Widespread transition to services vexing electronics and high-tech firms

Tim Jellison, Accenture

USA: The rate of change in the electronics and high-tech industry is bordering on frenetic. In this high-speed environment, the industry is entering a critical strategic juncture where transformational changes are needed and will determine which ones achieve high performance--or fall out of the race-- during the next several years.

Until now, many traditional tech companies have risen to great heights making either hardware such as servers and routers, or software including computer operating systems and business applications. For several years the firms have used one business model or occasionally two by perhaps adding professional services to their hardware or software revenue engines along the way. But this limited number of business models is no longer a sustainable competitive strategy.

Many companies will need four or more business models to offer the flexibility customers are increasingly demanding. These business models should be, ideally, running effectively within the next two-to-three years. For a software company, this may mean offering traditional licensed software, software as a service (SaaS), integration of hardware and software into appliances, and, for some, an advertising model for certain customer segments.

Add to these a traditional people-based professional services business model and it’s easy to see the operational complexity a typical software company is either dealing with now or about to cope with to stay relevant and avoid obsolescence. The same is true for hardware companies.

Accenture addresses these issues in a recently released report titled “Where the Cloud Meets Reality: Operationally Enabling the Growth of New Business Models”

The magnitude of change, challenge and investment to make this happen is huge. Most companies are underestimating what an increase to four or more business models means in terms of operational complexity and additional strain on operations.

Operating models and capabilities of typical electronics and high-tech companies are already stretched to support the legacy business. Add to this the impending shift to “everything as a service” and many companies are far less prepared for this change than they need to be.

Fueling this market flux are a few sweeping changes. At the core is cloud computing. Virtually anywhere you turn in this industry, cloud computing is being discussed, analyzed, and built into strategic plans. Cloud computing can reduce information technology costs, increase business efficiencies, and enhance corporate innovation by using more agile systems and processes. For tech companies this means “products” will be delivered in new and different ways.

Key cloud offerings include SaaS, platform as a service (PaaS) and infrastructure as a service (IaaS). SaaS refers to software functionality delivered over the web often using a subscription model. PaaS gives developers the ability to build applications directly for the cloud, and then deploy those applications using cloud architectures. IaaS allows access to compute, storage and other infrastructure as a utility often with the user specifying how many resources are needed and how they’ll be used.

The important overarching point is that the electronics and high tech industry is becoming more of a service business. The proliferation of these technology-enabled services means traditional tech players need to focus more on experiences their services create and the underlying capabilities that enable a customer experience so superior that users are compelled to renew their subscriptions.

In some ways, this means traditional tech players need to develop capa bilities they haven’t before such as metering and billing; churn and revenue management; operational infrastructure; and key metrics including security and service level agreements. This means they will look more like a telco or cable company than a hardware or software company. That’s a big change in operating model and capabilities.

One reason this unfolding “as a service” business arena is becoming so hot is because the dollars at stake are so alluring and those who don’t move fast will be left behind. Over the next five years, enterprises will spend $112 billion cumulatively on software as a service (SaaS), platform as a service (PaaS), and infrastructure as a service (IaaS) combined, according to Gartner, an industry research firm.

Likely winners?
So, who are the likely winners and losers as this industry transitions more to services?

Companies that started as SaaS providers, rather than traditional hardware manufacturers and software developers, have a leg up. They already have an early head start working in the sweet spot of where the industry is headed: services. They have already developed operational capabilities to deliver a superior customer experience and can parlay that with more relative ease to provide, for instance, PaaS offerings. By contrast, most traditional hardware and software companies are just beginning this journey.

Many traditional hardware and software companies have another hurdle to overcome. Due to numerous mergers and acquisitions over the years, they’ve become complicated businesses with overlapping operating models. Caused by a failure to properly integrate acquisitions, this complexity has resulted in virtual gridlock when trying to enable new business models.

Companies that have invested too little integrating past acquisitions will be disadvantaged as they try to add new XaaS business models into their already complicated operations. Converse ly, those relatively few traditional hardware and software companies that have done a good job integrating operations after mergers and acquisitions possess a competitive advantage.

Balancing investments in legacy and future service businesses
Traditional market players also have another weighty issue to juggle: How much to invest in these new business models while continuing to fund and run effectively their current businesses. This will require a skilled balancing act. Traditional technology business models will not disappear anytime soon.

The SaaS business model will represent only about 10 percent of total software industry revenue for the next two to three years. Hence, the traditional licensed software model will remain a critical software offering for several years. On the other hand, SaaS is the primary driver of new market growth; virtually every traditional software company plans to have both business models within just a few years even if still lacking a SaaS model today. To remain competitive, they will have to do both well. Yet it won’t be easy nor inexpensive. Potentially hundreds of millions in investments are at stake, and money will be a huge factor in how this plays out.

Consider a software company seeking to launch a new “appliance” offering such as a network security device. Integrating software and hardware typically requires several changes to the existing business model and the underlying operating model supporting it. The investment required to develop basic IT systems and processes needed to operationalize the appliance business model, for example, could exceed $10 million—at least. In more typical cases, creating a two- or three-segment operating model to support a new XaaS business model could cost $50 million-to-$100 million--or more.
Despite these cost contrasts, the business case for moving to a segmented operating model can be compelling.

How to succeed
To succeed in this services market, one of the keys will be to think in terms of segmented operating models. These are holistic set of operational processes, people, and systems needed to successfully deliver against the business model strategy. It’s smart to figure out what market segments prefer a high-end or low-end server solution.

Likewise, ascertaining proper operating models to deliver these services will be key. In most instances, the operating model to deliver XaaS will be different than the one for delivering traditional business models. Companies will have to figure out how to map their current operating models to the new business models, discern what models need to remain the same or change, and create a blueprint for what they will need to operate four or more business models successfully. Few companies are thinking actively about this approach today.

Final thoughts
It’s time for electronics and high-tech companies to move fast in a big way to capitalize on this major business model proliferation. Thinking ahead of this game is the name of the game. Disciplined resource allocation will ultimately determine which companies achieve high performance in this all-important race.

The author is a senior executive with Accenture’s Electronics & High-Tech Group.