Techaisle Blog

SMB cloud is ubiquitous today and becoming even more so, central to the technology and management needs of both smaller and larger SMBs. Cloud is no longer a trend that is discrete from mainstream IT. Techaisle data shows that cloud is viewed as an IT priority by 96% of US SMBs and 90% of current cloud using SMBs are increasing their cloud usage within the next one year. Cloud is not a future issue, it is an essential component of SMB IT.

While cloud growth has been extraordinary, it is reasonable to expect continued high-trajectory growth resulting from three key factors:

1. Cloud is established as essential IT infrastructure
2. Cloud addresses real business needs
3. Suppliers will work with buyers to overcome current SMB cloud adoption challenges

Where are these SMB firms who are planning an expanded cloud presence in the evaluation process? Techaisle asked SMB respondents to identify whether they would refer to themselves as “gathering information,” “identifying potential solutions” or “evaluating suppliers”.

As cloud adoption continues to expand within SMB organizations, Techaisle SMB & midmarket cloud adoption survey data demonstrates that 38% of SMBs are gathering information on cloud technology, solution options and appropriate cloud adoption steps. 32% have moved beyond to the stage of evaluating solutions and the balance are in the process of evaluating suppliers. However, Techaisle believes that these percentages are a moving target as SMBs continue to increase spending on cloud.

Among the midmarket businesses, fully 80% of those planning new cloud initiatives are at this stage, with only 7% focused on evaluating suppliers. Highest percent is within the 100-249 employee size businesses establishing a clear fact that as businesses transition from a small to a larger organization they increasingly gravitate towards cloud to solve their growing pains, establishing processes and supporting a dispersed workforce.

Combining the above information with the data that 94% of midmarket firms are already using some form of cloud solution, we get a picture of a midmarket enterprise market that is in the process of assessing where and how the use of cloud should expand through the enterprise. Small businesses, on the other hand, have a roughly normal distribution across these categories: 24% report that they are gathering information, 46% have moved on to identifying potential solutions, and 30% are evaluating suppliers.

Techaisle believes that the differences between the small and market organization findings reflect different stages of cloud adoption. The small business findings are consistent with a community that moves from point to point, working first on one discrete solution, and then on the next. The midmarket findings are consistent with a community that has already deployed point solutions, and is now trying to build a longer-term strategy for an integrated, flexible approach to incremental cloud expansion. This dichotomous approach is a real challenge for suppliers: they need to differentiate discrete solutions for the small business market, and demonstrate that their offerings are essential components of broader strategies for mid-market firms, while attracting attention to their companies and products and building brand preference in both segments.

This perspective is reinforced by data showing the current uses of cloud within SMBs. Generally, SMB IT departments have used cloud to supplement IT infrastructure resources – for example, by procuring cloud-based storage to offload data from on-premise drives, or by using cloud for backup. Cloud has also made its way into SMBs as a means of supporting non-core applications and related processes; for example, cloud might be used to automate previously manual tasks in HR or customer support that aren’t linked to financial and production systems. But data from the Techaisle SMB survey finds that use of cloud is expanding even into these business-critical applications.

When SMBs are asked to indicate the areas of their operations where cloud has been or will be applied, nearly half report that they are using/planning to use cloud for IT infrastructure, and 37% state that cloud will be deployed to support non-core processes and applications. However, nearly 30% state that they are using or are implementing cloud to run at least some of their core applications. Given that these core applications are not changed or re-platformed very often, 29% is a surprisingly high figure. Cloud is expanding beyond IT-specific uses and niche applications, and is increasingly seen as a viable platform for even business-critical process support.

The shift in cloud’s positioning and dichotomous approach brings with it a shift in the kinds of insights needed to help connect suppliers and buyers to address common interests in deployment, integration and expansion strategies. SMB buyers need help in moving past initial cloud pilots and applications to integrated cloud systems that provide support for mission-critical processes. Cloud sellers need to adjust their messaging to address the needs of early mass market rather than early adopter customers.

A strictly “by the numbers” review of the state of the SMB channel in the US paints a portrait of a well-balanced but fragmenting industry. Techaisle’s survey of SMB channel partners finds that revenues from products and services are approximately equal, and that services revenue are being derived from transactions that do not include products as well as from product-inclusive deals. SMB channel respondents report that 58% of revenue is attributable to services-led contracts and that a similar proportion of revenue is derived from recurring sources, vastly different from 2012, 2013 and 2014.

