. Today, Dell announced a very bold move to break out of the services chasm:

• Dell to Acquire Perot Systems for $3.9 Billion, Creating Comprehensive, Customer-Focused IT-Solutions Company

This move is a SIGNIFICANT milestone in the technology industry. In 1999, IBM was the sole enterprise technology company that aggressively invested in true system integration service capabilities.  Today, the ranks are growing larger. EMC first leased (from Accenture) and then purchased a technology consulting capability which continues to grow. I have previously documented the growing importance of service revenues to EMC:

• The increasing Importance of Service Margin Dollars

In 2008, HP bought EDS. I have written several articles observing the positive impact of that acquisition for HP:

• HP, WSJ, OMG
• Virtual Datacenters and The Services Chasm

Now, today, Dell takes an aggressive plunge into services.  I truly believe this move by Dell marks a definitive shift in the relationship between product providers and system integrators as well as a clear acknowledgement that advanced services have become a table stakes capability for all product companies.

All eyes will now turn to companies like Cisco, Oracle, and even Microsoft. Suddenly, the stakes associated with pursuing the correct services strategy have never been higher.

Overlay or No Overlay?

Next week, I head out to New York City to spend a day in a roundtable with Professional Services executives. The topic: Services Sales. How can product companies maximize the selling motion for professional services? There are four levers PS execs can pull to improve the ability of a product company to sell services:

1. Change the organizational structure: Create new roles or change the reporting relationship of existing roles.
2. Improve sales processes: Define and deploy processes that improve the selling motion.
3. Improve sales skills: Invest in training the improves the ability of sales representatives to position, scope, and price complex service engagements.
4. Change compensation: Alter compensation plans to create a greater emphasis on selling services.  

All these levers are important. For this blog entry, I want to focus on organizational structure and the presence of an overlay services sales force.