Large IT company business models and the cloud


Earnings season arrived and I am wondering how long big companies can keep their current structures and business models . Size is not always an advantage – it can actually destroy the value of a company .

Big companies try to attack this problem by firing a lot of people . But I have hardly known a company that has succeeded much that way – only very few pull that off .

The problem with firing enmasse is that you have to use broad policies to determine who needs to go . When you fire 1000s of people – not only do you end up firing people who could have done wonders , you lose other good people who will leave because they feel they can do better elsewhere . Firing people lower down in the hierarchy rarely does any company any good. Those are the peeps who do actual work – and they are not usually the ones who made the decisions that turned bad and led to management needing to fire people . Micro corrections throughout the year are a whole lot better in my opinion than mass firing . But at large size and matrix organizations – you cannot optimize . I know that first hand – I have tried and failed , repeatedly .

Large IT companies that have HW and SW have a problem – HW becomes a leading indicator for software , when investors look at the whole company . So if HW declines now , market assumes software will suck pretty soon too . The worst part is if you also have services in the mix . Services trail both HW and SW . So for such companies – if they don’t stop bleeding for HW, market will probably punish them for a long time in future .

The move to cloud is what seem to screw up the larger companies . Cloud is a low margin business – which a large company doesn’t really want to be in . If they don’t do it – they will become obsolete . If they do it – it takes a large amount of time for market to absorb the shock of lesser top and bottom lines . Damned if you do and damned if you don’t . Essentially cloud economics seem to work only for companies who don’t do anything else but cloud business .

When companies solely depend on EPS as a way to set goals for investors – they just lock themselves in jail and throw the key away . To beef up EPS, you can only do three things . Make more revenue , spend less cost and buy back shares . You can’t make more money in cloud – it’s commodity business compared to legacy revenue streams . Your marketing and data center and retraining costs will make sure you can’t spend less . So the only way they can survive is by buying back shares aggressively . That is money they can’t invest back in business. As soon as investors see it – they punish the stock . It’s kind of funny in a sad and weird way how this tactic seems to boomerang

So how exactly do they come out of this vicious cycle ?

I think the sustainable way is to sell off low margin businesses as stand alone entities and double down on what you know best . And if that doesn’t work – then split the company into smaller entities that don’t have to bear huge over heads because of checkers and double checkers . I don’t think any big IT company board is ready to do anything that drastic . They can try to innovate their way to glory – except it is very rare for innovations to scale to an extent that it compensates for the drag caused by deteriorating legacy businesses .

So I guess I will just keep wondering what will happen to all these goliaths . Is there a silver bullet somewhere ? A lot of people I care for work in those places and for their sake , I hope good things happen to those companies

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8 thoughts on “Large IT company business models and the cloud

  1. Reblogged this on Thoughts, Theories, Facts, and Notions and commented:
    Vijay,

    I agree with your overall analysis that Cloud is changing business serving up cloud as IaaS is low margin business, but I also agree with @Jeff that selling the best business practice will succeed. To your point, the internal practice of the business only has to be “good enough” to succeed. Great business practices don’t ensure success any more than not so go ones failure. Abysmal business practices will sink even the best business.

    I’ll also remind you I heard the same cries with “host to client/server”, “brick & mortar to e-business”, “coding to SOA”, and now “cloud”. I agree it is substantial and opens a world of opportunities. I don’t think wholes RIFs do anything but find the CEO and CFO a quarter worth of cash with longer term implications. What I do believe is change will always happen and businesses have 3 options: 1) Move (get out, sell off, etc.), 2) adapt (use the change to advantage), or 3) Die. Lack of decision and action is electing #3 and will never work in an ever changing environment.

    SAP will adapt, it just may not have big salesforce and sell differently, because of the value in the optimized business processes. IBM will adapt, but may not have HW business and will learn to sell value on top of the cloud and not just the base cloud (IaaS) plus move most of its SW business to cloud like bluemix (http://www-01.ibm.com/software/ebusiness/jstart/bluemix/).

    BTW, love to see what you think of the increase of the outside in programmer over the inside out programmer (traditional IT).

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  2. There was a report from Deloitte/Monitor recently about the futility of cost cutting in business – cost reductions either fail, or costs bounce back, or cost cutting weakens company (wish I could find it again 🙂 )

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  3. An important point that is missing here, regardless of whether an IT company is large or small: Fact is that it’s really tough to sell a platform. What does sell is business solutions. The guys who have the best business processes are going to be winners.

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    • Let me give some contrary data points
      1. Oracle sells more database and technology platforms despite having an apps business. Same with IBM
      2. SAP which has been an app business primarily, and IBM which is a platform business primarily are both suffering from move to cloud

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  4. Hello Vijay,

    I have been following your blogs from SCN. I am a BW consultant and started following you on and off from the SCN blog titled ‘BI and ESA driven approach to SAP implementation’. You are an inspiration. Please don’t stop writing such articles. Thank you for all the good things you have given through your blogs.

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