A Roadmap for Technology Oems Turning Demand for Services Into a Strategic Opportunity

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A Roadmap for Technology OEMs Turning Demand for Services into a Strategic Opportunity

Sponsored by SPONSOR PERSPECTIVE

The road to business transformation can be a bumpy one, with unexpected detours and volatile conditions that can slow you down. For technology companies, these challenges are exacerbated by their need to aggressively adopt digital transformation (DX) internally while simultaneously adapting their solution portfolio to enable their customers’ DX journeys. The need for speed is becoming more pronounced as time goes on, potholes and roadblocks notwithstanding.

Traditional IT is giving way to flexible “as-a-service” solutions at a rapidly accelerating pace. Leading technology research firm IDC predicts that the ability of enterprises to rapidly develop their own digital innovations will become a core Eileen Gibson competitive requirement by 2023, as more than half of the worldwide economy Vice President, Market will be digitally driven.1 Many companies are moving even faster. The CEO of Management and Strategy Hewlett Packard Enterprise (HPE), Antonio Neri, publicly pledged to deliver the Tech Data Global Lifecycle full HPE portfolio as a service by 2022. However, the Technology Services Industry Management Association reports that the transformation period for most tech companies is greater than five years2—and some have only recently started, suggesting that the pace of change is happening faster in the market than it is internally for many technology firms.

Navigating the inverse relationships between cost and revenue in the transition from traditional to digital delivery models is difficult at best. It requires stalwart executive commitment, deft management of stakeholder expectations, and substantial finesse in deploying the optimal mix of resources—both capital and human. And all this should come without sacrificing quality and availability of legacy support.

Nearly every technology company is using a blend of build, buy, and partner strategies for their unique journey. They are assessing what they are uniquely qualified to do and filling portfolio gaps with acquisitions and alliances. Business processes that don’t advance or accelerate the future state are high on the list for partnering or outsourcing, which enable tech firms to mitigate exit barriers from their legacy business while releasing capital from operations to increment investment and accelerate transformation.

Tech Data Global Lifecycle Management has sponsored research with Harvard Business Review Analytic Services to examine how technology vendors are judiciously shedding legacy operations in the context of their need for speed on the road to the as-a-service world and digital transformation. Through interviews with industry experts and customers, this white paper encourages you to consider the accelerated transformation and extensive benefits that come with simplifying your business operations—while also expanding your reach—through purposeful partnerships.

Transformation is inevitable, and it’s time to put the pedal to the metal and reach your destination faster. We invite you to read on and think again about your journey and how the right strategic, global partnerships can help get you there.

Sources: 1 IDC, “Every Enterprise Is Becoming a Digital Innovation Factory,” January 2020, https://blogs.idc. com/2020/01/17/every-enterprise-is-becoming-a-digital-innovation-factory/. 2 Technology Services Industry Association, Technology & Services World conference 2019, Las Vegas, Nev., October 2019. A Roadmap for Technology OEMs Turning Demand for Services into a Strategic Opportunity

It’s no secret that companies across most business HIGHLIGHTS sectors have had to rethink—and in some cases, rip up—their business models in order to battle traditional competitors and digital insurgents. The retail industry Original equipment manufacturers (OEMs) in the technology sector is redesigning brick-and-mortar operations while are struggling to invest in growing it innovates its online presence. Manufacturers of everything-as-a-service markets while simultaneously supporting industrial equipment are transitioning from just selling their declining hardware and the latest systems to providing preventive maintenance software businesses. services managed by monitors that analyze equipment performance in real time. To succeed, OEMs must focus on three important areas: gaining new In recent years, technology original equipment manufacturers (OEMs) have insights into the services market, added themselves to the list of companies that must successfully navigate addressing financial and workforce challenges associated with dual- dual-mode businesses, and the pressure to succeed is intensifying. mode initiatives, and investigating These OEMs are seeing demand for their traditional products continue to be strategic partnerships for managing outstripped by growth in everything as a service, or XaaS. The “X” may refer products and customers. to computing power, storage capacity, or applications that the technology vendors deliver on demand from remote data centers. By delivering a steady stream of digital innovation, these companies have been instrumental in The lessons technology OEMs helping their customers transform their businesses and stay competitive are learning can provide a model in their respective markets. Now it’s the technology companies that must for other industries struggling redouble their efforts to reinvent their businesses by finding new ways to to balance old and new revenue simultaneously support customer service and service level agreements streams. (SLAs) for traditional and new revenue streams alike. In the process, OEMs must reevaluate all aspects of their operations to find optimizations that can liberate more capital for investments in their XaaS portfolios.

