How VMWare And Cisco Might Bring The Nexgen Data Center Closer

Rumors of an alliance between Cisco and VMware have been swirling with varying levels of intensity for some time.

What’s the business problem that a potential alliance needs to address?

1) The most obvious one is that current VMware Distributed Resource Scheduling (DRS), Disaster Recovery (DR), and High Availability (HA) functionality built on core capabilities like VMotion are incomplete. It’s hard to move the Virtual Machine (VM) for spare capacity or to deal with downtime to any random server and maintain the connections to the same isolated data and storage area network (SAN). Instead, administrators either have to open up the network so any server can see any other server and any storage device, a security risk, or they have to manually remap the connections.

2) The less obvious and more speculative problem to be addressed is the management and automation of business services across resources and applications. It is still primitive, though the big 4, CA, BMC, HP Openview, and IBM Tivoli are all hard at work addressing this, and CIOs are looking for the provider of a strategic, new provider.

 

So what might VMware and Cisco do about these challenges?

 

1) As far as DRS, DR, HA – Cisco could enhance its Nexus 5000 switch to make it possible for VMware DR, HA software to move a collection of servers, related storage, and associated network connections to a backup site or to add additional capacity with no manual intervention. Adding the mobility to virtual connectivity would probably take some collaborative development between VMware and Cisco, building on Cisco’s existing technology. The Nexus 5000 already virtualizes the I/O between a server and the data and SAN networks. It takes one big Ethernet pipe from the server (2 for redundancy) and then delivers separate connectivity to data and SAN networks.  (Starts 3Leaf and Xsigo offer this functionality and supposedly Brocade is close behind).

 

Some have suggested that Cisco could go so far as adding VMware VMs to server blades in its switch. we think that’s unlikely because it would create instant enemies out of HP, IBM, and Dell and motivate them to elevate competitive offerings. We think a more plausible alternative is to tip toe up to the point of adding full server capabilities.

 

Given that enterprises are spending more on server I/O and storage than virtualized servers,Cisco may see a larger market opportunity as well as a collection of less threatening competitors.  Instead of invading traditional server territory, Cisco could potentially carve out much of the value add of the storage systems as possible to build on its dominance of connectivity.. Today, VMware DRS, DR and HA software works by orchestrating a workflow that involves software on the virtualized servers as well as software built into the storage system such as thin provisioning, snapshots, deduplication, and replication. It’s possible Cisco could build enough storage intelligence into its switch so that VMware can have it manage the storage intelligence such as snapshots and replication. In that scenario, the Cisco switch would treat the back-end storage as a dumb set of disk arrays and make multi-vendor storage systems much easier to manage.

 

2) On the management and automation front, VMware has big ambitions but little to show for them thus far. Cisco might be able to help there. VMware’s goal is to deliver the automation, reliability, and security of the mainframe to a data center full of commodity x86 servers. Cisco has a management and automation product called VFrame that has good functionality on paper but has experienced teething problems within Cisco. From what we’ve heard, Cisco’s own IT operation doesn’t run it and the sales force never warmed up to it. They appear to be more comfortable with selling big ticket infrastructure based on speeds and feeds instead of a business solution. Perhaps VMware can build on it and breathe new life into it.

 

Challenges ahead

 

Whatever happens, VMware has its work cut out for it. Microsoft appears to be aligning its significant systems management resources behind its hypervisor foundation.  Citrix has an enviable channel and installed base from which to upsell desktop virtualization. And even Red Hat has acquired a well-regarded, high-performance hypervisor. Meanwhile, the big 4 systems management vendors have been working on the management and automation of business services even while the virtualization revolution was brewing.

 

Economic Fallout From Virtualization In The Data Center

This is our first set of hypotheses about how virtualization is impacting each of the layers of the IT stack.  We will elaborate and refine them as we continue to collect insights from vendors and our upcoming survey of IT decision makers.

