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An IT sea change for smaller companies

September 20, 2006

David Berlind, fresh from a dinner hosted by storage giant EMC, thinks the time has come for small and medium-sized businesses (SMBs) to stop rolling their own information technology: "Call me crazy. But it seems to me that the [IT] industry has finally evolved to a point where selling infrastructure (including storage) to SMBs should be like selling regular gasoline to the driver of a truck that runs on diesel fuel. Whether you're at an existing SMB or about to start one up, it makes almost no sense to insource any IT. Especially IT infrastructure like servers and storage." The SMBs that can still justify owning their own IT infrastructure, he writes, "are fewer and farther between and if you ask me, sales in the SMB infrastructure channel are basically surviving on a myth: the myth that SMBs should be insourcing."

I would call it more a habit than a myth - the ability for companies to jettison most or all of their in-house IT infrastructure is a recent development - but I think he's right. Ironically, even as many smaller companies are embracing hardware hosting, software-as-a-service, and other forms of utility computing, many others are currently building up their IT assets, drawn by low component costs. I think those companies are going to end up regretting a lot of the investments they're making. They'll soon find that the highest IT costs aren't component costs but labor costs, maintenance costs, electricity costs, and other secondary expenses - and that owning your own gear ends up reducing your flexibility rather than increasing it.

Berlind reports that EMC's CTO, Jeff Nick, agrees. During the dinner, he made "a comment about how most all IT functionality should be delivered as a service. By the end of the conversation, Nick was talking about how EMC's long term focus (in terms of selling infrastructure) should not be to push storage on SMBs themselves, but rather, to help make the service providers to which those SMBs should be outsourcing their IT more successful at providing those services." On the server side, that seems to be Sun's emerging strategy as well: For SMBs at least, don't supply the end-user; supply the utility.

As I described last year in my article The End of Corporate Computing, back when electric utilites first emerged, it was the smaller companies who led the way in hooking up to the shared grid. The prospect of avoiding big capital expenses and high labor costs, and all the associated headaches of owning a lot of specialized technology, outweighed the risks involved in moving to a new supply model. The same thing's happening with IT today. Big companies, with lots of capital and lots of legacy systems, may be able to justify building their own internel IT utilities - they can gain considerable economies of scale on their own - but the equation's very different for SMBs. As Berlind suggests, SMBs today would be well advised to approach their IT requirements - both hardware and software - with the assumption that they should be buying services, not assets. Sure, there'll be plenty of exceptions, but that should be the going-in assumption. If IT isn't your business, get out of the IT business.

Comments

We are experiencing a major IT industry shift right now, and if you know where to look you can actually see it as it happens. This shift is all about Microsoft and open source. The IT industry is shifting away from Microsoft.

Posted by: Addiction Treatment at September 20, 2006 04:58 PM

Oh come now, this is all a bit abstract.

What kind of SMBs? Exactly what kind of services? At what cost?

There are too many unknowns - both in this post and the whole issue for that matter - to generalise to such a degree.

I don't disagree completly but there are certainly all sorts of factors that come in to play -- here are just some of them:

* Niche - Does the SMB have a specific IT requirement that suits customization? If you're a regular consultant with simple needs, maybe not. But get into issues of fulfilment, logistics, point-of-sale, niche CRM requirements, (+ many more) and suddenly the SMB has a requirement that can't be outsourced so easily/cheaply. Even worse, I've seen examples of businesses having to accomodate to the way the outsourced SaaS works. In otherwords they are configuring their business for the software rather than have the software configured to their business.

* Regulatory restrictions - Accountants, Lawyers, etc have regulatory issues preventing them from putting personal, commercially sensitive etc on 3rd party services

* Scalability - SMB's if they are successful become enterprises that then begin to need and justify their own requirements. Migrating data away from some managed services is a hot issue right now as I'm sure you know.

* Costs. Maybe this is more picky than anything, but it's hard to generalise that 'outsourcing is cheaper' when there are no examples with figures. And even if there are, there's no common link to say that outsourcing will always be cheaper.

I don't think the post is wrong, but I think it suffers from the kind of "glossing over the details" that many in a CxO position tend to make when dealing with IT that may be outside of their own competency.

Posted by: Ben Metcalfe at September 20, 2006 05:00 PM

"I think it suffers from the kind of "glossing over the details" that many in a CxO position tend to make when dealing with IT that may be outside of their own competency."

I should point out WRT to this point that I don't mean you Nick , but those in a CxO position who's job it is to decide such matters for their business.

Posted by: Ben Metcalfe at September 20, 2006 05:04 PM

The point is not in what should SMBs do (i.e. outsource their IT infrastructure) - the point is who can make a profit out of supplying the IT Infrastructure to the SMB. In the world of "reselling" - it's much easier to "get the money" once, than to keep going to back to these SMBs month after month after month.

Ultimately, the problem is one of "subscription saturation" (my term), meaning at some point, a business can not pay another monthly subscription fee for another "rented" service - they are completely saturated from a cash flow standpoint -- and there are no "counter balancing" company assets.

SMBs as a group, represent the highest customer risk with regard to support costs and churn/turn over. They might represent a HUGE market potential, but they also represent the highest risk.

