Posts Tagged ‘HP’

A Platform for Recognizing Service Innovation

May 18, 2012

The technology industry is enamored with technology innovation—as it should be. Technology innovation creates “oohs and aahs” from customers and analysts. But in the technology industry, the fastest growing revenue lines are service related. And recognizing service innovation is not top of mind in the technology industry. Even though millions of dollars of profit are at stake in the service businesses that are embedded in product technology companies. From TSIA’s perspective, this needs to change.

Two years ago, TSIA launched “Service Revolutions.” This is a competition where companies have six minutes to pitch how they are revolutionizing the way services are delivered. The audience (composed of industry professionals) votes on what concepts they think are truly most revolutionary. TSIA recruits startups that are working to revolutionize the world of technology services. The winning startup receives a $10,000 check and a wonderful PR opportunity. We also recruit existing service practitioners to pitch how they are changing the service game. This year heavy hitters HP and SAP pitched interesting service innovations. The audience picked SAP’s innovations in delivering implementation services:

The Advanced Delivery Management builds on the concept of Rapid Deployment Solutions as fully packaged solutions that can be delivered in short time and extends this concept to services SAP delivers. The key components that allow us deliver consistently around the globe and deliver predictable results is standardization of the way we deliver both on organizational level and in the way we design the services portfolio.

I love this body of work by SAP. They have been on a multi-year journey to reduce the amount effort required to implement SAP software, and their investments are paying off. Even more, I love how SAP is shining a bright light on how service innovation is changing the game for them. Check out this post on their community page: ASAP Methodology

There is a lot of money at stake in these service businesses. And where there is revenue, there is usually investment for innovation.  I can’t wait for next year’s “Service Revolutions.”

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The New Pattern in Moving Service Margins

April 12, 2011

In my last entry, I overviewed the fact that the margins in Technology Services have been steadily improving over the past five years. In this post, I want to discuss how this margin improvement has occurred and how the levers for margin improvement are shifting.

Three Big Levers

What levers have technology service organizations been pulling to steadily increase their margins by ten points over the past five years?  Analyzing TSIA benchmark data across multiple service lines (Support Services, Professional Services, Education Services), it is clear that the highest financially performing service organizations have mastered the following three tactics:

1. Global Sourcing (labor arbitrage): TSIA has aggregated multiple data points that demonstrate the positive impact of leveraging global resources to deliver ALL types if services—not just support services. This trend of global sourcing service delivery has been relentless. Service organizations that are not leveraging global labor pools are finding themselves at a significant cost disadvantage.  Even service organizations with highly differentiated brands and offerings are learning how to leverage global sourcing models to optimize delivery costs.  

2. Minimized discounting on service offerings: TSIA tracks discounting data. Even with the downturn in the global economy, technology service organizations have done a very good job of minimizing discounting on their service offerings. The days of “throwing in services” to get the product deal, went by the wayside with the advent of new revenue recognition rules in 1997 and the requirements to support VSOE.

3. Reduction in non-billable labor hours (less overhead): Last but not least, the most profitable service organizations run relatively lean and mean. These organizations spend less than 1% of services marketing and less than 5% on services G&A.

Right now, what type of companies achieve really high service margins? All types. The TSIA benchmark data has examples of big and small service organizations achieving high margins.

 

Seven Levers

So think of the levers a service organization can pull to improve financial performance. There are seven very common levers every service line could potentially pull to improve margins:

Optimizing each one of these levers can potentially improve financial performance.

Two years ago, Matt Denesuk, one of IBM’s services engineers spoke at a TSIA conference. In his presentation, he listed seven levers a service organization can pull to improve and grow a labor-based business. As you can see in his slides below slide, a lot of overlap with the levers I just listed and a conclusion that “reuse” is now a critical lever moving forward.

In December of 2010, I had the opportunity to address 3,000 global professional service employees from HP’s software division. During that conference, I polled the managers and asked them what levers they planned to pull to improve service performance in the future. Here is the summary of their response.

So here we have the two $100B behemoths of the industry—both signaling that labor arbitrage and operational efficiency are no longer the big levers to improve service performance.

This leads us to a new pattern that is emerging in technology services. Looking at a spider graph that shows what levers service organizations pull to improve financial performance, we are seeing a shift from the levers on the right, to the levers on the left. Reuse, revised selling models, and detailed customer analytics are the new levers. For many service organizations, NEW levers.

Will Cloud Kill Services?

November 9, 2010

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.

 

The Q3 Services 50 Webcast

October 26, 2010

What the heck does this mean?

Join me on Thursday to find out during the Q3 TSIA Service 50 webcast:

webcasts.tsia.com/home/listing/tabid/64/listingkey/63/the_tsia_service_50_q3_2010.aspx

 

 

Server Sales: The Rest of the Story

May 26, 2010

This week, the Wall Street Journal reported a healthy rebound in server sales.  Total shipments in Q1 of 2010 increased 23% compared to the same quarter one year ago. This rebound in product revenues is highly aligned with the data TSIA reported from the Q1 Service 50 snapshot in our webcast back in April. Product revenues are clearly rebounding: that is the good news.

