Author Archive

Blog ported to new platform

February 12, 2009

We have ported our blog to a new platform and new brand. You can follow our work on

The new blog contains highlights from our most recent report Ripple Effects from Virtualization. Please check out our new blog location to read about how server virtualization will disrupt the storage, database, and middleware markets while creating large new opportunities in business continuity and cloud computing.

The report is based on feedback by 200 IT customers on vendors like VMWare, Citrix, Microsoft, Oracle, IBM, Symantec, CA, BMC, NetApp, EMC, DELL, and HP, and is also available here.


Controversy over Cloud Adoption and Economics

October 24, 2008

The Economist came out with an excellent special in its Oct 25 edition entitled ‘A Survey of Corporate IT’.  A series of articles explore the future of cloud computing.

The public’s excitement though around cloud computing overrates what is happening and under-estimates the dramatic impact that internal and external clouds will have in the medium term.

Hopes too high on pace of adoption

Our own research with customers indicates that businesses are slow to adopt the public cloud (outside of SaaS of course).  Top concerns are data protection (security, privacy) and lock-in to one cloud provider (lack of standards).  Early enterprise adopters are those with spiky traffic (e.g., media and entertainment) where the cloud provides low baseline cost with infinite scalability.

Our survey also indicates that enterprises are building private internal ‘clouds’ right now which are enabled through virtualization (see prior post just below).

We have heard repeatedly that joining these with external clouds is a few years out, though we are encourged that it’s on VMWare’s roadmap.

Profound impact on IT industry not well understood

Mark Stahlman of Gartner is quoted in the article that “hardware always wins when new demand for computing is uncovered.”  While we agree that lower cost and complexity will drive new applications for computing, we see significant disruption to the IT industry as we know it once cloud computing gathers pace:

  1. Server and storage vendors will face lower margins and a period of lower growth.  Customers move from ‘just in case’ forward buying to a ‘just in time’ capacity on tap model, which is a roadblock to unit growth.  Moreover, concentration of buying power in the hands of a handful of big clouds is a negative for margins, witness the recent Amazon – EMC deal.  We are not confident that the extra demand which Stahlman sees will compensate for that fairly tangible downside
  2. Cloud technologies in the enterprise, growing out of virtualization and service-oriented management, promise at least an order of magnitude greater administrative productivity.  Today, one IT administrator typically manages 20-30 physical servers.  By contrast, these emerging private clouds can manage far more sophisticated and scalable application services without growing staff.  At the extreme, public clouds like Microsoft’s and Google’s leverage one administrator across several thousand servers.
  3. Cloud computing will not provide material profit upside for the providers of large clouds anytime soon (e.g., Microsoft, Google, Amazon.  Rackspace is the only pure-play in the group.)  Cloud provision will be a commodity business except for niche clouds, e.g., ‘high security’ for regulated industries or government customers where you need to prove or restrict the physical location of the data
  4. While Windows may appear to be consigned to the history books today, Microsoft will attempt to change that with its announcements at the Professional Developer Conference next week.  We expect them to create a new set of tightly integrated online services that resemble Tim O’Reilly’s much talked about Internet Operating System.  It is likely to deliver not only dramatically higher administrative productivity for their internal operations, but dramatically higher developer productivity than any of the competing cloud platforms.  Microsoft shouldn’t be counted out yet.
Here’s a view of one of the seven Economist articles, contrasting our view with those of others on the topic.  I encourage our readers to check out the full special report at newstands or online (subscribers only).

Is VMware’s Hyper-Growth Phase Over?

October 19, 2008

VMWare’s Opportunity to Expand Into and Potentially Disrupt Adjacent Markets

By George Gilbert and Juergen Urbanski

We’ve talked to a fair number of VMware customers and investors over the past few weeks.  In the process, we’ve repeatedly been asked whether VMWare is done with its phase of hyper-growth.  While it isn’t likely to grow anywhere near triple digits again, it is likely to grow into a strategic platform provider for both data centers and desktops, though this will require solid execution in a tough macro environment.  Its opportunity comes from its chance to both expand and disrupt a series of large adjacent markets.  The ripple effects of this sea change in computing will also affect many markets which VMware has no plans to compete in, though that will be fodder for future posts.  (Disclosure: the authors own shares in VMware)

VMware’s biggest near-term challenge is that it over-sold both units and high levels of functionality with their enterprise license agreements.  These ELA’s were an attempt to encourage customers to deploy more virtual servers with richer functionality ahead of Microsoft’s entry into the market this past summer.  While this may have had some success in making adoption of Microsoft technology more challenging in some accounts, it has actually had unintended side effects.  It left VMware competing with its own inventory of licenses already on the shelves of its customers.  While VMWare works its way out of that near-term hole, some have lost sight of the bigger picture opportunity.


Death of the VAR in a SaaS World

August 20, 2008

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.


Web 2.0 Turns The Enterprise Inside Out

June 18, 2008

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

June 16, 2008

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., regularly point to marketing performance optimization as a top 3 marketing pain point


Roadmap to Improving IT Services Profitability

June 11, 2008

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.


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.


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.


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).


HP – EDS: A good deal, actually

May 29, 2008

Is the EDS deal bad for HP shareholders? The market’s initial reaction suggests so, with HP losing several billion dollars in market cap because the deal introduces operational risk to what has been a remarkable turnaround / margin expansion story for HP investors.

A more in-depth look though at the likely strategic rationale, potential alternative targets and possible financial rationale leads us to conclude that the deal may not be so bad if you take a longer term perspective.