White Paper | A Roadmap for Technology OEMs Harvard Business Review Analytic Services 1 experienced growth in service revenues.1 And the Covid-19 pandemic appears to have added fuel to this trend, according to a new TSIA survey. All respondents to a survey conducted in April and May of 2020 say the Covid-19 crisis will accelerate Technology companies face business model transformations so that a greater percentage of revenues will come from XaaS offers. In another recent significant financial challenges as TSIA survey, less than a quarter (23%) of the respondents they launch or expand XaaS business anticipate that forecast bookings for recurring revenue lines while simultaneously trying to from XaaS business models will drop more than 10% due to the impact of Covid-19. This compares with more than sell hardware and software and meet half (56%) of executives who expect transactional revenue associated maintenance and repair from traditional business model bookings to decline by more commitments. than 10%. These numbers indicate that XaaS sales will not only grow faster in good economic times, but also be less vulnerable to large-scale market disruptions. One technology OEM experiencing these trends is Hewlett Packard Enterprise (HPE), an organization with a storied high- But finding extra cash isn’t easy. Technology companies tech past that began with two engineers working in a Palo Alto, face significant financial challenges as they launch or expand Calif., garage—and that helped spur the rise of Silicon Valley. XaaS business lines while simultaneously trying to sell Servers and other hardware still generate significant revenues hardware and software and meet associated maintenance for the company, but now XaaS is becoming the focus of its and repair commitments. That creates a difficult balancing act business model. “Everything as a service is critical to the for OEMs: the vendors must fund declining product business success of our go-to-market strategy,” says Greg Stafford, a lines while at the same time expanding their emerging service vice president at the company. offerings to achieve their profit potential. “[XaaS] gives customers a tremendous opportunity “Companies that launch these dual environments often to embrace digital transformation to differentiate their encounter conflicts that cost them financial performance,” businesses and grow revenues,” Stafford says. “To be says Glen Allmendinger, president of Harbor Research, a innovative at a very high speed, they need the freedom consulting firm for technology businesses. “Many companies to choose a combination of different technologies that fit we work with in this context eventually make more money their needs.” from services than with products, but their leadership had But moving to XaaS is more than just a way to support to understand that initially, at least, there was going to be a customers and give HPE a hedge against slowing revenues negative impact on finances.” in traditional product lines. It may also open new revenue The key is devising a strategy for overcoming these streams by helping customers quickly adopt emerging problems and accessing the resources technology OEMs technology, such as artificial intelligence and the internet need to turn XaaS into a solid and growing revenue stream. of things, to support business transformation strategies. In Technology firms are finding answers by focusing on three a study by the management consulting firm Deloitte, 40% of important areas: developing deeper insights into the services the respondents said their prime objective for adopting XaaS market, identifying the financial and workforce challenges is to gain access to the newest technology, while 37% named associated with dual-mode initiatives, and investigating accelerated innovation as the top catalyst.2 It’s no wonder strategic partnerships for managing products and customers then that other technology OEMs, including not only HPE, for both business lines. but also Adobe, Cisco, IBM, and Microsoft, are doubling down The lessons technology OEMs are learning can provide a on services or moving exclusively to that model. model for executives in other industries as they struggle to balance old and new revenue streams. OEMs Face Multiple Financial and Workforce Challenges Inside the Technology Market: The financial constraints mentioned earlier aren’t the only Why XaaS Sales Are Accelerating challenge OEMs face as they fight to succeed in the highly A survey by the Technology Service Industry Association competitive XaaS arena. They must also ensure that the (TSIA) found that nearly half (48%) of the 50 largest people selling and managing their XaaS contracts have technology providers have seen product revenues flatten or appropriate customer-engagement skills. With traditional decline in recent years, while 66% of those same companies transactional models, technology companies—and their

