Cloud continues its devastating rearrangement of the technology marketplace. As legacy vendors struggle to compete many deck chairs are getting moved about – some pretty spectacularly. In the meantime, the boat is still sinking.
We have seen how SaaS (Software as a Service) is tearing up traditional software firms who must adapt or perish. Computer hardware companies are also in true peril. When customers move to public cloud IaaS (Infrastructure as a Service) they no longer buy hardware. Worse yet, the cloud service providers don’t buy it from them either. They have equipment built for them, to their specifications, right down to the chip sets.
Likewise, one by one, the big IT Outsourcing houses that used legacy hardware and software are winking out, too. They used to be giants straddling across the global landscape. Now, they only get mentioned in news releases with so much spin on them it’s embarrassing: EDS, ACS, Perot Systems, and of course – IBM.
Everywhere you look you see the old ITO (Information Technology Outsourcing) model that sold the concept of “your mess for less” disappearing. They offered beleaguered CXO’s relief from the worry and hassle of running IT with the promise of reduced IT expenses. The outsourcers’ could do this through scale in operations and purchasing, plus squeezing labor costs through juniorization and off shore labor arbitrage.
And they were valuable, or at least seemed to be at the time. HP bought EDS in 2008 for almost $13.9 Billion. Xerox Acquired ACS in 2009 for $6.4 Billion. Also in 2009, Dell acquired Perot for $3.9 Billion. In 2008 IBM had a record year and it’s Strategic Outsourcing signings were up 20% worldwide and 44% in North America. There didn’t seem to be any clouds on the horizon (pun intended). After all, Amazon Web Services was just two years old in 2008 and just a blip.
Fast forward to today. Oh, and you might need a scorecard to keep track of the dizzying rearrangement of deck chairs. Just the other day – HP Enterprises, the technology half of the old, venerable HP – announced that it was spinning off its troubled services business, which includes what is left of EDS to CSC. Ironically, HP and CSC are calling the resulting entity “Spinco” for now. (I swear I did not make that up!) Of course, it is wonderful win-win for both sides and reflects great management insight. Well, at least they got a bump in their stock prices.
HP itself split up into two companies just the year before. (Pre-split HP had written down the value of EDS by $8 Billion just four years after purchasing it.) And, CSC also split itself up into two companies during the same time. Seems pretty straightforward, right? But as they say wait there is more! Xerox sold ACS to Atos, a French company, for a little over $1 Billion. Recall, Xerox paid $6.4 Billion for ACS. And, after a few months after the sale was revealed, Xerox announced that it too was splitting into two companies. Let’s summarize: HP, Xerox and CSC each split themselves into two parts and then shuffled some of the pieces among themselves or sold them.
Dell, who went private in 2013, and agreed in 2015 to merge with the legacy storage provider EMC (more deck chairs), recently said it would sell Perot Systems to NTT. At least it appears Dell only lost $800 million on that one – still, that is 20%. And IBM, what can we say about IBM? Big Blue isn’t so big anymore. It recently posted a 14-year low in quarterly sales. Besides nobody wanting their hardware or software anymore, a key contributor to this decline is Global Services (which includes outsourcing) where the backlog is shrinking (Translation: No New Sales).
How did this meltdown take place in such a short time? Cloud is a dagger to the heart of the ITO value proposition. Remember this was: reduce management hassle and save money through scale and cost cutting. But you still got your mess, just for less. Cloud brings a scale and efficiency to operations that not even the largest outsourcers could meet because its operating model is so different.
Cloud assumes machines will fail and therefore they should be cheap, run very efficiently and use very little labor. Management hassle is non-existent. Software manages the machines and applications automatically move to another healthy machine if one fails. There are no repairs. They just throw them out. All of this means there are very few people. All the labor arbitrage in the world does not help you when the competition is at, or near zero.
But where the clouds value really kills the legacy outsourcing model is its flexibility and agility. Remember in the legacy model? It’s still your mess. All the laments about IT departments being too slow are still true with ITO. With cloud there is no wait to order and install machines. They are already there waiting for someone to use them. The beauty of it is you don’t pay for them until you actually use them and you stop paying when you shut them off. That kind of flexibility means you can be faster to market with new products, functions and features. Cloud does everything ITO tried to do but then goes one better.
Software, hardware, outsourcing are all being beaten up pretty bad – what do you think will be next? It’s seems obvious that cloud would be doing this in the high tech arena but the impact of cloud is much more far reaching than there. Look for restructuring and M&A activity. Often time there are cloud powered invaders shaking things up. Your industry isn’t rearranging deck chairs is it?