There is a debate raging in the technology industry concerning the impact of cloud computing on service activities and revenues. Back in August of 2010, the partner at A.T. Kearney who is in charge of their outsourcing practice made some provocative statements in CIO Magazine. These are just some of observations made by Arjun Sethi:
- In the next five years, outsourcing as we know it will have disappeared.
- We foresee a new model wherein outsourcers will provide standardized software solutions on a per-use basis.
- Google and Amazon will eat away a significant share of the IT outsourcing market.
Read the complete interview with Arjun for more of his perspective.
Three months later, the counter arguments are being made. Boris Renski and Victoria Livschitz are executives at Grid Dynamics, a professional services company that specializes in cloud computing deployments and enterprise systems scalability. Boris and Victoria argue that cloud computing will not be the death of outsourcing or consulting:
- Outsourcers generate roughly $95B a year charging customers for the support of hardware and software environments. That argument will shrink, but it will not evaporate overnight.
- With the advent of cloud models, outsourcers are creating new revenue opportunities by differentiating themselves with specialized infrastructure offerings like IBM’s Smart Business Development and Test Cloud.
- The emergence of cloud platforms will NOT eliminate the need for development and integration. Instead, it offers the opportunity to refocus consulting resources on solving higher level problems and build new types of applications that were previously impractical to consider.
So, the outsourcers and consultants have weighed in. What about the product companies? You know, the hardware and software providers that are making billions of dollars selling both their products and services to customers. How will cloud impact their business models? More specifically, how will cloud impact their services strategy?
The Product Company Point of View
Talking to TSIA members and analyzing industry data, TSIA has published the following point of view to its members regarding the impact of cloud computing on product companies:
- Hardware, software and maintenance are being combined into “subscription” services. This trend will continue to accelerate over the next five years.
- The migration to cloud consumption models is decreasing the perceived value of traditional implementation, integration, and certain classes of technical support services.
- There is an increasing need for value added services that drive adoption and successful consumption of technology solutions value by customers.
Think about the impact these trends are having on the revenue mix of an enterprise hardware/software company. Today, these product companies make anywhere from 30% – 80% of their revenues from services. These services are mostly centered on providing initial implementation assistance and then providing a support contract. Based on TSIA benchmark data, the image below shows the revenue mix of a company selling both hardware and software as part of an enterprise solution. As can be seen, traditional support services and integration services play a vital role in the economic engine of these types of product companies.
With the advent of cloud computing, the revenue model could radically change for product companies. The image below shows a new mix modeled off of many of the SaaS providers TSIA has benchmarked.
This shift in models will force almost every product company to answer a very hard question:
Are declining service revenues acceptable in our business model?
If the answer to that question is “No”, then product companies will aggressively be entering the fray with both traditional outsourcers and consulting firms to create new value added service offerings.
With their acquisitions of large service companies, HP and Dell have already signaled they will be going toe to toe with the pure service providers.
Xerox and IBM were there long ago.
But what about the other large players? Can Oracle or SAP survive on subscription business models with no consulting or maintenance dollars? Can Microsoft live off of lower margin subscriptions instead of high margin licenses? Every product company will need to firmly decide where they stand on the above question. And once they do, let the market shifting games begin. The outsourcers and consulting firms may be in for interesting surprise.