Iron Mountain has been under well-publicized pressure from an activist shareholders to focus back on its core business. Related to this, the company has decided it is unwilling to continue to fund its digital business unit, Iron Mountain Digital (IMD). Since Iron Mountain came public with this conclusion the quick reaction has been to question the viability of the cloud storage model.
However, attributing IMD’s demise solely to cloud, or cloud economics, is shortsighted. You can argue the merits of the Iron Mountain offering all day, or point out the premium they tried to charge relative to the competition. But neither of these are the core reason why it failed to make money in this business. The problem appears to have been more of a structural issue -- Iron Mountain’s inability to reach a broader customer base with its technology and unwillingness to spend the money or compete with its partners to do so.
What plagued Iron Mountain had very little to do with cloud and everything to do with the fact the enterprise storage market has historically been controlled by a few very large players. Participants in this market are either with the big guys or against them. If you are going to acquire assets that compete with your OEMs, you need to attack to drive ROI. Straddling both sides of the line, like most try and do, usually doesn't end well. Half pregnant is no way to live.
Iron Mountain was never able to nail the digital strategy. Ten years ago it made the decision to own IP in this business. It viewed digital as a natural extension of its core services. it was right about that but wrong about the need to own the IP. Close to $500 million in acquisitions later, it owned some decent online backup, archiving and e-discovery assets. However, from a business model standpoint, it never worked. The worldwide digital business grew revenue only 1% in FY10. Operating income declined 45% in the same period to $28 million. IMD’s operating margins were 11.9% in FY10, significantly lower than the core North American physical business at 44.3%.
Iron Mountain’s biggest struggle with its digital business was an inability to extend these products beyond its core customer base. The reality here is its OEM partners never really wanted it to be anything more than the “Iron Mountain” for physical records. Anything that looked or smelled like a business that was competitive to its partners was going to be an uphill battle, unless the company wanted to disrupt its broader go-to-market strategy, invest heavily in its direct digital sales force, and compete head on with these OEMs. Unwilling to go all in, it was stuck in a box. Consequently, it couldn’t amortize the cost of developing and maintaining this technology across a wider audience. So while the business could theoretically have contributed to gross margins, the operating model was broken.
Continuing to invest in this model, at these return levels, was unsustainable. Faced with funding a bigger push into cloud, and the unknown risk/reward that came with it, the company has instead retrenched and is “evaluating its options”. The best outcome here for Iron Mountain is a sale of the digital assets with the buyer licensing back the technology to Iron Mountain. This creates an asset-light technology service provider strategy that lacks the go-to-market conflict inherent in IMD’s prior model.
Historically in storage, due to the limited routes to market, establishing disciplined positioning and an effective go-to-market strategy has been as important as the architecture. The irony here is that in the early cloud market the traditional storage OEMs (the same ones that Iron Mountain competed against) have found themselves competing with their major service provider customers. And while backing off may seem like the right thing to do for the sake of some tactical deals, this doesn’t mean it is in the best interest of the long-term strategy. Interestingly, key market players are divided on this subject. EMC, NetApp, and Cisco have chosen to be technology enablers, while HP and Dell have chosen to compete.
For Iron Mountain, entering into the digital business may have been a sound strategy. Unfortunately, the structure within which the strategy was implemented impaired the execution. If a particular transaction had any contention, it stands to reason that channel conflict, margin structure, and internal politics all favored the physical/deep archive business. Iron Mountain, consciously or subconsciously, could never get the math right to justify sacrificing margin-rich legacy business to build out a digital offering.
What We Learned
Some of the key lessons from the Iron Mountain Digital experience are:
- Strategy and structure go hand in hand. Be creative in defining the right structure to spawn the new strategy. Don't assume a separate division is the answer. This, often times, is not separate enough.
- Tactics and strategy conflict. Tactically it would seem to make sense to appease your existing partners by not competing with them. But you need a strategy in the background prepared for the day that you will compete. In this rapidly evolving market, it could come faster than you expect.
- OEM alignment creates risks. A fast way to get leverage in storage is to align with the major OEMs. But realize from the outset that this is a double-edged sword. These relationships usually provide diminishing marginal returns as they grow. To eventually evolve out from under an OEM stronghold is something that few, if any, have ever gotten right.
- The OEM Stronghold will weaken over time. As more and more IT is consumed through cloud/off-premise delivery models, the traditional OEM grip on the end customer is weakening. It is extremely important to think about how best to position for this dynamic as it unfolds in front of us.
Action Item: Never underestimate the cultural, organizational, and channel conflicts inherent in any new investment, strategy or venture. Think through the tangible and intangible investments required to push through these conflicts. The real costs of executing on the strategy could very well skew the ROI against the opportunity.
Footnotes: Dave Cahill is a Wikibon contributor and founder of Diligence Technology Advisors. Diligence is a boutique strategy and advisory practice with a focus on storage, cloud computing and emerging technology opportunities. Dave can be reached via email (email@example.com) or twitter (@dcahill8).