This initiative revisits an incredibly successful model at beginning of the IT market that died out due to a move that traded strategic imperatives for tactical benefits.
The old services model
At the beginning of the computer revolution, IBM rose to dominance with a unique services-based model where you didn’t buy anything. You rented it instead. In fact, they wouldn’t let you buy it. There were a ton of advantages to this model.
Still, when the market was saturated, the easy way to increase revenue was to break from services and start selling the hardware, break out from the existing comprehensive service contracts, and find creative ways to charge extra for everything.
The move traded strategic revenue for tactical financial gains and a relatively short profit spike.
With APEX Cloud Services, Dell is creating a new form of that old services model with similar initial benefits. In the future, Dell may have the same motivation to break from this model that IBM had and hopefully will learn from IBM’s moves.
Let’s talk about why Dell and its competitors move to services and why most large IT-focused companies are finding this old model suddenly attractive again.
Benefits of the services model
The advantages of the services model are significant. As a vendor, you get a recurring revenue stream that works like an annuity and is relatively invulnerable to economic changes in the market. This relative economic stability frees you from the potential need to adjust operations in changing conditions. The lease revenue is far more resilient to economic changes, given its operational expense (OpEx) nature than a capital expense (CapEx), which is far more volatile during times of economic change. I expect the pandemic, which turned out to be an economic roller coaster for the segment, was a substantial motivating factor for this change.
From an environmental sustainability perspective, this services approach de-emphasizes hardware consumption and forklift replacements driven by the need to drive sales revenue — in favor of modular and upgraded products that increasingly live off of cloud resources. This outcome is because, under a services model, a hardware replacement is generally covered by the services contract and increases the cost for the vendor, not profits, and thus results in more of an upgrade/reuse set of practices over rip and replace currently more common.
The benefits of a services model to the vendor are a vastly more reliable revenue stream, higher customer loyalty and engagement, a greater strategic connection to sustainability efforts that can more effectively improve financial performance, and a level of economic stability that was previously unattainable using the more typical sales model.
Moving to this services model will force Dell to create more modular platforms that are cheaper to install and support and designed to be upgraded rather than replaced over time, to keep Dell’s support costs down. So the move both makes Dell more reliably profitable and puts more financial emphasis behind becoming more sustainable. It’s a win for both Dell and the planet.
Preparing for the pivot back
Offerings like Dell APEX Cloud Services are being driven through the market.
The danger is that if growth stalls, the temptation to return to the old rip and replace model will increase to gain tactical growth, but once that initial artificial growth is over, the company will face the loss of all those earlier benefits, rendering it vulnerable to failure or hostile takeover.
As a result, putting in place sustaining policies that prevent a reverse pivot would be in everyone’s best interests. The good news is that it appears to take decades for these pivots to develop, so we’ll have time.
Assuring this reverse pivot away from services for tactical gains isn’t repeated should be part of the long-term planning for any company implementing these massive service programs.
See more: Top Cloud Service Providers & Companies