Selling Naked Commodities and Making Profits

“We’ve all witnessed commodity hardware companies making high-profile acquisitions to enter the IT services business: Dell/Perot; Xerox/ACS; HP/EDS, etc. IBM has been delivering this combination of software and services for years and it amounts to about 70% of IBM's revenue today. It looks like these other companies are trying to catch a wave. But are they up to it?”

This interesting observation was brought to my attention by a reader of this blog who offered to put me in touch with an executive at IBM who could expand on it if I was interested. Yes, I said; I was interested.

What Dell and Xerox and HP are doing clearly says they are done with selling naked commodities. They are seeking higher profits by wrapping their products in blankets of value added services. One of the central tenants of this blog is that profitability in the real time economy comes when companies transition away from a narrow focus on low cost production of commodity products and services (an efficiency driven business model), and wrap their commodity products and services with customized blankets of value added services. By doing this they can earn higher profits (as in 2 – 4% and sometimes more). And those value added services are all information based; IT is what delivers those services, so use IT as a profit center (this is a customer responsiveness driven business model).

We set up a conference call with Alan Ganek, CTO of IBM's Software Group. He had some unequivocal statements to make and some pointed questions to ask. I’m not saying I agree with all of what he said or that I accept the implications of some of the questions he asked. But IBM is calling out these new folks on the block and asking if they are really up to the demands of the IT services game. Here are some key points he made.

“Take Dell; they acquired Perot and now they hope to drag their hardware along with their services”, said Alan. “Customers are looking to solve problems, not buy hardware. We sell value because we keep our services very vendor agnostic; our software and middleware allows us to put in any vendor’s hardware. How can Dell – who has NO software at all – possibly sell value? Perot will just sell Dell hardware.”

“An IT services team that doesn’t have a middleware cache of assets typically focuses on a labor based approach,” Alan continued. He said when services groups don’t have pre-built solutions they sell the client on developing from scratch and then the client is left on their own to support and upgrade the custom coded solution built for them. “We can provide clients the customization they need from a broad base of software components that are broadly used so they have a broad base of support. How can these newcomers to the IT services business match that?”

Those sound like fighting words. I wonder what people at Dell or Xerox or HP would say.