Posted by: Arnie at September 20, 2006 06:50 PM

Glossing over the details???

With all due respect Ben, that's simply not true.

First, all of the issues you list exist in the traditional software model. Lawyers and accountants have to use certified services for storing backups, hauling away shredded documents and even repairing their computers. Migrating data between between proprietary software data formats isn't a walk in the part either.

I work daily with providers rolling out utility computing and SaaS services and I promise you there's a lot of folks working on these issues.

Posted by: barmijo [TypeKey Profile Page] at September 20, 2006 07:25 PM

Nick,

Let me start out by saying that it is your job as a thinking fellow to point out or postulate on future trends such as utility computing and SaaS. I on the other hand as an IT security professional have to deal with the impacts of changes like this and my concern is for the SMBs (or even more so large corporations) which have any sort of regulatory requirements for their data.

Up to now there are very good models for the practices of data security based around the idea that data storage is relatively discreet. The utility model pretty much destroys this assumption with server and storage virtualiztion. Infosec practitioners and auditors will have to take a serious look at how the notions of Confidentiality, Integrity & Availability are affected, much less how data affected by "Chinese Wall" regulations is affected.

I guess we'll all have to burn those bridges as we come to them though.

Posted by: Chris_B [TypeKey Profile Page] at September 20, 2006 10:27 PM

Here we go again, Mr. IT doesn't matter. You have some valid points in saying SMB should no longer do their own IT.. some are just not built or prepared for it. But for those that are, they can see where they have strategic advantages over those that don't. Granted, some IT services can be viewed as 'commodity' but therein lies the strategy, discerning the difference between an IT commodity that every Joe Blow can implement versus an IT technology that only the strong can utilize.

Posted by: Jack at September 21, 2006 09:07 AM

Chris, I agree that there are real security issues here, and I've been trying to work up a post on this issue. At the same time, owning and maintaining your own assets does not necessarily make the security situation better.

Jack, You may be surprised to hear that I agree with you completely. If a company is convinced that (a) a particular information technology can provide it with a strategic advantage and (b) it can only gain that advantage if it owns and maintains the technology itself, then, yes, it should keep it in-house. My point all along is that that situation is becoming rarer and rarer as IT matures and that companies need to be careful to challenge their assumptions that IT is giving them or can give them a meaningful advantage.

Posted by: Nick Carr at September 21, 2006 09:50 AM

Might the same forces yield on-site, commodity IT appliances that folks could own, maintain and upgrade as easily as a PBX? The thought of hosting critical services off-site unsettles me.

Posted by: Sid Steward at September 21, 2006 12:36 PM

As the CTO of an SMB, I've spent months working with various "IT Utility" companies. The goal is to research the viability of outsourcing all non-essential IT functions. The reality is that these companies, even after negotiated discounts, are still 50% more expensive than the current situation. I think what the EMC CTO really means is, "our disk sales are stagnating, so we need to come up with a new annuity stream". I've worked with some pretty scrappy companies only to be shocked by the monthly bill. It adds up to more than the costs of the functions to be outsourced. Please, IT Utility is a pipe dream for the next 5 years. It's a wet dream for VARs.

Posted by: Andrew at September 21, 2006 04:03 PM

I don't know why people are getting hot and bothered about this. In the SMB market it's over. Move on. Sure, some stuff stays locally but only as long as it makes sense to do so. I see very, very few SMBs where you could honestly say that holds true. And, show me a business critical IT process in SMB that works as a differentiator? Very few.

Posted by: Dennis Howlett at September 22, 2006 11:30 AM

Nick, we have bantered about this before. If you make a blanket statement about the joys of utility computing, you should also make the mirror one that today's "utilities" like IBM and EDS have not shown ability or willingness to pass along economices of scale.

EDS has over 100,000 employees. The average Fortune 500 CIO has 500 IT employees (and the average SMB has even less). Infosys has delivered over 18,000 projects using its GDM. The average CIO has done fewer than 10. ... Yet vendors cannot price their products or deliver performance on a utility scale model? How much more scale do they need?

Andrew's experience above is not an exception.

Posted by: vinnie mirchandani [TypeKey Profile Page] at September 24, 2006 07:22 AM

As a vendor of business management/workforce/CRM services (SaaS) to SMB's, I fully appreciate the issues raised. On one hand, we originally focused on just selling our software as a subscription and leaving the hosting to other IT service providers. Unfortunately, there are not too many IT providers who are willing to setup the OS, database, security, online integration and other aspects of a live mission critical business app. Hosted service providers are busy serving up websites and are not technically qualified to provide the minute and detailed support to provide a live, mission critical app online.

After some gut wrenching experiences, we now know better. We now work closely with the customer giving advice, information and even hands-on IT services so that our business app is hosted safely, securely and delivers the promise of software as a utility.

This has of course put pressure on us as we are a small company, but it has started to pay dividends as referrals are now starting to come in requesting similar "kitchen-sink" approaches. This , we think is the greatest oportunity for small ISVs like us - and something that the likes of Salesforce.com, Oracle and MSCRM can never hope to penetrate. Now, if we can only replicate this nationwide in the US - that is our ultimate vision.
Comments are welcome!!

Posted by: zeelog [TypeKey Profile Page] at October 16, 2006 06:09 PM

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