 

The Ultimate Objective

·         It’s more than just the savings from server consolidation and more than just greater flexibility in managing planned (VMotion) and unplanned downtime (disaster recovery, high availability)

·         Ultimately, it’s about automating the data center in order to make it easier for companies to deliver online business and consumer services.  The iconic example of an online service that complemented a traditional business was the Sabre travel reservation system born in the ‘60s.  It was based on purpose-built infrastructure that required intense collaboration between the customer, American Airlines, and the vendor, IBM.  More recent examples include Fedex package tracking or the familiar dot.com services from Amazon, eBay, and Google.  In order to make it easier for businesses to build or assemble end to end services from existing assets, technology vendors have to convert “assets” into “pools of services” using virtualization at every layer of the IT stack.

 

Looking at the IT Stack Layer by Layer

 

Servers: Steady Workload Expansion Suggests Near-Term Pricing Stability

·         Continuing consolidation of virtual workloads has created servers with more and more multi-core CPUs.  Whereas we’ve all heard of customers consolidating 10 workloads on a single server, we’re starting to see the intent to put 50 on a single server.  Although customers want to stay within the envelope of commodity x86 servers, this steady expansion of individual server capacity suggests prices and margins shouldn’t completely evaporate.  (Suppliers to public cloud vendors such as Microsoft or Yahoo or Google may find otherwise).  But with this capacity expansion trend comes new risks and bottlenecks.  For one, each server becomes too big to risk failure.

 

Storage: Accelerating Migration From Server Direct Attached Storage (DAS), Consolidation of Vendor Investments During Systems Refresh, Increasing Value of Storage System Software

·         Storage should see a bump in growth from the convergence of the above factors though ultimately “thin provisioning” of capacity on-demand to applications and data de-duplication should return growth rates to historical norms

·         With servers too big to risk failure, storage continues to be carved out and put on a NAS or SAN so that virtual machines can be easily migrated in the case of planned or unplanned server downtime while still pointing to persistent storage on the network.  Apparently, customers used to frequently have SAN or NAS environments segregated by application.  These are undergoing consolidation so that all the workloads or applications consolidating on fewer servers can all connect to one or a few pools of data. 

·         Customers also appear to be consolidating vendors to get closer to a single virtual pool of storage during this simultaneous refresh of the storage systems.

·         Increased spend on backup, disaster recovery, and high availability is causing additional value to shift to the storage systems for several reasons.  First, the number of workloads or applications considered mission critical or just important enough to ensure quick recovery continues to grow as it becomes easier and cheaper to deliver these capabilities.  Second, backup and recovery capabilities have moved off servers.  With so many workloads consolidating on them, this functionality is bottlenecking their operation.  By living on the storage network or the storage system itself, they operate where the data already lives without soaking up server CPU cycles.  Snapshots that get backed up off the storage system enable continual data protection.  Replication to a storage system at another site provides the foundation for high availability.  Data deduplication, however, prevents this profusion of data from growing geometrically.

 

 

Networks: Speed and Redundancy Driving a Refresh

·         With the extra load on the path between consolidated servers and each other and more networked storage, the pipes are getting clogged.  As a result, both appear to be in line for an upgrade.  The data networks are likely to move to 10GbE.  And the storage networks are likely to move to higher speed Fiber Channel over Ethernet or iSCSI.

·         The big unanswered question is whether customers will consolidate their data and storage network equipment vendors so that it will be easier to configure and manage end to end secure quality of service (QoS) bandwidth from spindle to server to client.

 

Operating Systems: Just Enough OS (JeOS) at Just Enough of a Price

·         In a virtual world, the server operating system becomes just a library of functionality that is part of a bigger container of functionality.  In other words, ISVs can deliver a ready to run virtual machine (VM) file that contains all the operating system, middleware, application, and specific configuration settings necessary to run the application by deploying the VM file as a virtual server. 

·         In this “appliance” scenario, the ISV distributes or determines the configuration settings for the supporting software so that only the minimum required capabilities are used.  Consequently, deployment of and pricing for any extraneous functionality is squeezed out.  Today this works with Linux, but Microsoft prohibits it for Windows.  We’ll see if they can maintain that position.