2 Harvard Business Review Analytic Services White Paper | A Roadmap for Technology OEMs reseller partners—invest a burst of resources at the start of the selling cycle when they work closely with customers to show how the technology supports the client’s business goals. XaaS engagements differ because they require a steady stream of resources after contracts are signed for staying engaged with customers to ensure they derive ongoing value [Moving to XaaS] may also open new from the service. revenue streams by helping customers Traditionally, OEMs focused on helping customers select and implement the right products and, later, refresh the quickly adopt emerging technology, installations when they reach the end of their useful life. such as artificial intelligence and the “Many OEMs don’t know much about what happens to their internet of things, to support business products in between in terms of how they’re being used and transformation strategies. challenges that may arise. For XaaS, many vendors may need to redesign the way they interact with customers to better understand the whole lifecycle of their products in terms of how customers interact with them,” Harbor Research’s Allmendinger says. getting the right team in place that speaks the language of the When OEMs stay connected throughout the product client and convinces [them] that you are the right provider lifecycle, they not only help customers get the most out of of the service,” says Bjoern Langmack, managing director of their purchases, but they also build a stronger brand presence the Application Modernization Studio at Deloitte Consulting. with their clients. “Customers have to be convinced that committing to a Efforts to redesign traditional models often require OEMs service doesn’t add risk or put their business in a dangerous to retrain a large portion of their existing workforce or find position. Then, as the complexity and sophistication of new talent with experience in services businesses. In addition, services increase, the level of trust by the client has to become OEMs will likely need to develop additional business processes even deeper.” that can scale globally across all geographical markets to serve Vendors with two business models—one for products and their full customer base. “Finding the resources to do those one for services—will struggle to gain trust if customers hear things is difficult when legacy revenues are dropping but different messages from two sales teams, he adds. new services revenues haven’t started growing significantly XaaS contracts require a consultative sales approach and yet,” says Thomas Lah, executive director and executive vice a willingness to discuss the merits of cloud services with not president of the TSIA. only CIOs, but also CEOs and CFOs. Profitable returns for OEMs hinge on cultivating satisfied customers who increase consumption, sign up for additional cloud capabilities, and Best Practices for Enhancing eventually renew their contracts. That means meeting XaaS Success regularly with customers to alert them to new services and The financial, customer-engagement, and resource pitfalls address any friction that could reduce the profit potential of threatening XaaS business models are tricky, but they’re not the contract or create churn opportunities for competitors. insurmountable. Technology OEMs can address them in four “It’s such a different type of discussion with customers that, interrelated ways: in some cases, companies will have to retrain their teams,” says Tim Herbert, senior vice president for research and Adjust to the differences in product and service market intelligence at the Computing Technology Industry revenue streams. Association (CompTIA). “And sometimes, it’s just too difficult OEMs must adjust their traditional financial models to cope for certain members of the staff to make the transition, and with the different cadence of XaaS revenues versus those companies will have to rebuild their teams to achieve the from product sales, which come in one up-front payment. right mindset.” Cash flow for XaaS, on the other hand, comes in installments over the life of an XaaS contract, and the size of the revenue Find the right timing for transitioning traditional stream grows or shrinks depending on how much of the customers from products to services. service each customer consumes over time. Technology firms must understand the market realities that impact the timing of XaaS rollouts and ultimately how long Deliver clear and coherent messaging to customers. it will take for that area to generate significant revenues. OEMs must assess how they’re positioned for the customer- For example, some large packaged-software vendors with engagement demands of XaaS. “Customer engagement means dominant positions in their markets have aggressively

White Paper | A Roadmap for Technology OEMs Harvard Business Review Analytic Services 3 XaaS contracts require a consultative sales approach and a willingness to discuss the merits of cloud services with not only CIOs, but also CEOs and CFOs. “It’s incumbent on OEMs to manage customer relationships end to end. There are many different areas to consider—new workflows, enablement models, and training requirements,” says Greg Stafford of HPE.

