Can Cloud Pull Technology and Services Models Together to Deliver Value?

Die-hard technologists often ignore the services side of the IT business, looking at it as a necessary evil, a cost-center threatening to get out of control, or too abstract to fully investigate. What exactly is systems integration again?

But a look at the financials of several leading OEMs shows that services now makes up a significant part of their businesses:

OEM Percentage Revenue from Services*
IBM 57%
EMC 36%
HP 34%
Xerox 31%
NetApp 22%
HDS 22%
Cisco 19%
Dell 12%

*Most recent fiscal year.  Source: Company financial reports and Wikibon estimates.

And recent services-related M&A activity has been impressive: HP/EDS and Dell/Perot stand out, but look also at Xerox/ACS and even Oracle/Sun.  Click back a few years and you recall Sun buying StorageTek (with a big, profitable services business) and HP buying Compaq, which itself had acquired the huge Digital Equipment Corp. multivendor services business.  IBM “validated” this kind of strategy when Lou Gerstner turned the company around in the mid- to late-90s by de-emphasizing technology in favor of 1) figuring out what customers actually needed, and 2) putting together products and services, in whatever combination, to meet those needs.

But the product/services divide is still there, both in the market and within technology companies.  For example, OEMs still typically run separate Product Marketing and Services Marketing groups.  The Services group is often physically and culturally off on its own.  Part of this is tied to differing financial models: The revenue-generating part of IT services–professional services such as consulting & integration, or large-scale outsourcing–is contract-based.  Services revenues generally can’t be counted until the services are delivered.  Outsourcing deals typically aren’t profitable at all until the second or third year.  A big project to implement a private cloud at a customer’s site looks good when it’s announced, but the revenues won’t be pouring in for awhile, and some big projects don’t wind up being profitable at all.

In contrast, product sales, especially hardware, represent reportable revenues almost immediately.  And technology firms are built to deliver products: They regularly give away some services to make the product sale, or to retain the customer.  Some companies drive up maintenance contract pricing so high that the customer is better off upgrading to the new system than renewing maintenance coverage on the old one.  And so on.

Moving to a Services Model

Cloud computing and converged infrastructure promise to finally bring together technology innovation and service delivery in ways that bring new levels of value to customers.  John Furrier of Silicon Angle recently interviewed Tony Kolish, SVP of EMC Worldwide Customer Support, about how converged infrastructure appeals to CIOs:

If you play this out and think about cloud as a service-delivery model, built on standardized technology building blocks (e.g., converged infrastructure) that will be increasingly hidden from the customer, you begin to see the potential long-term benefits for customers who, truthfully, want to run their businesses, not be IT experts.  This implies the following:

  • Service providers must deliver on promises of cost-savings, security, reliability and effective customer support, to win real customer commitment to the public cloud model.
  • Technology companies must get better at describing the true business benefits of private cloud infrastructures, so that CIOs can explain these benefits, and associated changes, clearly to their own organizations.
  • Traditional services companies must continue to innovate to deliver value as enterprise needs for consulting and integration shift and potentially decline with cloud adoption.