 

Server Software: Licensing More for Variable Usage

·         Until a few weeks ago all major vendors such as Oracle and Microsoft licensed their server software for “peak” usage.  In other words, customers paid for the maximum number of cores, CPUs, or servers their software would physically touch or run on.  In a virtualized data center, however, capacity fluctuates more with demand and certainly more fluidly for maintenance and high availability activities. 

·         In this more fluid environment, there is intense customer pressure to change the licensing model.  Just in the last few weeks Microsoft eased the licensing restrictions on its server software to accommodate deployment to virtual servers.  This is likely the first step for all vendors to an environment where software is licensed more according to its usage than according to the number of servers it is deployed on.  That would appear to be an effective price cut for customers.

 

Enterprise Applications: Lower TCO

·         Virtualization doesn’t seem likely to up-end the economics of enterprise applications.  But increasingly sophisticated management tools, starting with deployment, availability, and recovery, should help drive total cost of ownership (TCO) down to less burdensome levels.

 

Management and Automation: The New Data Center OS

·         One major new layer in the IT stack will emerge over the next few years.  Today we call it systems management, but it will go beyond the monitoring and management of traditional physical resource pools such as storage, servers, and networks.  Instead, we are likely to see a management platform that automates and orchestrates the delivery of resources from virtual pools of infrastructure to deliver business application services according to policies set in SLAs.

·         This layer is what Microsoft, IBM, and HP among others called utility computing early in the decade and what the public Web companies call cloud computing today.  For it to work, however, it appears that existing software will have to be modified to be more deeply aware of the connection between how it’s designed and how it’s deployed.  Like all major platform shifts, this will take time but create great value for its owner.  Microsoft and VMware are both focused on this layer but maybe we’ll see a dark horse such as Cisco emerge.

Death of the VAR in a SaaS World

In general, offline channels have not played a big role in SaaS GTM strategies. The early focus of business and infrastructure SaaS solutions has been on SMBs. SaaS delivery makes it economical to serve SMBs, and online channels make it economical to reach SMBs. As SaaS grows up though (see our earlier post), what role will offline sales channels, in particular VARs, be able to play?

We are very skeptical that VARs will be able to thrive and prosper in their current business model as SaaS adoption continues to gather momentum. The reason is that the TCO model that is promised by SaaS drastically reduces the revenue pool accessible to channel partners. (As we point out in our earlier post, the TCO model still needs to be proven in the long run.) In a June 2007 article, the McKinsey Quarterly compared the total cost of ownership (TCO) for a 200-seat CRM license as on-premise ($2.3m) vs. SaaS ($1.6m). More interesting though than the headline 28% reduction in TCO is the fact that the non-software revenue pool accessible to channel partners shrinks by 90%. Specifically, in this midmarket example, the $1.1m that is spend in the on-premise model for implementation, deployment and ongoing operations shrinks to a meager $106k in the SaaS world.

When, If Ever, Will SaaS Crack Core, Mission Critical Processes In The Enterprise

It’s no secret Software as a Service (SaaS) has generated tremendous excitement among many customers for its apparently transformational adoption model and ownership experience.  Unlike client-server applications, SaaS delivers faster time to value often via a viral buying cycle as well as lower risk deployment.  The early adopter focus has been on small and midsize businesses (SMBs) because SaaS makes it economical to reach them with broad penetration for the first time.  Where SaaS has carved out successes in large enterprises, it has largely been in more independent, non-mission critical departmental functions who have no capex budgets such as HR, CRM, or marketing, not end to end suites.  Despite the undoubted progress that SaaS is making, we believe the adoption of core, mission critical processes (Financials, order management, industry-specific processes such as manufacturing or securities processing) in large enterprises is still many years out for a variety of technical and business challenges.

SMBs have been the early SaaS suite adopters because traditional vendors couldn”t reach them

SMBs have been the low hanging fruit for early SaaS adoption because they’ve historically been underserved by application vendors.  Small deal sizes and bare bones cost of ownership requirements typically were critical stumbling blocks.  The small deal sizes mean vendors have to reach them with a much lower cost channel than direct sales.