It is worth noting that while measures of this type provide a very useful benchmark for channel partners, some interpretation of the benchmark data is necessary. For example, the proportion of business attributable to services is only part of the issue that SMB channel management is wrestling with: what kind of services (for example, managed PCs or device maintenance?) is an important consideration in evaluating the impact of a channel services revenue stream.

Similarly, growth in services revenue is not necessarily a proxy for progress, as it can result from simple reductions in product revenue rather than effective transition to a business model properly aligned with the market as a whole. Techaisle believes that SMB channel partners that are looking to be part of the “managed services” channel should be targeting just over 20% of services revenue derived from managed services in 2016, and more than 40% by 2018.

The revenue growth expectations are also interesting. Although 63% of SMB channel partners are expecting revenue increases in the next one year, the scenario is quite dismal for VARs as compared to MSPs. 54% more VARs than MSPs are expecting their revenues to remain flat and a percentage of VARs are expecting their revenues to decline by an average of 30%. Even some MSPs are expecting their revenues to decline by an average of 20%.

However, the overall optimism for growth provides some insight into how and where the channel is growing.

On October 12 Dell took an enormous step along its new chosen path of reorienting away from a provider of low-cost PC and server hardware to a role as a more sophisticated supplier to businesses that view technology as a strategic asset rather than as a tactical necessity. Dell announced a “definitive agreement” to acquire EMC (including EMC’s ownership positions in VMware, RSA Security, Pivotal Software, Virtustream and other industry firms and joint ventures) for $67 billion – the largest-ever acquisition in the information technology industry. The deal was announced to analysts and media in a conference call that featured Dell Founder and CEO Michael Dell, EMC President/CEO/Chairman Joe Tucci and Silver Lake Partners Managing Partner and Managing Director Egon Durban, and included VMware CEO Pat Gelsinger, Dell CFO Thomas Sweet, and David Goulden, who acts as CEO for EMC’s Information Infrastructure business.

Two second Take

The acquisition greatly enhances Dell’s position in higher-margin, higher growth markets: storage is expanding faster than servers or PCs, and EMC is focused on the higher-margin software used for device management as opposed to the creation of physical devices themselves.

Revenue Synergies – the $67 billion question

While the call eschewed any commentary on staff redundancies between the two organizations, it focused its messaging on “revenue synergies that are three times larger than cost synergies,” a justification for the deal that comes primarily from new growth opportunities rather than from squeezing out costs through headcount reductions.

It can be assumed that most of this growth potential comes from expanded market rather than product positioning. In his remarks, Michael Dell noted that Dell/EMC (including VMware) have already established “leadership positions in storage, servers, virtualization and PCs,” and have strength in IT’s “most important growth vectors,” including software-defined data centers, hybrid cloud, converged infrastructure, mobility and security – and are “positioned as a leader in an amazing 22 Gartner Magic Quadrants.”

If Dell and EMC are already leaders in all of these large and/or expanding areas, then the question is where will further growth come from? It appears that the combined entity is banking on the benefits associated with increased customer account presence. In particular, Michael Dell noted that “as the data market moves to a compute-centric, converged model, Dell’s server franchise is a natural fit with EMC’s strength.” The theory appears to be that by combining EMC’s prowess at selling to enterprise accounts and Dell’s broader compute portfolio the company can increase share of wallet within major accounts; there is also some opportunity for using EMC to drive increased storage presence within Dell’s “growing commercial infrastructure franchise” in the SMB base, but this is likely to be a secondary consideration.

Security, Converged Infrastructure, Mobility, Big Data

Dell has been investing heavily in building a comprehensive security portfolio, assembling advanced threat identification services firm SecureWorks (acquired by Dell in 2011), firewall/unified threat management from vendor SonicWALL (acquired in 2012), backup software specialist AppAssure (2012) and identity monitoring and management software vendor Quest (also acquired in 2012), plus related capabilities sourced from thin client vendor Wyse (purchased by Dell in 2012) and from work done by Dell’s own engineering team. With the latest acquisition Dell adds encryption pioneer RSA Security (which became a division of EMC after being acquired in 2006) and enterprise mobility management supplier AirWatch (acquired by VMware in 2014), thus diversifying the portfolio even more. Dell has been positioning end-to-end security as a differentiating feature of its infrastructure portfolio for some time and with the acquisition Dell’s security story becomes even stronger, and even more distinct from the approaches of competitors like Lenovo, HP and Oracle.

