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.

Impact on Total Service Revenues

TSIA benchmarks the revenue mix of technology product companies. We also track the mix of product and service revenues from the data of public companies in our quarterly Service 50 snapshot. These data streams create the ability for us to model the mix of products and services different types of product companies achieve to maximize revenue and margin dollars. For our purposes today, let’s model a “typical” hardware company. On average, hardware companies in enterprise technology receive about 40% of their revenues from services with 60% of revenues coming from traditional product sales. In the world of cloud computing, customers are no longer purchasing new hardware to install on premise. Instead, customer’s are purchasing the same computing capabilities as a service delivered by an off premise cloud. When this occurs, hardware companies will either be providing hardware to a cloud provider or offering the service directly to customers.  Product sales directly to customers will dramatically be reduced. This fundamental change in the consumption model will create a dramatic change in the revenue mix of hardware companies. Instead of a 60/40 mix with 60% of revenues coming from product sales, we are much more likely to see a 40/60 mix where less and less revenues are coming from a traditional product sale. The image below shows this transition.

   The Impact of Cloud on Revenue Mix   

 Impact on the Service Mix

In a world of cloud computing, not only will more revenue come from service transactions, the mix of service activities will also be dramatically altered for hardware companies. Instead of majority of service revenues coming from supporting equipment installed on a customer site, hardware companies will find themselves providing services that enable customers to leverage this emerging cloud infrastructure.

Today, hardware companies secure a majority of their service revenues by selling the value proposition of 99.9999 availability. “Hey, if you want your IT environment to stay up and running, you need our maintenance services.” In cloud computing, that value proposition becomes meaningless. As Jason described in his talk, cloud environments are composed of massive arrays of servers running virtualized applications. When hardware fails, the cloud continues. Broken hardware is simply harvested out of massive datacenters on a monthly or even quarterly basis. The cloud, by the nature of its design, delivers high availability.   This reality creates the demise of the traditional value proposition of support services. However, as one door closes, several new doors open.

Customers will need more assistance designing and integrating cloud capabilities into their business.  Most importantly, customers will be looking for managed service offerings that simplify the consumption of everything from storage capacity to mobile applications. Customers will want to “turn on” new users and features from the cloud, not “implement and integrate” new systems and applications. This fundamental shift in service mix is captured in the table and graph below.

Impact of Cloud Computing on Services Mix

Services Mix Graph

Are hardware companies prepared for this significant shift in revenue mix? Unlikely. This was the discussion Jason and I had briefly after his presentation.  Hardware companies need to align their services strategy to a rapidly changing marketplace. I start Bridging the Services Chasm with the following statement:

“Effectively aligning a company’s services strategy to the overall company strategy will become the defining discipline in any product company’s success.”    

Never were truer words spoken for hardware companies that hope to thrive in the world of cloud computing.

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4 Responses to “Death of the 99.9999 Value Prop”

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