Posts Tagged ‘IBM’

Managed Services Mistakes

January 8, 2013

In my last post related to Managed Services (Framing Managed Services), I made the following observation:

Managed Services is the fastest growing service line for hardware and software companies that have established support and professional service businesses.

At TSIA, we see this trend continuing in 2013. To support this critical service line, we have hired a veteran from the Managed Services industry to lead a new TSIA service discipline dedicated to Managed Services. George Humphrey joins us from Avaya where he helped build and optimize their Managed Services offerings.

This week, George was debriefing me on conversations he has had during his first thirty days with the advisory board members of this new discipline. Companies currently represented on the board include: Avaya, Cisco, EMC, JDA Software, Microsoft, IBM, Symantec, and Ricoh.

As George summarized the discussions, I was transported back in time. I felt like it was twelve years ago, when I first started working with multiple product companies regarding their Professional Services business. At that time, all of the PS leaders suffered from the same handicap—they could not benchmark the financial performance of their business against similar embedded organizations. Because no meaningful benchmark existed, management teams (and executive teams and boards) were forced to guess what reasonable or unreasonable performance was. This vacuum of facts created many absurd expectations. Today, Managed Service organizations are suffering from this same exact vacuum of facts. Just as Professional Services embedded within a product company IS NOT the same business as independent consulting, Managed Services within product companies IS NOT the same business as independent Managed Services.

George said to me “I see it again and again—companies under estimating the time and investment required maturing an MS platform.” With no baselines grounded in fact, I have found management teams will gravitate to optimistic fiction.

As we talked more, George began outlining the common mistakes he has seen product companies make as they work to establish an MS business. Besides underinvesting in general, product companies also miscalculate the shift required in the sales model. Managed Services is different from every other service line product companies establish such as Professional Services, Education Services, and Support Services. Why? Because Managed Services DOES NOT naturally relate to a product transaction. Think about the consequences of that reality for a moment. They are massive when it comes to creating demand for this service line.

By the end of the conversation, George had outlined several more challenges commonly faced by embedded MS organizations. I have asked George to publish a paper for the MS membership titled: “The Top Five Mistakes Made When Building a Managed Services Business.” Even before the data from his new MS benchmark starts flowing in, he knows what these common friction points are.

For more information on George’s work and TSIA’s Managed Services Discipline, contract George directly at george.humphrey@tsia.com

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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

 

 

The Service 50: The Tech Recovery Continues

July 28, 2010

This week, TSIA has been analyzing data from our Q2 2010 snapshot of the TSIA Service 50. This is an index of fifty of the largest providers of technology services. As I pore over the data from the Q2 quarterly earnings, it is clear that the recovery for the tech industry is not just centered in a few strong performers like Xerox or Intel.  The recovery is presenting itself across the tech sector in companies both large and medium sized. Also, the Q2 numbers were better than the Q1 numbers—which shows the trending is in right direction!

On Thursday, I will be delivering my one hour dissertation on the Service 50 Q2 data. To join me, register here:

http://webcasts.tsia.com/event/809lglbhcy

To give you a glimpse of some of the analysis, below is a chart that segments the revenue trends of the companies in the Service 50. As can be seen, compared to the same quarter one year ago, companies are seeing an increase in product revenues.

Revenue Growth for S50 Companies

Historically, for technology companies, the return of product revenue growth is always news for celebration. Specifically, because tech companies operate to one clear truism:

Product Revenue = Profitability

Even services intensive tech companies like IBM, Xerox, and Oracle still operate to this unshakable truth. Yet, there is a disturbing trend that is beginning to present itself in the Service 50 data that questions this high tech truism. To learn more, join me on Thursday.

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

“Cloudprem” Providers

May 4, 2010

I’m in the middle of the TSW conference here in Silicon Valley. So far, the discussions, presentations, and panels have validated several assumptions related to the impact of cloud computing on technology providers:

  • Cloud breaks existing financial models
  • Cloud is incredibly disruptive to the current go to market models of the tech industry
  • Cloud has the potential to devalue the current service offerings of product companies
  • Cloud forces technology providers to “declare” their service intentions. Will they focus on providing technology components to others that provide cloud offerings or will they begin offering value added services directly?
  • Customers under immense IT budget constraints are anxious to explore new cloud computing options.

Validation always feels good, but it is the impact of cloud I did not understand that is blowing me away right now.

(more…)

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

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?

The TSIA Service 50

October 26, 2009

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.