HP Results:The Services Story of 2009

HP recently announced their results for Q4 as well as their results for the year. From my perspective as the Executive Director of TSIA, this is the technology services story of the year. Period. Throughout the year, we have been documenting the growing importance of service revenues and margins to product companies like HP. In an economic downturn, product companies benefit from a services buffer. As I predicted at the beginning of the year, this buffer was going to be critical to product companies of all shapes and sizes. For HP, services made all the difference in the world in 2009.

The Readers’ Vote: Top Three Trends

OK, I’ve asked folks in the industry to weigh in on what trends they believe will have the greatest impact on the technology services industry over the next few years. Thanks to John Ragsdale, my research colleague at TSIA, for promoting this poll to his readers as well. I identified nine trends that could have significant impact on the industry. A clear majority of the readers believe two of these trends are more likely to change the industry. After that, opinions begin to vary widely.

Nine Key Trends in Technology Services

In my last entry, I provided a framework for classifying and tracking trends in the technology services industry. In this entry, I want to identify nine key trends that TSIA predicts will impact the industry. I also want to provide you an opportunity to voice your opinion regarding what trends you feel we should be tracking.

Tracking Trends: The PDQ Model

With the publication of The Complexity Avalanche by J.B. Wood and Bridging the Services Chasm, TSIA is getting more requests to comment on the “trends” that will be impacting the technology industry. Instead of joining the swollen ranks of organizations and individuals that provide insights on hot trends, emerging trends, meta-trends, etc., I thought it would be helpful to present the model TSIA will use to track and discuss critical industry trends impacting the technology industry.

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: