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Two of the three titans of the asset-intensive infrastructure services business are merging. What does this mean for the services industry?
Let’s start with why they’re merging. Clearly, the space that they occupy is a mature space. It has been undergoing tremendous competitive pressure from the Indian firms with their Remote Infrastructure Management (RIM or RIMO) offerings. After losing some initial share to the Indians, the three titans – CSC, HP and IBM – seem to have righted their ship. HP had a one percent increase in sales and IBM had a three percent increase in sales. So the space seems to have adjusted to be able to meet the Indian RIM challenge.
In addition to continuing to meet the RIMO challenge from India, the three firms dominating the space also face the issue of work migrating out of legacy into the cloud. I think we haven’t yet seen the effect of this migration hit the market in a significant way. But it’s coming.
So there are three competitive challenges causing this merger to happen:
It’s a win-win
Therefore, the merger makes sense. As in other mature industries, it makes sense to drive industry consolidation where a scale player can better manage the transition in a maturing market than individual players. This merger is straight from that playbook.
Therefore, the merger makes sense. As in other mature industries, it makes sense to drive industry consolidation where a scale player can better manage the It also makes a lot of sense for each entity. HP can divest itself of this mature space and focus on the faster-growing server and networking space. It frees Meg Whitman and the HPE franchise to focus their attention on the growth segment of the marketplace. So I think it’s a good play for that. It allows CSC to consolidate the infrastructure space and now positions them at the same scale as IBM with similar economies of scale and global reach. So I think both parties win. in a maturing market than individual players. This merger is straight from that playbook.
But it faces big challenges
The challenges for the leadership team under Mike Lawry are twofold:
A significant challenge will be to achieve the cost reductions without affecting customer service and disrupting the customer base.
The merged entity is estimated to have $1 billion in synergies in year one – in other words, duplicate cost that can be eliminated. That’s about six percent of their cost base and seems like a reasonable going-in assumption. However, in this case I think it will be challenging, given that both CSC and HP are coming from having recently aggressively adjusted their cost bases to become competitive with the Indian challenge and therefore do not have large inefficiencies or fat that is available to cut without adversely affecting customer service. This will focus the synergy exercise on duplication of resources, which makes the billion-dollar target more difficult.
In addition to improving margins through these cost-cutting exercises, the merged entity will have to make strategic bets to invest in critical market segments and industries that will allow it to grow and offset the ongoing challenge from the India-based RIM players as well as the workload migration out of legacy and into cloud.
Net-net, I think this merger is good for CSC and HP. I also think it’s good for the industry in that the combined entity is better able to manage this transition than they would have individually. But substantial challenges remain for the combined entity to continue its cost reductions as well as invest in growth areas. Mike Lawry is an old hand with experience at this type of game and has had ample time to perfect his strategies from when he took over CSC. Now he has a bigger field to play on.
I recently met with a major player in the Internet of Things (IoT) space, and the company is incredibly frustrated with how developments are evolving. They pointed out the promise of the IoT but said it’s not evolving much beyond the use case of predictive maintenance. It seems people are In Denial (ID). Why aren’t use cases and revenue opportunities in the IoT exploding? I believe the hindrance is the same as it is when trying to drive change through any new technology: the change is cross-functional.
The fact that it’s not evolving much beyond predictive maintenance types of use cases is frustrating to any CIO looking for the next big thing in technology-enabled competitive advantages.
In the new world we’re moving into, where we have a high degree of automation and hyper-scale data centers, cloud, SaaS and re-usage, why do companies even have an IT infrastructure function or department? As companies integrate their software-defined ops function with their software development function, creating DevOps, they no longer need an IT infrastructure department as we know it. Even legacy applications are highly automated and moving into co-located environments. It’s easy to imagine the service providers’ lament: “OMG – no infrastructure departments!”
In Silicon Valley and in any of the born-in-the-cloud environments, there already is no infrastructure layer. We’re definitely seeing an acceleration of cloud adoption in individual companies. And the cloud’s impact is evident in the services industry in terms of the slowdown of the infrastructure services deals, providers’ struggle for share, and explosive growth among the automation and cloud providers.
Implications for enterprises and service providers
In a world where software eats everything, cloud, SaaS and DevOps are accelerating; and the implications are quite profound.
For enterprises: Within five years, most enterprises won’t have an IT infrastructure department. As speed becomes the new currency, it’s just a matter of when, not if. Enterprises will need to replace the IT infrastructure function with a small, reconfigured standards-and-compliance group. That sounds radical, but leading companies and agile companies are doing it.
For service providers: There is a huge book of business that is now starting to run off, although the run-off is currently disguised by late outsourcing adopters. How do you replace a book of business running off? Or can you replace it? And if you replace it with hyper-scale cloud and automation tools, doesn’t that suggest that a different provider/vendor mix will likely be the new winners?