Why Selling Search To Microsoft Would Damage Yahoo’s Core Display Ad Business

I was really intrigued by David Kirkpatrick’s last story on Microsoft and Yahoo in Fortune Magazine.
His key insight was about search market share creating a more liquid marketplace for advertisers.   Search market share drives up the demand for and value of keywords.  That’s why Google’s search ad revenue share is even greater than its search query market share.

But there’s one other thing that Microsoft doesn’t mention when it talks about purchasing just “search”: there really is synergy between search ads and display ads, which is where Yahoo gets the majority of its revenues.  It’s very hard to measure the value of display ads because they don’t surface when a user does something that shows their immediate intent (e.g. search for a lawnmower) - that’s why they can only charge for eyeballs/impressions while search engines can charge for clicks on keywords.

But everyone knows that those display ads create brand equity or other awareness that search ads ultimately get to monetize.  So all the major online vendors (MSFT, Yahoo, GOOG) who happen to have both major display ad networks (Google’s I think was built on Doubleclick) and search engines are planning to track what display ads users look at over time.  Then they will be able to correlate that with later search queries and search ad click-throughs.  In other words, they are finally going to start attributing more value to the display ads, which have never really been measurable.  But Microsoft has a plenty big display ad network so they just want to carve the search business from Yahoo.  And Yahoo is under such pressure to do a deal that they’re willing to sacrifice the future synergy of their search and display ad businesses.  Without search, they won’t be able to offer advertisers the same measurement capabilities as Microsoft and Google.  Their display ad pricing and revenues will suffer as a result.

They have been unable to articulate this synergy, or any other part of their strategy for that matter. It’s ironic, but they probably would be able to leverage that synergy with the Google search deal.  They also seem to be turning their internal platform for their properties into an Internet scale Web developer platform.  But they can’t even convince their top talent to give them some breathing room.  It’s game over.

Web 2.0 Turns The Enterprise Inside Out

A couple of good examples emerged from the Churchill Club session yesterday on “Succeeding with Web 2.0 within the Enterprise”:

• Serena Software is using Facebook as their corporate intranet and it now seems to be morphing into a sort of extranet. To overcome adoption challenges among its employee base, most of whom are ages 45 and over, Serena brought in a bunch of 16-year olds for Facebook Fridays. Serena’s SVP Marketing Rene Bonvanie claims 90% of employees are now using it. The primary benefit seems to be increased collaboration. Bonvanie says this makes it easy for both employees as well as customers to identify the right person for a specific question. Conversations have become more open and imbued with better knowledge. Thus, marketing and sales are losing some of their monopoly power as touch points with the outside world. In addition, knowing more about your previously face-less co-workers may also help increase a sense of common purpose at the workplace, states Bonvanie
• Best Buy’s Steve Bendt shared how their internally-focused ‘Blue Shirt Nation’ network helps generate recommendations that can increase store sales. Giving this online market place of ideas the look and feel of ESPN and online games was key to creating adoption among Best Buy’s young workforce, where turnover of 60% per year is the norm
• Paul Pedrazzi from Oracle shared how it’s internally-focused Oracle Connect and externally-focused Oracle Mix social networks do a great job of filtering content. One use case for Mix - once the traffic picks up more - is prioritizing customer needs and feature request prioritization. A common challenge is that product managers tend to overweigh feedback that is recent, local or comes from the largest customers - those who can afford to send their folks to Oracle’s executive briefing centers
• Shiv Singh from Avenue A / Razorfish shared how their own internal wiki, now used by 75% of employees, aims to increase internal information sharing. There is no silver bullet for overcoming employees’ tendency to ‘keep information close to their chests to impress their boss’. As you would expect, measures that can drive the right behavior range from executive sponsorship to making sharing fun to incorporating collaboration in the informal and formal reward and recognition systems

Marketing Strategies for a Recession

It is not uncommon for large enterprises to spend $300m or more per year just on marketing (e.g., $10bn in sales, 3% marketing budget). The bulk of that money is typically spent on lead generation (i.e., driving interest in the company’s products and services), vs. high level awareness. Is that money well spent? Three facts suggest not:

