Creating The Next Business Model

I now spend the majority of my time with a vast array of entities I've come to call service providers, or -- more specifically -- IT-as-a-service SPs, to differentiate them from the telco and network variety.

Push me a bit more, and I'll add the phrase "next gen" to the term, simply to differentiate between existing offers (largely built around physical IT) that are in the market, and newer models that can fully exploit what virtualization can do.

Each and every one them smells opportunity in the air, and is trying to figure out their next big play. 

But, as I've come to find out, most of their thinking is characterized by where they're coming from, and less about where they're going.

Let me share some examples ...

The Outsourcer Model

Ten years ago, outsourcing was a big deal, and still accounts for a lot of IT activity these days.  There are lots of ways to characterize outsourcing models, but the one I keep gravitating to is "fixed service, fixed price". 

Or, less charitably, "your mess for less".

Outsourcing engagements are large, complex and difficult transactions for both buyer and seller.  They're hard to get in to, and notoriously hard to get out of.

The economic incentives for outsourcers should be clear: reduce your costs for contracted services, and try and find new services that the client will pay for.  Strangely enough, I see most outsourcers spending 90% of their time on the first bit, and 10% on the new bit.

There seems to be little incentive to make big investments in re-architecting the legacy environment to be more efficient and flexible.

The topic of variable services offerings (ones that are easy to dial up or dial down) seems to create all sorts of cognitive dissonance with many traditional outsourcers.  They're staring at all the assets that are already on the books.  They've built their operational and pricing models around steady-state IT, rather than variable IT.

Yes, it's easier to attract new clients, but it's also easier for them to leave.  And what happens when a fixed-service, fixed-price client wants variable services that might result in less revenue and/or margin? 

Another pragmatic issue is the existing sales force.  New offers require new skills to be learned, and all of that takes time and effort.

The best answer?

I see that most outsourcers are moving forward by creating new business units (with various degrees of autonomy) that are focused on newer, variable-style IT services rather than traditional ones.  They use different infrastructure and operational models.  They wrap these offers with new branding, new identity and new pricing models.  And they usually have a few "specialists" to work with the legacy sales and marketing teams to introduce it to the marketplace.

The good news?  Outsourcers have enormous credibility when it comes to grown-up enterprise IT.  Their credentials are usually compelling.  The challenge is to take what they're good at, and package it in new ways.

And more than a few of them are finding more market opportunity than they can easily address, which I guess is a high-class problem to have :-)

The Telco Model

Over the last decade, various traditional communication companies have dabbled in various flavors of IT-as-a-service.  The business logic for doing so is clear: they've got the infrastructure and the operational model under control, as well as good capabilities in billing.

On first blush, you might think that this whole SP thing would move wholesale to the telcos, simply because they appear to have the potential for significant economic advantages.  But, generally speaking, it ain't happening that way for many of them.

Why might this be?

First, the motivations between customer and vendor don't exactly line up.  It's not uncommon for a telco operator to view the world in terms of "more sticky services over the wire" which isn't exactly the prime concern for most enterprise IT organizations.

Second, the enterprise IT buyer isn't always the same person who bought the network services.  It's a different part of the organization with different concerns.  Addressing those concerns requires a dedicated skill set and usually an expensive sales cycle.  That's a concern for most lean telco business models.

Again, I work with a few telcos who are finding great success in the IT-as-a-service space.  And there seems to be two models that work.

The first is the dedicated business unit model, as discussed above.  Given the level of investment and independence, it appears much is achievable in this space, and there are some great stories to be told.

The second strategy seems to be very judicious in your offers -- make sure than they're synergystic with your existing offers and go-to-market.  Backup and/or storage as a service seems to be popular, as is security event information management.  Lots of opportunity for monitoring end-to-end service delivery as well.

None of these are major departures from the core telco network-centric value proposition, and none of them require a particularly massive investment in presales or marketing.

The Hosting / Co-Lo Model

Another promising group of next-gen service providers are the hosting and co-lo crowd.  Their model was built by providing physical infrastructure and basic data center services.  In some sense, the good ones were seen as simply an extension of the enterprise data center's capabilities.

But physical infrastructure on a per-tenant basis has its limitations.  The costs of entry can be signficant.  Rapdily scaling up and scaling down can be problematic, as is the opportunity to offer new and more valuable services that clients are demanding.

Worse, there's limited opportunity for oversubscription against pooled resources.  And any SP that learns how to play the oversubscription game will have an economic advantage over one that doesn't.

But, in many senses, they're strong candidates for being successful in the IaaS model, and -- by implication -- any model that depends on IaaS.

They know what things cost.  They know how to be responsive to their customers.  They usually have operations nailed.  All good things if you're going to be in the infrastructure business.

Their challenge usually comes in pricing based on variable consumption, and -- ultimately -- charging more for knobs that can be turned quickly, rather than the setting of the knob itself.

Going a bit further, many have a go-to-market challenge along the lines of the telco model.  They don't have big, expensive sales forces that can invest the time in creating relationships that result in profitable engagements.

Going forward, I see their primary challenge in either (a) investing in sales and marketing,  (b) aligning themselves with people who already have the trusted relationship with enterprise IT.

The Vertical Model

I love these guys. 

They tend to offer a core set of killer applications to a targeted industry  that needs their expertise.  And, when you go looking, they're everywhere with more entering the market all the time.

They know who their customers are, and -- more importantly -- who's not their customer.  Their value proposition tends to be narrow, focused and differentiated, so their offers tend to be difficult to commoditize, even by the most skilled procurement department.

In essence, they're selling their industry expertise in one form or another.  And that's valuable stuff.  People are paying for the end result, and not the underlying plumbing.  It can be a beautiful thing.

I think these folks are in an opportunity-rich situation.  Not only can they continue to enhance and enrich their unique application offerings, but they can extend downward and start offering ancillary IT services -- against the same IT infrastructure -- that enables them to get more spend (and stickier relationships) from their clients.

Let's face it -- if you trust service provider X with your core business applications, wouldn't you tend to trust them with other aspects of your IT landscape?  And whether those ancillary IT services are provided by the vertical service provider, or an affiliated partner, really doesn't matter all that much in the eyes of the customer.

On the other hand, I'm meeting horizontal-ish service providers who are starting to focus on one or two core verticals -- just to improve the efficiency of their sales model.  Most people in a given industry tend to have the same sorts of concerns and needs. 

Learn how to solve that for one industry-specific customer, the next one is that much easier.

Stepping Back A Bit

There's more to be said, but I think I'm going to save it for later.

If we conceptualize this next-gen IT-as-a-service provider, running on pooled and virtualized infrastructure, and learning how to exploit the variability in IT requirements, a couple of things are pretty clear.

First, there's plenty of opportunity for everyone.  The more I look, the more I see.  And it shows no sign of stopping.  Call it "cloud" if you must :-)

Second, everyone has access to basically the same sets of resources: technology, people, data centers, etc.

The winners -- at least at this early stage -- seem to be the players that have solved the go-to-market problem, and are working on carving out a unique niche for themselves, rather than trying to be all things to all people.

Just another reason why I like this space so much :-)

 

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