Although it is tempting to look at a Dell/EMC/VMware combination as a means of consolidating a converged infrastructure offering capable of competing with the Cisco-led Vblock (Cisco, EMC, VMware) and FlexPod (Cisco, NetApp, VMware) offerings, it appears that Dell’s vision is broader and more strategic.

The acquisition also gives Dell a foothold into the big data deployment market opportunity where the enterprise spending is still hardware driven rather than software and analytics uptake.

And with AirWatch in the mix, Dell finally gets a mobility story in place beyond just the mobile devices.

Move to cloud

Michael Dell believes that “the combined company is very well positioned to address the move to the cloud,” both by providing infrastructure to public cloud providers and private cloud operators and through VMware’s ability to enable hybrid cloud. But in his remarks, he went further, observing that “I think what you’re seeing with the Software Defined Data Center is an ability to take the benefits of the public cloud and bring them into an on-premise data center.” He considers the complexities associated with connecting compute, network and storage as a major demand driver for public cloud, and virtualization and converged infrastructure as a means of delivering greater simplicity in on-premise environments, allowing firms to focus on optimizing for “the application user, quality of service and security.”

But Michael Dell is not satisfied by simply focusing on leveling the terrain between cloud and on-premise infrastructure, his vision is to supply infrastructure across different environments (public clouds, SaaS, hyperclouds, private clouds), providing common, connected and secure platforms to customers of all sizes, wherever their IT workloads reside.

Financial challenges

A lot has been said and written about financial challenges but due to the enormity of the deal size it is worth another read, from our point-of-view. The cost of debt may have an impact on the overall cost of operating the newly-expanded Dell entity. Dell was thought to have about $12 billion in debt prior to this deal; clearly, this figure will increase substantially after the acquisition. Michael Dell did state that observers could expect “a significant deleveraging” resulting from cost savings, increased revenue and cash flow management improvements that come with being a private company, but $67 billion represents a very high hurdle for these activities. Obtaining the funds themselves is not an issue but it seems likely that the costs associated with debt service may affect product prices and margins, and it is difficult to boost either in many of Dell’s core hardware markets. It might well be that asset sales become important to enhancing corporate profitability by reducing the cost base of the company.

Should debt reduction become a priority, the newly-expanded Dell would have a few options, starting with VMware. Although there was no mention of selling VMware as part of this deal – indeed, VMware CEO Pat Gelsinger was described as having a “very bright future” in the new organization – EMC’s 80 percent stake in VMware is worth more than $26 billion at current valuations. It will be very tempting to convert this equity into reduced debt to help the competitiveness of future hardware products, though this would be at the cost of an ownership position that (as per the terms of the Dell deal) accounts for 40 percent of EMC’s overall value. There are other avenues Dell could pursue – for example, it could combine its in-house security assets with RSA, and perhaps AirWatch, to create a stand-alone security business that could be monetized via issuance of public market shares – but a VMware sale is clearly the most direct means of raising capital to reduce debt.

Go-to-market challenges

An often-overlooked ingredient in a merger is the extent to which go-to-market staff and strategies can be melded in a single organization. This will likely be a significant issue for the expanded company. Dell and EMC customer-facing staffs have very different skills and compensation levels and may not be neatly amalgamated into a single sales force. The channel strategies of the two firms are different as well. Because EMC has focused primarily on large deals within large accounts and Dell has been more SMB (and consumer) focused, it may be that the sales staff and channel strategies can be aligned by sector but that will not erase the GTM discrepancies.

EMC sales staff work large, high margin deals, and are among the best compensated reps in the industry; Dell certainly cannot afford to reduce EMC-classic rep compensation (which would trigger a mass exodus to competitive startups) or to pay EMC rates to Dell-classic sales staff (which would consume more than 100 percent of current margins). From a channel and alliance perspective, EMC is a strategic partner to its enterprise-level services and software partners; Dell is primarily a tactical resource for SMB-focused VARs and integrators. These approaches target different partners with different programs and are delivered in different ways. Again, it is possible to align strategies by market sector, but many partners are likely to try to “shop” across programs to “Frankenstein” together blends of services and compensation structures that optimize the supplier benefits that they derive from the new Dell, and some – notably, Cisco, which is an EMC ally via Vblock – will find a Dell partnership untenable.

Final Take

While there are reasons to admire Dell’s strategy, it is very rare to find successful examples of a merger yielding a combined market presence that eclipses the individual positions of the firms involved. However, these are still early days, and the hard decisions will not be made until mid-2016, but there are still many operational issues to be ironed out between now and then. Even though Dell is not a public company, it will need to explain its expectations of “revenue synergies” to customers, analysts and the press, and Silver Lake will likely need to do the same for its current and potential investors.

