Hardware, whether network or IT, is commoditizing in the view of most in the industry and on Wall Street. Software licenses now make up less than a quarter of the revenue of some major “software companies” and the open source movement is making credible progress toward making a big chunk of it free. What’s left? The answer is “professional services”, and we are already seeing signs that the future of tech might belong not to people who make stuff but to those that can make stuff work.
In networking, we have all of the credible telecom equipment vendors moving to become more professional services companies. Ericsson, for example, has made no bones about its position that this is their revenue/profit future. We’ve seen most of the big network vendors launch at least embryonic professional services efforts. While you could argue that this was simply an example of the universal desire to increase total addressable market (TAM), you could also argue that it represents a growing realization that this may be where the money really is.
Government data on tech spending has always divided the total pie into hardware/software, networking, and professional services, and in many of the last ten years the size of these pieces have been roughly the same. Most of the professional services spending in the past has gone to the big consulting and integration companies, like Accenture, but there’s a key factor in market evolution that’s created incentive for the vendors themselves to get into the business—an incentive beyond direct professional services profits.
In a recent Gartner report, HP and Cisco were seen as being the server players who were “thriving”, and that’s pretty consistent with my survey results this year. What’s interesting is that the buyers of servers (enterprise or telco) say that the big factor in the deals is specific experience of the seller in integrating servers into a complete solution for the buyer. In short, professional services. If services can pull through hardware/software sales, then anyone who’s a vendor darn sure better start thinking about it.
Another issue is that of margin pressure. I remember my first IBM PC—it had two 5.25-inch floppy drives with about 160k capacity each, a text-only monitor, and 128kb of RAM, and it cost about four thousand dollars. Retail margins were about 35%, so the store made twelve hundred bucks from the sale. The local retailer could afford to spend a little time helping get the (for the time, enormously powerful) system running and even involved IBM Boca to help. Today the full sale price of a low-end desktop would be about a third of the retail margin of my first system, and the gross margin is less than 20%. Nobody is going to hold your hand for that; they won’t even blow you a kiss. Thus, as hardware/software commoditizes the loss of profits reduces “included” services.
The problem is that in a commodity market you can make more money only by selling at that lower market price to more people. A mass market is an illiterate market, so they need more support and not less. What we’re now finding is that this has divided the market for tech into the consumer space—where the motto is “fire and forget”—and the business buyer who now has to buy support incrementally. And of course that support doesn’t require manufacturing costs or shipping or repair.
The support-and-integration-centricity of our tech markets isn’t getting less, it’s growing. Look at SDN and NFV, both technologies that purport to call for open solutions. The effect of that openness is to drive down prices of the components of both technology or even make some of them open-source. That means that anyone who wants to do a real SDN or NFV implementation is going to have to pull together pieces to create a cohesive system. Can they do that? Internal literacy on both SDN and NFV today is in the statistical noise level. The biggest SDN and NFV opportunities probably accrue to the companies who can be the integrators—fit the puzzles together with confidence and take responsibility for what they create.
I expected to see this trend, and I also expected it might empower the current giants of software consulting and integration—the Accentures, for example. Instead, what my surveys are showing is that the buyers typically want to cede the professional services associated with a tech project to a vendor with a lot of product skin in the game. Part of that is the fact that the understanding of how to build and sell a given product builds some understanding of deployment and use. Part is that buyers who used to think of independent consulting/integration firms as being “unbiased” now think of them as first having hidden relationships with vendors and second being interested only in lining their bottom line by adding unnecessary costs. Two-thirds of enterprises said they believed that independent third-party firms were less likely to offer them the best strategy than a vendor integration organization.
It may be that professional services will be the differentiator among “vendors” as we move into the era of the cloud, SDN, and NFV. I don’t think that this will mean that we move to a world where every hardware element is a nameless white box given a personality by an independent integrator, but rather into a world where the name on the box stands for integration skill and problem-space knowledge rather than for manufacturing.
If that’s true, this will be a massive shift. It’s hard to build a professional services story from simple cost reduction—why not reduce costs by reducing the professional services spending? On the other hand, productivity and other “benefit-enhancing” projects demand that problem-space knowledge and that might force sellers to value true solutions and benefits. It could, over time, help restore innovation (maybe of a different kind) to our industry.