• Our own interviews with 100+ Sales & Marketing executives confirm that 85-90% of leads generated by Marketing are never followed up by Sales
• The average tenure of US enterprise CMOs is 18-24 months. CMOs are the C-level function with the highest turnover
• Third party studies (e.g., www.cmocouncil.org) regularly point to marketing performance optimization as a top 3 marketing pain point

When Applications Talk To Each Other Via SOA, What Happens To User-Based Pricing

Alphabet soup of evolving application design patterns: SOA, EDA, BPM

It’s clear that SaaS doesn’t represent a threat to client/server pricing.  Consider what SOA might represent. In case the terminology is new, here are the definitions first. Bear with the abstractions. To be technically correct, we have to include Event-Driven Architecture (EDA) and Business Process Management (BPM) technologies as well for customers to get the full value out of autonomous services communicating with each other with few users involved.

• In the case of enterprise applications, SOA means functionality in the form of business processes that are made up of services that communicate with each other’s interfaces by exchanging data. These interfaces might be implemented as Web services. The supplier electronically submitting an invoice to a customer is the relevant example here. 
• EDA allows services in an SOA to be more loosely coupled. They can communicate by publishing and subscribing to events without either side talking directly to the other. A retailer tracking delivery of goods to its distribution center via RFID would be an example here.
• BPM orchestrates services and includes users in a workflow where necessary to manage a complete process. A BPM agent for a supplier may be managing the order to cash process when a customer places an order that goes beyond their credit limit. The BPM agent may escalate this exception to the finance department as well as the sales account manager for resolution.

Why SaaS Isn’t The Real Threat To Enterprise Application Pricing

Whether subscriptions or perpetual licenses, it’s still about user-based pricing

Imagine for a moment that you are at IBM and a small supplier of components from the Far East has just submitted an invoice. It just shipped an order of printed circuit boards to IBM’s networking equipment division in upstate New York. IBM receives it and a clerk in its invoice processing department enters the invoice into its ERP system. Whether IBM bought a client/server or software-as-a-service (SaaS) ERP system doesn’t matter. The clerk has to fill out and navigate as many as 20 screens to enter the invoice so the purchase to payment process can move to the next step.

But go back to the distinction between client/server and SaaS applications. Conventional wisdom says that SaaS applications such as SalesForce.com and their subscription licenses represent a threat to the perpetual licenses and the business models of traditional client-server companies such as Oracle or SAP. Stretching payments out over multiple years, as SaaS does, makes it harder to show the profitability and growth that comes from the upfront payments of perpetual licenses. The reality is somewhat different. As many know, SaaS actually takes in significantly more revenue over the product’s lifecycle. But the pricing models have much more in common than their differences. They both charge based on the number of users accessing the application.

Roadmap to Improving IT Services Profitability

Pricing excellence can lift the profitability of services businesses by 300-500 basis points. Getting there requires a well-structured, multi-functional approach with strong executive sponsorship. The size of the prize though is well worth the pain.

CONTEXT

The Professional Services (PS) business at product-led enterprise technology vendors often fails to live up to its potential. Managed properly, PS can play a key role in enabling customer loyalty, deepening account relationships, and channeling insights from the frontline back into product development. At many vendors, though, the PS business falls short of delivering on these objectives and is plagued by low overall profitability.

This post lays out an approach to improving PS profitability which we have refined over the course of working closely with several Fortune 100 technology providers.

CHALLENGE

Managers in Professional Services businesses often focus on reported utilization, i.e., volume, as the primary driver of improving overall profitability, followed by a focus on structural labor cost (e.g., on-shore vs. off-shore mix). Compounding the profitability challenge, billable utilization is often affected by the need to remediate product quality issues in the field.

RESOLUTION

Pricing though can yield large potential for improving aggregate profitability but is often an undermanaged area, as it resides at the intersection of services product management (strategic pricing), the services field (tactical pricing) and services operations (enabling infrastructure).