There are reasons to both admire and to question the Dell/EMC deal. The answer to the $67 billion question will be found in the opportunities for “revenue synergies” that extend well beyond today’s converged infrastructure SKUs, and into the cloud and the core operating models of customers ranging from EMC’s traditional public sector and large enterprise accounts to Dell’s SMB buyers. If Dell can extend its reach across the full spectrum of IT/business infrastructure, it may build a position as the behemoth HP believed it would become, before it was bifurcated into two distinct business units. If it does not, it may more closely resemble Oracle, trying to assemble a coherent vision from a series of mismatched pieces.

The real winner though is Silver Lake. It has positioned itself as a central force within the technology industry, an unusual position for a private equity firm, and may signal that excellence in financing is joining excellence in inventing technology and excellence in technology marketing as paths to the industry’s pinnacle.

Business decision makers (BDMs) are an intrinsic force in most midmarket organizations and are the primary decision makers in some high-growth technology areas, including collaboration, social media and analytics – meaning that increasingly, BDMs are ‘the boss of IT’. These BDMs view IT as a component of business processes, rather than as a stand-alone silo. Techaisle SMB & Midmarket Decision Authority data shows that twice as many BDMs as ITDMs (IT decision makers) in midmarket businesses say that it is critical for IT to understand how technology contributes to overall organizational success. These BDMs have specific objectives for technology usage, clear perspectives on adoption drivers and impediments, and tend to be influenced by information sources that are different from the inputs used by ITDMs.

This pressure from business managers leaves IT leaders scrambling to stretch limited budgets to meet seemingly limitless requirements, striving to deliver predictable, secure systems that respond to the increasingly varied needs of their business users and competitive environments. The growing divide between IT authority and responsibility, exacerbated by the fact that business perspectives on IT are shaped by information channels that are not part of the IT professional dialogue, has created an environment where businesses are struggling to develop the cohesion needed to promote or embrace new IT capabilities to achieve business objectives within existing IT and business process structures..

In a unique survey, Techaisle posed the same question, “expectation of associating business success factors to IT solutions” to both BDMs and ITDMs and probed to identify what each expected from the other. Techaisle data shows that BDMs tend to have higher expectations of IT; while business decision makers and technology decision makers are reasonably well aligned in some areas, there is a wide expectation gap in others, which may explain (at least to some extent) the continued proliferation of non-sanctioned, “shadow” IT.

The figure above provides a simplified view of differences between BDMs and ITDMs across several different factors. Although there is a tacit agreement that both business and IT management should understand business related success imperatives and should be able to associate IT solutions to achieving those objectives, closer examination of the data shows some important differences between the two groups:

• 53 percent of upper midmarket BDMs say that it is very critical for business success that ITDMs are able to identify and associate IT solutions with business efficiency, productivity & profitability. On the on the flip side, only 30% of IT executives in these upper midmarket businesses say that business executives should be able to associate IT solutions with business efficiency, productivity and profitability. Responsibility for delivery clearly rests with IT, and BDMs have very high expectations from ITDMs.
• Data also clearly shows that BDMs again have high expectations for support in using technology to build customer connections. Over 40 percent of BDMs believe that it is critical that IT has a grasp of solutions that enable beneficial customer & supplier interactions. In contrast, only 1/4th of ITDMs say that BDMs should have a grasp of such solutions.
• Employee productivity is an important aspect of business and in most cases businesses are expecting IT to understand and deploy core technology solutions to make employees more productive.
• Business process automation is an area where there is better alignment between IT and business. However, automation is a dominant need within the 100-499 employee size segment; nearly 40 percent of BDMs in the segment say that it is critical that IT can identify requirements for automation and associate IT solutions with these needs.
• Cross-organizational integration is recognized as being important by both BDMs and ITDMs in mid-size businesses: over 50 percent of both groups agree that it is critical for both business and IT to associate technology solutions with business demands. This is an area where both BDMs and ITDMs are fully aligned.

The trend towards increased BDM involvement in IT decisions is likely to accelerate further. BDMs are already active in shaping demand in core IT markets, and they are the dominant force in high-growth areas like collaboration, social media and business intelligence/analytics. ITDM and BDM divergence will continue and although there is cross-pollination they may as well continue to operate from different pods. Although it may be tempting to try to bring the various parties together, IT suppliers cannot successfully act as intra-corporate matchmakers: they have to come to grasp with the reality of selling to two different constituencies which have different expectations.