Archives For Inside the Tornado

moneyExpect 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….Blog Subscribe Ad

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

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In 1995 Geoffrey Moore brought us ground-breaking information in his book entitled, Inside the Tornado.  This book was required reading for many technology manufacturers, including HP, a strategic partner of my employer at the time.  Using a standard marketing normal distribution curve, Moore showed us how market adoption changes when you start talking about technology.  It takes years for, what he refers to as discontinuous innovation, to catch on when talking about cars, phones, or air travel. But when speaking of today’s hot technology innovations, suddenly adoption is taking place in months.  Why is that important?

Well, to the technology manufacturers, Moore showed how products met the first inflection point of that model where early-adopters transitioned to early majority, a new audience of buyers.  He explains in his book that this audience is a bit more conservative than the first, and unwilling to work with technology that is bleeding edge!  This group represents people who might be risk adverse or, like many information technology professionals, goaled and paid on up-time, not innovation.  The first group however, representing those who will take a risk on new technology, is likely in the camp of profit center managers, looking for technology that puts them out in front of the competition.  This is further explained in Bosworth’s book, Customer Centric Selling, as he applies the model in a slightly different way to various kinds of buyers.

Manufacturers studied these models with profit and adoption in mind.  Moore’s point was that, manufacturers needed a way to enter the larger markets of early majority and late majority (possibly representing 33% and 33% of the possible market for each) if they were to enter the larger majority markets with their products.  The first one there would be given the greatest opportunity to become the market’s defacto standard.  Once there, the channel was established to meet the accelerating demand for their products, which Moore termed, The Tornado, thus the title, Inside the Tornado.  This is where the manufacturer views the channel, but this is not necessarily where the profits are for the channel partner.  The problem is, most resellers (VARs) are positioned exactly in the middle of Moore’s Model; perhaps the most unprofitable position possible for a reseller, which in turn, hurts both the reseller and the manufacturer – the company depending on their partners to bring in more and more of their business.  This is a problem.

(You’re probably wondering what this has to do with the red hydrant…nothing, it’s just a fun picture I took while photo shooting with my daughter).

© 2011, David Stelzl

What allows a company or individual to command higher fees?  I’ve written various posts over the past few weeks on fees, and yesterday, I commented on setting higher fixed fees vs. totaling your projected hours and presenting a fixed amount (this generally leads to underestimating and a decrease in project GP).  But what allows a company to propose higher fees without the competition coming in to win the deal on lower pricing?  Commodity sales compete on price…high-value sales don’t.  Here is a list of category offerings I use when considering how to go to market.

1. Product

2. Staffing

3. Projects

4. Strategy

5. Vision

The order builds from pure commodity to greater intellectual capital.  On the low end, companies like Dell are selling low priced desktop systems online.  Nothing unique here, but they are fulfilling a market demand; consumers want inexpensive computers, in fact they demand them.  Dell can fulfill this market demand by finding more efficient ways in manufacturing and distribution.  What was once a $5000 entry point in the early 80’s (and 5K back then was something to talk about), is now a few hundred dollars.  Netbooks and IPads may further change the game here.

Staffing follows with various skills that set apart individuals.  Projects help companies move forward with initiatives that change the business.  This is where value pricing really starts to make sense.

An interesting question arises with my model at this point.  What about a utility such as SaaS like Salesforce.com?  Cloud computing should fit in here somewhere…but we’ll come back to that another day.

As we move up, start thinking about Accenture or PWC.  Strategy commands big dollars.  In a prior life I referred to our growing company as, The Andersen Alternative (Back before the days of the Accenture brand).  The message was clear; we were consultants, working up the model toward higher value consulting, while selling the technology to implement those things we recommended doing.

Finally we have people who create vision.  People like Geoffrey Moore (Author of Inside the Tornado) come to mind.  Consultants working at the top with large high-tech companies, helping them figure out where to go next.

Most resellers are not built to reach vision creation; their sweet spot is probably in the project area.  Larger integrators are beginning to build business process, ITIL consulting, and other forms of business consulting into their model to offset the commoditization of product.  If you don’t start thinking about this now, you may find yourself without profits next year, and perhaps out of business in the near future.  But let me point out, the problem is not with the area you play in, rather it is in the model you’ve built.  Resellers are built to sell projects, Dell was built to sell hardware.  Both have high profit potential…but building one model and selling another is destined for failure.

© 2010, David Stelzl