The Rise And Rise Of Services

On September 21, 2009, the day of Eidul-zuha, Dell announced that it had
agreed to acquire Perot Systems for $3.9 billion. 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 billion. Of course, there is more commonality to the deals than being
announced on the days of major festivals in India. The two companies had just
put their official stamps on a trend that started quite some time back, but had
become the most defining trend in IT in the first decade of this century, or to
be more accurate, in the second half of that decade.

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

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 of IBM 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.

In short, going purely by its share in the IT budget, the real ascent of
services happened in the first few years of the decade. It is difficult to
believe that the actions that we see-hardware companies getting into
services-would come after five years.

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 few 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 77 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 the most important part of IT. In fact, services today has become too
important to be left to specialized services companies alone.

Shyamanuja Das

Courtesy: DQ