The services industry shivers as it contemplates its future.
Workshops are common in the global services industry, for all purposes from solutioning to product/service updates to team building and more. But depending on how they’re run, they can be exciting or dreadful, valuable or time wasters.
In our 20+ years of workshop facilitation, we’ve seen some “interesting” things. Here are our top tips on how to ensure your next workshops are successful – or not.
“I’m not sure who needs to be there, so let’s invite everyone.”
We’ve all heard the phrase “the more the merrier.” But whoever said it wasn’t talking about workshops. Even multi-day workshops always seem tight for time, so you need to be targeted on who you’re inviting.
Although it’s important to have execs present at workshops, their presence should be limited to an overview and conclusion. They need to understand what’s happening, but still be distant enough to let their project managers be involved, since they’re the ones who are responsible for the outcomes.
“This is an important subject, so let’s block everyone’s calendar and see how it goes.”
No matter how long you decide your workshop will run, it’ll never be enough. You’ll always have participants asking for more presentation time. But the workshop needs to follow a strict outline, or you risk giving undue benefit to one participant over another.
“Workshop done! Let’s grab a drink.”
Follow-up afterwards is just as important as the workshop itself. It’s critical to have someone tracking actions, questions, and follow-up activities post-workshop to close off any open items.
Do you have any workshop horror stories to share with our readers? My last tales-of-horror entry on SOWs may provide some inspiration. If you have any other topics you’d be interested in reading about, don’t be shy; we can all use a humorous break!
The common theme in all my market conversations around digital disruption with enterprises, technology vendors, and system integrators is the word “legacy.” But, no one is clearly defining what a legacy technology is. Is it three years old, or three decades old? One that entails costly support, one with diminishing skills, one that is proprietary?
Technology can become legacy only when it has worked well, and still serves some purpose. Indeed, as true legacy technologies helped make businesses what they are today, they deserve some overdue respect. Of course, on the flip side, many technologies that should have been decommissioned lingered on not because they served well but because switching was costly and risky.
Legacy technologies continue to run the most mission critical workloads in enterprises. However, times are changing fast. Moore’s chasm is reversing, and enterprises are now chasing startups, or incubating internally, to lead technology-driven business transformation and disruption. With this, enterprises must address numerous critical questions. How should they go about selecting the legacy technology most suited for upgrade or replacement? How do they make a business case beyond cost savings? Do their CIOs and IT leaders have sufficient data points regarding this? What is the surety that they won’t regret their decision three or five years down the road?
One big challenge I see is that enterprises believe their legacy technologies are sacrosanct and should not be altered or experimented with. This has worked beautifully for technology vendors and systems integrators who have fed on these fears to sell their solutions. They promise to “integrate” legacy with newer technologies without disrupting ongoing operations. They are overzealous in committing that the investments in legacy will be protected.
While this sounds good in theory and has worked in the past, it has outlived its utility. For digital business to work, legacy technologies must be meaningfully altered and upgraded to incorporate the fundamental concepts of newer paradigms. These include an open architecture, service orientation, environment independence, dynamic resource allocation and consumption, and elasticity. Anyone promising to “protect” legacy without introducing the changes above is lying or creating a poor solution.
Though today’s technology is tomorrow’s legacy, the pace of legacy generation in the future will be exceptionally rapid. Enterprises will not be able to make their three-year, five-year, or ten-year plans, and will have to rely on extremely agile operations to ensure they can plug and play the most suitable technologies. Unfortunately, things are not getting any simpler. The myriad of technologies with their own protocols and lack of standards, multiple APIs with different performance characteristics, proprietary cloud technologies, and other similar disparities are again creating integration challenges.
What is the way forward? Enterprises cannot control the flow of technologies available in the industry. Their best bet is to invest in people who are going to use these technologies to create business outcomes. I believe the days of technology specialists are fast fading, and enterprises will require “multi specialists.” These are resources who understand technology beyond the monocular views of application developers or the operational view of the IT organization. They understand how and why different services should talk to each other, how to develop fluid, self-contained workloads, how to design systems that are open and allow technologies to be hot swapped, how to leverage external systems, and how to continuously monitor the impact of technology on the business.
However, new systems are becoming open yet more complex, vulnerable to attacks, costly to maintain, and difficult to architect. Enterprises are insufficiently investing in the people who drive the technology agenda. The silos of technology and business continue, while they ideally should have collapsed. And although the idea-to-cash cycle might have reduced, it has not been fundamentally altered.
Therefore, despite their best efforts and all the technologies available, enterprises may find themselves right back where they started – the dreaded legacy.
What do you think is the best way forward?