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Last week I was at the VCE Analyst Council in Chicago. What makes VCE different is that they actually build and deliver a complete solution, basically a turnkey datacenter. Everyone else mostly delivers parts at this scale. I’ve been really fascinated about this concept because I think it should be the norm not the exception.
I first saw this concept in action long before I got to know VCE. Back in 2009, Microsoft was pitching a data center in a container. You specified a complete solution (servers, networking, storage) and a shipping container showed up that needed only power, water (for cooling) and to be plugged into the network. Software could be preloaded, and the data center was tested at the vendor manufacturing site, making it amazingly fast to implement.
VCE offers pretty much the same thing without the container and with reassembly inside of your building. In a market that has seen rather dismal growth, VCE has been growing at an impressive rate, showcasing that buyers like this concept.
However, competing with VCE is “The Cloud,” or more accurately, Amazon Web Services (AWS) for the most part. With AWS, time to implementation is also impressively short, and there is no capital cost to deal with. Certainly there are issues with compliance, particularly with regard to security, but often this just takes a change in the policy and some blending of on-premise technology (which likely already exists) into a hybrid model.
The two approaches aren’t mutually exclusive, and current thought is that the ideal solution for most companies should be a blend of the VCE and AWS approaches with dynamic management and compliance assured.
However, there is a tension between the two models, and it isn’t yet clear where we’ll end up.
Capital Expense vs. Operating Expense
Let’s assume that both of these approaches can perform the same tasks. The choice then comes down to a couple of things. The most visible is that there is a capital expense to having equipment on-premise and none associated with a cloud service. Many organizations assume that operating expense is better than capital expense, and a lot of firms are structured to make it harder to get approval for capital expenditures than for recurring operating expenses.
But the right way to approach this is by calculating the firm’s cost of capital, because in the end even capital costs can be translated into an expense (in this case interest). The expense of capital is what you pay to borrow or service it (debt or equity financing), and it is always harder than operating expense to calculate and justify. However, interest rates are dirt cheap right now, and Amazon is buying their equipment and marking it up, suggesting that, at scale, buying is likely a lower expense to the firm if it is done correctly. While finance should be consulted about whether the firm buys or subscribes to a service, that is often not the case when a service like AWS is selected, and at least at scale, it should be. (This should be an internal audit review function, and often is).
With the VCE approach, you do get more control over costs, as Amazon can raise rates without asking your permission or giving you any heads up. While the trend for the cost of cloud computing services is down, Amazon is under increasing pressure to improve profits. We’ve certainly seen how, once a dependency is created, vendors have a nasty tendency to raise prices because they know your switching cost will keep you tied to them.
Tactically, AWS is cheap now; strategically, this could become a problem in years to come. Maintaining flexibility so you aren’t trapped would be advisable.
Customer Satisfaction and Risk
Risk should be tightly connected to the goal of high customer satisfaction. If the hardware is in your control, you can plan for any major changes because your firm is the one making them. With a service, they don’t have to give you a heads up of a major change (though they typically do) because they don’t work for you and because they know that you’ll live with the result if your switching cost is high.
AWS runs on a utility model, and if you look at large network utility companies like cable companies and phone companies, you typically see customer satisfaction scores that are far lower than their hardware-selling peers. This occurs largely because they don’t have to really focus on customer satisfaction once established and instead focus on maximizing profit (which eventually can result in their demise, like it did for the first AT&T), unless their segment is highly competitive and the switching cost remains low.
VCE has one of the highest customer satisfaction scores in their segment, largely because they have to focus on the people buying their products or sales will stop. They don’t sell a locked-in service; they sell an actual product. Bad customer satisfaction could quickly drive new customers to competitors.
Now this doesn’t have to be the case. IBM’s customer satisfaction was actually higher when they leased hardware (basically sold computing as a service) than it was when they sold hardware. But that was because there was little competition at scale for the leased service and because IBM's founders drove a massive company focus on customer care. This is another example of why companies run by founders are typically more connected to customers. Thomas Watson, Sr. and Thomas Watson, Jr. were very unique executives.
So while it would appear that the on-premise hardware model can result in higher customer satisfaction, the overarching driver is how much the firm focuses on it.
It is extremely hard for a line organization to bypass IT and buy their own hardware, particularly at the employee level. It's highly unlikely that a line employee will buy a VCE product with a company credit card (though I’d sure like to see the CFO’s face once that expense made it to his desk for approval).
For AWS, on the other hand, this kind of "shadow IT" customer is their bread and butter. Cloud computing is simply a lot easier to use than most IT shops. There are two dangers here, one is compliance, in that most users don’t seem to know the word exists, and the other is that this approach dramatically reduces IT’s utility. In effect it makes IT redundant. More than anything else it shows that most IT shops don’t focus enough on their own customer satisfaction.
The best counter for shadow IT is an offering from BMC called MyIT, which is focused on helping make IT more customer-focused and better able to provide both on premise and remote services like AWS far more successfully.
Both VCE and AWS provide a highly packaged true solution. The differences between the two are that with low interest rates VCE should be less expensive than AWS (at scale), but a service will always be more flexible. This suggests that some blend of the two approaches (hybrid cloud) will remain the best approach for the foreseeable future.
However, IT must focus more on its own customer satisfaction and in making sure AWS-like services pass through their service matrix before getting to the user. That can help make sure the effort is compliant, that the prices reflect volume buying and, most importantly, that IT remains an important part of this process and doesn’t become redundant to it.
An overlay like BMC’s MyIT should be considered over both approaches to assure this final aspect. In the end, a tight focus on customer satisfaction both from a vendor perspective and an IT perspective will likely have the greatest impact on how successful IT appears. And that should be the ultimate goal of any related efforts.
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