converted customers to XaaS users by setting end-of-support Product lifecycle management covers a range of activities, deadlines for traditional products. “These companies draw including installing software on servers and end-point a line in the sand to move relatively quickly to the new devices, shipping and installing products at customer model and avoid having to devote resources to both camps locations, and performing maintenance and repairs defined for long,” says TSIA’s Lah. by service agreements. When products become obsolete, But aggressive moves aren’t always an option for lifecycle management teams dispose of the items. technology companies with less clout or those in hotly Customer lifecycle management represents similarly contested markets where deadlines would cause customers to diverse functions, including market communications, bolt to competitors. Still, other markets, such as government managing reseller partners, working with customers to and education, are inherently conservative, and customers ensure the successful adoption and utilization of services, prefer to slowly adapt their IT and business systems to understanding how customer business requirements evolve change. In other cases, customers may have customized over time, promoting upselling opportunities, and providing their hardware and software to meet unique business training and certification courses for clients. “It’s incumbent requirements, which increases the time it takes to transition on OEMs to manage customer relationships end to end,” to XaaS environments. “OEMs who face these realities have HPE’s Stafford says. “There are many different areas to no choice but to move customers more slowly to services consider—new workflows, enablement models, and training and plan for those revenues to more gradually overtake their requirements.” product revenues,” Lah explains.

Reevaluate business partnerships to free resources The Value of Third-Party Lifecycle and update sales strategies. Management Partners Industry analysts and OEMs with successful service lines say XaaS may represent a growth area for technology OEMs, but many organizations will need to update and expand their most OEMs are hesitant about walking away from existing product and customer lifecycle management capabilities. legacy deals or future sales from those revenue streams. With the right lifecycle resources in place, technology “Many customers will continue to keep hardware and vendors can alleviate the resource strains of balancing two software on premises, and OEMs will still want to sell those lines of business and influence how customers ultimately deals when they come up,” says J.B. Wood, president and assess the value of their traditional and XaaS purchases. CEO of TSIA.

White Paper | A Roadmap for Technology OEMs Harvard Business Review Analytic Services 5 The right partner enables OEMs to release capital from existing operations by reducing investments in areas that are no longer central to their business strategies.

But supporting both the XaaS and legacy revenue streams, hardware and software purchases to providing technical engaging with customers in different ways, allocating training for clients and staying informed about new end- investments, and managing both types of product and user business requirements. customer lifecycles require significant financial and workforce To support all these services, a product lifecycle commitments. Because of that, some technology OEMs are management partner must have a broad network of staff and supplementing their resources with third-party providers of warehouses to serve end users across the globe. “Vendors can product and customer lifecycle management services. “Given provide a lot of customer support for traditional hardware that [legacy business] is a shrinking market opportunity, it and software through remote monitoring and maintenance may make sense to outsource pieces of it so OEMs can focus devices, but at some point, on-site service calls will inevitably on their new core business model,” Wood says. be necessary,” says CompTIA’s Herbert. “Timely and effective The right partner enables OEMs to release capital from local service capabilities are especially important for existing operations by reducing investments in areas that are no customers that require high availability for their on-premises longer central to their business strategies, such as maintaining IT systems. OEMs need resources to address any type of hardware inventories and managing supply chains. equipment issues in the field, and a [lifecycle] company For example, technology buyers throughout the world still can help do that.” use many billions of dollars’ worth of legacy hardware in their Another decision OEMs must make as they consider operations, with products representing trillions of dollars partners is whether to forge a strategic relationship with more still being purchased each year.3 Lifecycle management a single partner who can handle all aspects of product and partners can relieve the strain on OEMs who otherwise would customer lifecycle management, or whether the breadth have to fund large, global teams of professionals to optimize and scope of these services require multiple partners that supply chains and overcome the resource demands necessary specialize in certain lifecycle components. Considering the for managing them according to country-specific political, complexity and costs that come with managing multiple economic, and compliance requirements. Also costly for partners, Lah believes that less is more when it comes to OEMs is employing the required field technicians to provide these types of partnerships. “OEMs must focus on a smaller, maintenance and support for customers. Whether OEMs closer set of partners to free up the resources needed to use partners to bolster sales and customer experience support XaaS as well as traditional hardware and software efforts or to augment maintenance operations—or both— sales,” Lah says. these relationships can free funds and resources for more Wood echoes this reasoning. “Customers want to work with strategic endeavors, such as developing new XaaS offerings companies that can provide a unified, integrated experience with artificial intelligence or other emerging technologies. with a single point of accountability and responsibility,” he says. “OEMs that pick a partner for one area and another partner for another area must try to stitch them all together to Finding and Evaluating Potential create a seamless customer experience. That’s no easy task.” Lifecycle Management Partners OEMs have other factors to consider before they enter Product and customer lifecycle management partners can into a partnership for handling the product and customer have a significant impact on overall business performance, management aspects of IT product sales. They should also so OEMs must carefully consider the expertise and resources ensure that candidates align with their key markets from of candidates before entering into a formal partnership. geographical and industry-sector perspectives. A single The evaluation process starts with assessing the partner who has an expansive global reach further ensures completeness of a potential provider’s services portfolio, that the OEM won’t have to rely on multiple partners. including the strength of product lifecycle components that Financial strength is another important criterion. “These span everything from devices and software configuration are not short-term relationships—OEMs need to choose a to installation and maintenance services, product disposal, partner that is going to be around for a long time,” Wood and recycling capabilities. Customer lifecycle solutions says. “In part, that means feeling comfortable financially should range from maintaining and optimizing on-premises that the partner will be there for many years.”

