Expect Your IT Infrastructure Business To Shrink in the Second Half

Steve Norton, columnist for The Wall Street Journal, reported new shrinking IT spending numbers in this morning’s CIO Journal Report.

This is the third adjustment this year according to my notes. Earlier in the year Gartner was calling for a 1.3% decline, then in April 3.1%. Now they are saying we should expect 5.5% shrinkage!  These are some big changes.  What’s going on?

Date Center Is Over

Several years ago, when Cisco started really focusing on data center, I made a prediction. You might remember it – It’s in my latest version of The House & The Cloud, and From Vendor to Advisor, a book I published back in 2012.  I made a similar prediction in 2007, in the first House & The Cloud – however it was about VoIP.  These technologies commoditize quickly.  But data center is different.  It was already a commodity!  Cisco was developing what Geoffrey Moore called, in his book Inside the Tornado, a +1 technology.  Plus-One is like putting a popcorn button on the microwave oven.  It takes something that everyone already has and makes it better.  But there’s a problem….

The Problem with Plus One Technology 

90% of the technology revenue is being sold today through the channel. If you look at Moore’s model, he shows how products enter the market as early adopter offerings, purchased by about 12.5% of the market. As the product matures, assuming that product enters the early and late majority markets, it enters the majority markets.  If the manufacture does things right, they might become the defacto standard as Moore’s Tornado (Inside the Tornado) heats up.  If that happens they will have 60% of the overall market just from their major market share, plus the earlier 12%; in other words, they’ll be dominating the market like we see Cisco doing right now in Route/Switch.

The problem is, that while the manufacturer is still holding the larger part of the available market share, their resellers don’t really make money on commodity sales. The margins get so thin in the late majority market, they face going out of business. Over the past 20 years we’ve seen technologies come and go. The new waves of technology fuel new resellers, or the reengineering of old resellers. Novell resellers became Microsoft LAN Integrators. The UNIX wave of the mid-nineties helped revitalize many companies that used to sell PCs or CAD-CAM software. And big server deals, including those UNIX systems drove endless storage sales and high-availability computing.  By 2000 there were countless resellers jumping on the  VoIP bandwagon.

In 2003 we saw a shift away from product.  The smaller integrators were all building managed services. Their customers were not candidates for big storage or server sales, so MSP became the goal of just about every reseller.  The consulting business was eroding, given the commoditization of products, so servers were moved to contractual recurring revenue. This was an excellent move for many – it gave stability to the reseller model that had historically struggled with fluctuating services utilization rates (Bench Time).

The larger companies, especially big Cisco integrators, turned to data center and big storage no available in a rack mounted Router chassis. But the plus-one technologies don’t revitalize the reseller for long because they are not what Moore called, discontinuous innovations. Rather, they are an attempt to eat away at existing market share. It’s just an upgrade from an existing commodity product – so competition is steep and margins are thin. The reseller is them left to make up their margin loss in volume. In the long run, this won’t work. The sales people I am working with, who are in this space are telling me their margins are too thin, and they can’t sell enough to make a decent living. They need something new.

The Problem With Managed Services

MSP doesn’t necessarily commoditize – its a different animal altogether. In a way, it’s already a commodity.  It’s really an offering to take on the management of commodity infrastructure.

Since the products involved in MSP offerings are a commodity, the only thing that had kept resellers from flooding the market with offerings was the cost of building the NOC (Network Operations Center). Without a NOC, it’s hard to have an offering. Enter appliances and the Cloud.

In 2003, companies like Nable lowered the barrier to entry by coming out with an appliance that would handle the SMB NOC needs. Of course it had it’s limitations. It didn’t really handle the security side of the equation. Since 2003, numerous offerings have emerged, basic security features have been added, and the SMB integrators all have one.

To make things worse, cloud now gives just about anyone the ability to offer a host of managed services.  I see resellers with just 2 or 3 employees offering services to hundreds of SMB companies, leveraging outsourced call centers and cloud based NOCs to handle just about everything but the initial sale.

MSP offerings are now just dollars/workstation sales. It’s a price sale, just like servers and storage.  There’s no margin left in it.

Back to The Four Things

In my book, From Vendor to Advisor, I make the case for focusing on one of four things. One of them is nearly impossible, so that leaves three. Two are in high demand. And Security has always been the most important of the four.  They are; ROI, Competitive Advantage (including Customer Experience), Operational Efficiency, and Risk Mitigation.  Competitive Advantage and Risk Mitigation are by far the best places to focus.  Some VAR owners will continue to offer all of the above, but like the medical field, the specialist always makes more money, and is always in greater demand.

© 2015, David Stelzl