The Rise and rise of services

Dell chairman, Michael Dell and Perot chairman, Ross Perot
Jr shake hands after Dell acquired Perot; within a week Xerox CEO Ursula Burns
and ACS president & CEO, Lynn Blodgett ink the deal for Xerox' ACS acquisition.
The precursor was HP's EDS two years back (Inset: HP CEO, Mark Hurd and EDS CEO,
Ron Rittenmeyer)

On September 21, 2009, the day of
Eid-ul-zuha, Dell announced that it has agreed to acquire Perot Systems for $3.9
bn. Just a week later, on September 28, 2009-incidentally, the day of Dussehra
in India-Xerox made a similar announcement. It agreed to buy Affiliated Computer
Services (ACS) for $6.4 bn. Of course, there is more commonality to the deals
than being announced on the days of major festivals in India. IBM had flirted
with the services idea-right from the day it started, when there was very little
distinction among hardware, software, and services. Though the former CEO Louis
V Gerstner, Jr is credited with turning the company into a services
organization, the boldest step came post-Gerstner, when the current CEO Sam
Palmisano decided to sell off its PC business to Lenovo in 2004. HP, which had
started the decade with a much-criticized decision to buy Compaq in the
beginning of the decade, more than made up for it, growing its services business
rapidly, after the new CEO Mark Hurd took over. The most visible step in this
direction, though came in 2008, when it bought EDS, a company often credited
with making the world realize the value of services as a distinct component of
IT-but which by that time had become a pale shadow of its former self.
Nevertheless, with that acquisition, HP dislodged IBM from the #1 IT company
position that it held since IT industry started getting tracked as a separate
industry. 2008 was also the year in which another major IT company restructured
itself to combine its two completely independent hardware and services business
units. Though the Japanese company Fujitsu's move did not get even a fraction of
the media attention, it remains one of the biggest examples of the strategic
steps companies have taken to position themselves in the new world of a
services-led market. Of course, Dell and Xerox joined the bandwagon. We believe
Sun-had it not been acquired by Oracle-would have gone for a big deal.

Why Services?

Of course, one basic reason was that it was growing faster. According to
IDC, the share of services in the total IT spend globally has shot up from just
about 33.7 percent in 2000 to 39.5 percent in 2008, the latest full year for
which data is available. The 2009 data is not available, but considering the
trend, it would be safe to assume that finally in 2009, services may well have
surpassed hardware as the biggest IT spending head for the enterprises globally.

That seems like a simple and powerful reason. But that
probably still does not explain the interest in services that we have seen in
the fag end of the decade-in 2008-2009. The biggest jump of services-according
to the IDC data-actually happened in the first three years of the last decade.
From about 33.7 percent, the share of services rose to 36.5 percent in the next
year and 39.5 percent in the year after. It reached a peak of 40.2 percent in
the subsequent year-2003. But after that, it has been hovering around there.

The New Drivers

In reality, while the hardware companies realized the potential of services
quite some time back, what finally enabled as well as forced them to act now
were a variety of reasons. We are into services, anyway: much before the Perot
acquisition, Dell had positioned its services really well. In a series of events
on Managed Infrastructure Services, in which Dell partnered Dataquest, the
business managers who made presentations to the audience talked like a true
infrastructure services company. This new approach was clearly visible in case
of Sun too. With fee users spending on new servers and virtualization and server
consolidation becoming the key mantras, most expected their hardware vendors to
partner in their journeys rather than listening to their presentation on buying
more boxes. This, in a way, forced the hardware vendors to get into a lot of
nuts-and-bolts issues themselves. That was a humble beginning of a journey which
these companies now want to pursue for long.

Revenue Predictability: While the front line sales guys were
getting pressurized to provide more 'help' in providing 'services', the top
management was worried about revenue predictability in the long run. More and
more users were reducing their hardware budgets, and hence any temporary
slowdown affected the business severely. The two years, 2008 and 2009, saw
particularly troubling times for IT companies. For hardware companies, it meant
struggling for basic revenues, whereas services companies were, to some extent,
protected from the slowdown because most contracts were long term. So, while new
businesses suffered for them too, the existing contracts gave them a base of
assured revenue. Especially in infrastructure services contracts, which are
usually long term, this steady flow of revenue allowed them to take bigger
risks.

Variablization: With everyone looking at variablization of
capital expenditure, for different reasons-for developed market enterprises, it
meant freeing resources. For emerging market companies it meant access to
technology which they otherwise would not have had-the hardware companies were
being pushed to a services model by their clients. While the full-fledged
utility computing model has not really started in a big way, the success of SaaS
in the software domain makes observers hopeful that soon, users would like to go
for even hardware on demand. A services model would allow hardware companies to
bundle their offerings.

The Advent of Cloud: However, what has been a game-changer
and what probably explains this rush to catch the services bus now, is the
growing hype and adoption of cloud computing models. This threatens the basic
positioning of hardware companies-whether they will get the ears of the CIO, if
they do not become active participants in the cloud offerings. This is the big
change that happened in the latter half of the decade. It is safe to argue that
this was one major reason behind almost every single hardware player getting
into services.

Coming Full Circle

In the early days of computing, there was little distinction between
hardware, software, and services. A user selected a 'computer' vendor who was
responsible for making it work. What the user often recognized and thought he
was paying for was the hardware, which he could see before his eyes. While the
story of how Bill Gates rescued software from the clutches of hardware is
well-recorded, it was much earlier that a gentlemen called Ross Perot had done
the same with services. It is said that EDS-the company Perot founded-was
refused seventy-seven times before he got his first contract. But the wave he
started has become the biggest defining trend for the new century. Ironically,
both the companies started by him are no more independent companies.
Nevertheless, the services component, whose importance he demonstrated, has
become has become the most important part of IT.

Shyamanuja Das

(Source: DQ)