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.
Now, I am not predicting the ACS/Xerox merge will be a train wreck—that is not my source of consternation. There are two observations that are smacking me about:
- The high tech industry truly is maturing
- High tech companies, analysts, and the business press are woefully underprepared for this reality
In Bridging the Services Chasm, I make an impassioned argument that the technology markets truly are maturing. The recent mergers of ACS/Xerox and Perot/Dell validate this assessment. To make the point clear, look at text from Bridging the Services Chasm side by side with excerpts from a New York Times article that covers the ACS/Xerox merger:
New York Times: The game is indeed changing for big technology suppliers catering to corporate customers as they shift to depend less on products and more on services.
The shift to services is being fueled by financial and strategic considerations and by the evolution of technology itself. Services businesses tend to be steadier sources of revenue and profit than product businesses, which are more susceptible to peaks and valleys of economic cycles. Services businesses also foster closer relations with corporate customers and often yield higher profit margins.
Bridging the Services Chasm: Three critical trends exist: Revenue mixes are becoming services intensive, companies are under duress to reduce cost structures, and customers are changing the way they consume technology. All three trends are placing new pressures on product companies to truly align and optimize their services strategy. For product company executives, this is not the time to ignore the realities. This is the time to embrace the conversation and identify new market opportunities being created by the inaction of competitors locked in dated go-to-market models.
New York Times: The cost and complexity of computing, analysts say, has led many corporate customers to conclude that owning and operating their own hardware and software is an expensive, distracting burden. So customers are pressing suppliers to not just sell them technology but to make it work for them to streamline business tasks like procurement, customer tracking, record handling and product design.
The share of corporate technology budgets spent on hardware and software, which are capital expenditures, has been declining in recent years. That percentage fell to 28 percent this year, from 36 percent in 2004, according to estimates from Gartner, a research firm. The rest is spent on operational expenses, including services.
Bridging the Services Chasm: Customers subscribe to a technology solution that is hosted off site (or off premise). They pay one price for the service—much like paying to turn the lights on. No integration. No separate insurance policy. This approach is being employed in everything from customer relationship software (salesforce.com) to enterprise storage (Glasshouse) and presents itself in concepts such as software-as-a-service, utility computing, and cloud computing. The economics for customers are becoming compelling. This new cloud model is changing the way customers consume and adopt technology. Instead of big bang approaches where companies must implement stepped functions of IT capability to support both current usage and future growth, customers can bite off just the amount of capacity they need. Although this new model makes it easier on the customer, it upends the product providers. Now, product providers must collapse both offerings and internal organizations to migrate from a product + product services + support model to one service offering.
So the themes from a book I started writing three years ago are playing themselves out right before our eyes today. That is exciting in a good way. But now for the sinking side of the equation.
Moving Beyond the Basics
Right now, mergers like ACS/Xerox and Perot/Dell spark a flurry of business press and financial analyst commentary. Most of that coverage focuses on the following truisms:
- Product revenues and margins are under pressure
- Product companies like HP/Dell/Xerox need new sources of revenue and margin
- Service revenues are less lumpy than product revenues
- Services drive customer intimacy
- Product companies like IBM have shown how important services can become to overall company success
Look back at the press over the past few weeks—you will see these themes advocated ad nauseam. I’m sorry, but, as an industry, we need to quickly move past these surface level observations and get to the harder issues that will face all product companies experiencing a significant shift in their business model. Specifically, how will product companies adjust the following parameters of their business models as revenues become much more service-centric:
- Pricing and revenue recognition models that accommodate complex service offerings
- Levels of investment in services R&D vs. product R&D
- The creation of KPIs that accurately reflect the success of product/service synergies
- Creation of organizational structures that optimize the development and deployment of services (not just products)
- New compensation models and skills development that creates a workforce adept at selling intangible services, not tangible product features.
These are but a few of the parameters that will be changing dramatically as the consumption patterns for high tech shift. Why aren’t the business articles discussing these very real challenges? How well do the financial analysts understand the shift occurring before their eyes? How prepared are product companies to effectively tackle these new challenges? How prepared is your product company? See—now you have that same queasy feeling I do.