“Now”, as Paul Harvey would say, “for the rest of the story.” Server shipments increased 23% but server revenues only increased 6%. The growth rates of shipments vs. revenues is shown in the image below:

Server Sales

Now, let’s project how 2010 could play out. Let’s say the economic turnaround continues and companies keep spending on IT infrastructure. To keep it simple, let’s say server shipments continue to increase by 23% for the rest of the year. Also, let’s assume the ratio between increased shipments and increased revenues remains the same. If these trends do remain constant for the year, the gap between shipmen growth and revenue growth will continue to widen as shown in the graph below. This dynamic creates a very real “margin gap.” This means server companies like IBM, HP, Oracle, and Dell are shipping more product but bringing in less revenue. This means less product margin dollars floating around to fund things like “sales and marketing.”

The Growing Margin Gap

The economy maybe recovering, but we, in the technology industry, are not automatically heading to easier financial times.  I’m just saying: LOOK AT THE DATA. LOOK AT THE TRENDS.

“The dogma’s of the quiet past are inadequate to the stormy present. The occasion is piled high with difficulty and we must rise with the occasion. As our case is new, so we must think anew and act anew.”

Abraham Lincoln

End of the Great Recession?

April 28, 2010

On Thursday, I will be reviewing the Q1 2010 financial results of the largest technology companies on the planet. Are tech revenues growing again? Are service revenues and margins still staying strong? Join me for The TSIA Service 50 webcast to find out how 2010 is shaping up for product technology companies.

To register:  http://webcasts.tsia.com/event/0u9q8m2dg5

Cisco and HP: The Times They are A-Changin’

February 24, 2010

The big news in the tech industry this week surrounds the very public divorce of HP and Cisco:

Cisco Smacks Down HP Partnership

Posted by Alexander Wolfe, Feb 19, 2010 12:17 PM

Both of these companies are members of TSIA. Like a child in any divorce, it is wise not to take sides. So this entry is not about the split, but the current environment where this dispute is occurring. To me, that is the larger story that all tech providers should be heeding. In fact, this specific dispute reminded me of the lyrics in Dylan’s classic tune, The Times They are A-Changin’:

Come writers and critics, Who prophesize with your pen

And keep your eyes wide, The chance won’t come again

And don’t speak too soon, For the wheel’s still in spin

And there’s no tellin’ who That it’s namin’.

For the loser now, Will be later to win

For the times they are a-changin’.

So, let’s explore why the HP-Cisco split serves as a milestone marker for the more dramatic market changes to come.

Parting of the Ways: Low Stakes

The line it is drawn, The curse it is cast

The IT bloggers and analysts are thoroughly covering this split. Here is an excerpt from Alexander Wolfe’s post this week:

Here’s the money quote from the Cisco blog post, which comes via channel chief Keith Goodwin, who is senior vice president of Cisco’s worldwide partner organization:

“Over the last few years our relationship with HP has evolved from a partner to companies with different and conflicting visions of how to deliver value to customers.”

Clearly, this is a significant shift in partner strategy for Cisco and HP. However, some of the analysts are comparing this to the divorce that occurred between HP and EMC roughly a decade before.  That split forced both HP and EMC to restructure their channel models after parting ways on product collaboration. The image below captures where the conflict occurred and what the impact was ongo to market models for the two companies.

The HP-EMC Divorce, Ten Years Ago

Both companies recovered nicely after the dust settled and markets were not fundamentally restructured. Perhaps this current breakup will ultimately play out in the same manner.

Parting of the Ways: High Stakes

This current divorce is playing out in a very different marketplace. Joseph Kovar from channel web makes the observation:

However, there is one key difference between the 1999 and the 2010 breakups. Whereas HP and EMC fought over how storage would be sold, they fought for their own part of that particular business.

For HP and Cisco, the stakes are higher. There is no single point of contention, such as storage, between them. Instead, they are fighting over the future direction of data center infrastructures, which has the potential to impact a wider range of technology and channel partners.

HP-Cisco Divorce Recalls HP-EMC Breakup

By Joseph F. Kovar, ChannelWeb

In fact, the entire go to market model for tech companies like HP and Cisco is on the cusp of a radical restructuring. Instead of the battle ground being focused on specific products and specific channel partners, the battle ground is being shifted to datacenter infrastructure and service consumption models. CIOs will not be negotiating with a reseller on how much Cisco or HP gear to purchase. A CIO will be negotiating with a service provider around the monthly or annual costs for entire datacenter capabilities. Services, routers, applications—the whole deal. This is the future Cisco and HP are now dancing around. The image below capture the new marketplace.

The HP-Cisco Dispute

 

The Waters Have Grown

So, it strikes me that this dispute is not like the one that occurred a decade ago between HP and EMC. The stakes are much higher. The go to market model is shifting much more dramatically. There will be big winners and big losers over the next decade.  

In Barcelona this month, I hosted a panel discussion of executives from Dell, Xerox, and HP. The topic was the recent acquisitions these companies had made of pure service firms. I asked the panel if their companies intended these acquired service organizations to remain “product agnostic.” The answer from HP was clear: “No.” The other executives layered on by stating that customers were asking less about the products being implemented, and more about the total cost of the environment.   This panel discussion should send shivers down the spine of any product-centric company that is being relegated to providing commoditized technology in this new market landscape.

And the words of Dylan keep ringing in my head:

Come gather ’round people, Wherever you roam

And admit that the waters, Around you have grown

And accept it that soon, You’ll be drenched to the bone.

If your time to you, Is worth savin’

Then you better start swimmin’, Or you’ll sink like a stone

For the times they are a-changin’.

HP Results:The Services Story of 2009

December 3, 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.

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Product-Centric Cloud Computing: A Race to the Bottom

November 5, 2009

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:

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?

Industry Alert: Dell, Perot and a Real Trend

September 21, 2009

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:

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:

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

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.