6 Harvard Business Review Analytic Services White Paper | A Roadmap for Technology OEMs “Customers want to work with companies that can provide a unified, integrated experience with a single point of accountability and responsibility.”

J.B. Wood, president and CEO, TSIA In their push to develop viable, dual-mode transformation strategies that address both business lines, technology OEMs should prioritize adjusting to the differences in product and service revenue streams, developing clear and consistent messaging, and finding the right time for customers to transition from products to services.

Other selection factors include the partner’s ability to messaging, and finding the right time for customers to manage all of the multiple channels OEMs use for selling transition from products to services. products, from direct and indirect sales to retail and These OEMs should also expand their partner networks ecommerce outlets. by aligning with companies that have successful track records for managing product and customer lifecycles. The right partnerships will enable vendors to offload much Achieving Balance of the overhead required to service traditional customers As growth rates for XaaS continue to outstrip demand for and resellers to liberate resources for more strategic on-premises hardware and software, technology OEMs are XaaS endeavors. struggling to simultaneously manage these two business “Many OEMs are stuck trying to find the right balance in lines. Each requires significant financial and workforce the product and service offerings,” Lah says. “It’s early days resources at a time when revenues from traditional product and they have a lot on their plate, including rethinking how sales continue their rapid declines, and XaaS profits haven’t they view value in the context of XaaS. But if they can find yet reached their potential. a [product and customer lifecycle] partner they can trust to In their push to develop viable, dual-mode transformation help them reengineer their market strategy and customer- strategies that address both business lines, technology OEMs engagement models, they’re going to find themselves in a should prioritize adjusting to the differences in product and very attractive competitive position.” service revenue streams, developing clear and consistent

Endnotes

1 Dornsife, Nicole, “Tracking Performance Data from the Top Hardware, Software, Services, and Cloud Technology Companies,” The Technology Services Industry Association, June 13, 2019.

2 Deloitte Consulting, “Accelerating Agility with Xaas.”

3 Gartner, “Gartner Says Global IT Spending to Grow 3.7% in 2020,” October 23, 2019.

8 Harvard Business Review Analytic Services White Paper | A Roadmap for Technology OEMs ABOUT US

Harvard Business Review Analytic Services is an independent commercial research unit within Harvard Business Review Group, conducting research and comparative analysis on important management challenges and emerging business opportunities. Seeking to provide business intelligence and peer-group insight, each report is published based on the findings of original quantitative and/or qualitative research and analysis. Quantitative surveys are conducted with the HBR Advisory Council, HBR’s global research panel, and qualitative research is conducted with senior business executives and subject matter experts from within and beyond the Harvard Business Review author community. Email us at [email protected].

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