IT vendors should integrate software, hardware to grow revenue

Amid shifting focus toward software and services as hardware margins fall, industry observers say IT vendors need to offer integration across all product offerings to differentiate themselves.
Written by Liau Yun Qing, Contributor

With the commoditization of hardware, IT vendors are increasingly turning to software and services to generate revenues, say market observers, who also dish out advice on how to sustain the hardware business.

Hewlett-Packard last month announced plans to offload its PC business, despite being the leading global PC vendor, to focus on its enterprise software and services business. Even consumer electronics giant Samsung was reported to be looking to boost its software capabilities through acquisitions.

In an e-mail interview with ZDNet Asia, Tom Kucharvy, CEO of California-based Beyond IT, noted that the shift in focus from hardware to software and service had already been "well in place" with IBM leading the way in this transition when it sold its PC business in 2004. Similarly, Dell began focusing on its enterprise business, he added.

In an e-mail to ZDNet Asia, Ludmila Berkesova who is program manager at Technavio, noted that while HP only recently talked about exiting the hardware business, the "seeds were planted in 2008" when it acquired EDS to gain a bigger share of the IT services market.

"While we can't call that move spectacularly successful, it was good enough for HP to think of changing their business model with a higher focus on the services part of the business," Berkesova added.

He noted that software and services were more lucrative businesses in both the short and long term when compared with hardware.

"If you look at any major corporations' IT budget, you will find that spend on software and services is actually higher than pure hardware spend. It is also a significantly higher margin business," he said.

"Low margins, higher labor costs, increasing local and global competition, and availability of low-cost hardware are all making this business difficult to run profitably," he added.

Phil Hassey, founder of Australia-based CapioIT, noted that hardware also requires services to integrate. He added that it is simply a business that vendors prefer to keep as part of their revenue stream, rather than risk letting a third party benefit from it.

Beau Skonieczny, research analyst of computing practice at Technology Business Research (TBR), explained why software and services are margin accretive businesses. Software is build-once and sell-to-many, and services is able to capitalize on higher-end consulting services as well as lower-cost outsourcing and tech support services to expand margins, he said.

Kucharvy added that software and services were "more sticky" as customers would find it more difficult to switch between software or services vendors.

According to Skonieczny, the evolution of cloud will gradually dissipate the need for large-scale, in-house data storage and servers, and purchasing decisions will be less focused around hardware capabilities. Here, software and services will be key in supporting the added scalability of cloud implementations, he said.

Keeping hardware sustainable
With the commoditization of hardware, Hassey noted that it was increasingly difficult to keep this business segment sustainable. That said, he added that hardware products were still needed in the market.

Hence, IT vendors would need an "absolute razor-sharp focus" on cost as well as a commitment to innovation that delivered increased value for customers, instead of innovating just for the product's sake, he said.

Technavio's Berkesova concurred, adding that market players would need to carefully monitor and manage their internal supply chain.

"Sourcing of components to ensure quality while keeping costs down, will be paramount in keeping the business viable. In a volume business such as hardware, it is very easy to see sourcing costs spiral up in short order," he said.

According to Beyond IT's Kucharvy, the "easiest" way for vendors to have a sustainable hardware business was through delivering a proprietary hardware platform that provided unique capabilities, and a proprietary architecture that locked in customers through software or locked out competitors through brand loyalty.

While most proprietary systems have disappeared from the market, he pointed to IBM zSeries servers and the Apple Macintosh, iPhone and iPad as example of "most sustainable and profitable" proprietary product lines.

He added that while Cisco Systems had a similar lock, its position was being eroded by more aggressively priced competitors.

A more difficult route vendors, touting industry-standard platforms, can take is to have "such a large volume advantage and economies of scale" that they are always able to sell at lower pricepoints than their competitors, Kucharvy said.

However, selling hardware alone might not be enough.

According to Hassey, vendors will need to bundle products and services, and ensure they develop intellectual property (IP) that can be reapplied across different offerings and that can provide competitive advantage. He pointed to IBM's achivements in the analytics space and HP's success in the data center space, as examples.

TBR's Skonieczny agreed: "Integrated solutions are the main ingredient to keeping hardware afloat. By owning the core IP behind software, services and hardware offerings, vendors are better positioned to establish more efficient and cost-effective ways to integrate the solutions with one another."

"Developing a cohesive portfolio across software, services and hardware will help strengthen vendors' offerings and promote pre-packaged solutions," he added.

While interoperable systems might put pressure on a company's hardware business as customers would find it easier to integrate products from different vendors, Skonieczny noted that packaged product pricing by large vendors such as HP and Cisco, that have larger scale and "end-to-end" products, could help promote hardware purchases and create a sustainable hardware business.

Enterprise lesson from Apple's success
For IT vendors, Skonieczny noted that owning the entire software, services and hardware stack is an important piece of the enterprise IT puzzle.

Pointing to Apple's lead in the consumer space as an example, he said Cupertino's success was supported by its closely knit products, software and services, which each had clearly defined focus areas and the ability to execute well on that focus in a streamlined manner.

Such a strategy could translate over to the enterprise space with success, but the key differentiator would be organic versus inorganic growth, Skonieczny said. Apple's innovations were built with minimal help from acquisitions which was one of the reasons why it had been able to maintain more product fluidity and closer integration of hardware, software and service, without needing to mix and match differing technologies, he said.

In comparison, other IT companies grew inorganically through acquisitions of disparate technologies and processes, he noted.

While it would be too late for many larger companies such as HP and Dell to build out an enterprise strategy similar to Apple's in the consumer space, he suggested these market players looked at deploying effective inorganic growth strategies within the software and services realms to differentiate their offerings from the competition.

Pointing to HP's acquisition of Autonomy, the TBR analyst noted that the purchase would "significantly bolster" the IT vendor's software expertise in managing unstructured data sets.

"While this is an excellent opportunity for HP from a strategic standpoint, the execution of Autonomy integration is another story," he said. "HP will need to find ways to integrate the data management capabilities into its existing enterprise portfolio, while building a more streamlined and cost-effective solution set for enterprise clients to utilize."

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