Last month, Livingstone and private equity house Lyceum Capital gathered the senior executives of 14 leading IT services players from across the UK, for a discussion of the issues facing the industry.
Around the table at Morton’s private members’ club in London’s Berkeley Square, and under the Chatham House rule, the group explored some of the trends, opportunities and challenges in the space, including:
I don’t know what I want, but I want it now
Clients are demonstrating a huge and almost universal desire for change (even if their IT departments don’t like it), but they have little understanding of:
- the best way to implement change;
- what should be changed; or
- even where they are currently.
One attendee described a call he had taken from a prospective client, who explained that he currently had 26,000 servers – “we know where 18,000 of them are, and there are 8,000 we think we have but we don’t know where.”
While the technology and service levels will always be key, enabling genuine change must involve the people within the organisation, including the IT department. Unfortunately, many clients have the wrong skills and in the wrong places, and there may be vested interests resisting change. (IT departments reminded him of “Turkeys and Christmas,” commented one attendee.) This creates a huge opportunity for astute providers, and it will probably take five years for clients to catch up and for CTOs to begin to see themselves as providing IT as a service to their own organisations. In the meantime, providers need to adapt to the disaggregation of buying authority within clients, and target the marketing and finance functions as well as the IT department.
The nature of client demand is also changing, and is often influenced by trends from consumer IT. One attendee described a client CEO asking why his IT infrastructure can’t be instantly and simply upgraded the way his wife’s iPad is.
But this increase in expectation is not matched by a willingness to pay. The perception that cloud = cheap makes it harder to justify premium pricing, even for the most complicated parts of a project or implementation. The client mindset has shifted to one of low cost/high value. This is not helped by AWS announcing another recent price reduction – its 47th – for its hosting services.
Drivers of Client Demand
So how can you get clients to pay? The real drivers of decision-making, and hence value, are the application need, the cost, and the functionality.
But if you can demonstrate that you will increase client revenue (rather than decreasing cost), price is not important. Enabling the top line is key to unlocking budget.
Seeing Clearly in the Cloud – Radical Transparency Infrastructure as a Commodity
Inevitably, the group spent a lot of time discussing the Cloud in its different aspects and different opportunities, as well as challenges.
As one CEO explained, the commoditisation of infrastructure implied by the cloud leaves nowhere to hide: AWS’s pricing is publicised, and covers the infrastructure only. In effect, Amazon sets the market price for infrastructure, and other providers can no longer hide costs in opaque pricing packages or cross-subsidise services with elevated infrastructure charges.
Go Big, Go Niche or Go Home
How can independent players respond to this commoditisation pressure? One attendee laid it out pretty starkly: “go big, or go niche.” Another identified vertical specialism as a distinct source of differentiation and value. A third suggested that traditional resellers might “find cloud pretty terrifying,” as it erodes the historic model (on premise license sale with 50% margin, ongoing support contract with renewals/upgrades etc.).
This led the group on to a discussion of the changes in the channel. Resellers have benefited from their large vendors – one attendee described it as “standing on the shoulders of giants” – but a number cited an increasing concern about vendors going direct, asking how a partner or reseller can maintain a client’s perception of value-add in this context. Fortunately, the low levels of service most vendors provide will continue to work against them.
Vendors are changing their strategies to make use of Cloud, and will adapt their go-to-market models. They’ve seen margins drop, and have managed to claw some of that back through realignment of the channel, but the big vendors are having to finance changing business models.
There was a widespread perception that vendors are trying deliberately to slow down migration to the cloud in order to buy time for their own business model transition. One attendee stated it baldly: “the hybrid cloud is pointless. It’s only purpose is to allow vendors to slow down the cloud transition to protect their own business, and to create work for integrators who make money out of complexity and are needed by clients to stitch it all together.”
(This discussion did open up one interesting area of opportunity – the disaggregation of the stack, and the role of an independent who can help a client to procure and integrate different towers of services, providing a service integration and management layer which sits atop the individual towers in the stack.)
Back to the Cloud
While they didn’t see hybrid cloud as a meaningful term, the attendees agreed that in practice most clients with any complexity of requirement will use different forms of infrastructure to satisfy different needs within their organisation. In the same way, the debate around public vs. private cloud has lost a lot of validity, too – as one attendee said, “it’s all essentially private cloud – it’s people who will provide infrastructure on demand very quickly.” Similarly, the migration from on-premise deployments to colo can be seen as the first client step towards the cloud. The old divisions (public/private, hosted/colo) are just points on a continuum – the optimal solution will depend on the client’s specific needs and workflow.
M&A – buy it or build it?
The attendees agreed that M&A offers an exciting route for growth (as well as a potential exit) and discussed at length the right way to execute a buy-and-build strategy. One put forward the view that the value extracted from an acquisition will depend fundamentally on the revenue synergies, the cross-sell – so you need to ensure you have alignment of both client base and service lines.
Another pointed out the difficulty of extracting cost synergies, explaining that he had not taken out a single £1 in cost synergy from multiple recent acquisitions – in fact he had increased overheads to strengthen the weak finance and other admin functions in the businesses he had acquired. “But,” he added, “the revenue synergies have been brilliant.”
Another highlighted the potential disruption a founder can cause if he has been bought out but is still within the organisation. Get them out, quickly, was the advice. Unless there is an earnout, we’d expect this to be music to any vendor’s ears!
Nigel Beighton, VP of Technology & Product, International, Rackspace
Ian Caswell, CEO, Sapphire Systems
Mark Collins, MD Oni
Edward Cook, CEO, AVM Impact
Tom Fletcher, Head of Technology, CIL
Simon Hansford, CEO, Skyscape Cloud Services
Justin Keatinge, CEO, Version1
Wayne Martin, CEO, GCI
Dom Monkhouse, Non-Executive Director, Novosco
Pontus Noren, Co-founder & Director, Cloudreach
Peter Sweetbaum, CEO, IT Lab
Mark J. Vargo, CTO, Blackhawk Capital