Building an IT services business around any given set of products assumes that those offerings are going to be installed somewhere—and that can be an issue. In the age of the cloud, it’s becoming increasingly clear that the IT services business is being fundamentally altered.
In fact, a recent report from the market research firm Technology Business Research (TBR) finds that network infrastructure revenue for the companies it tracks only grew 1.6 percent in the most recent fourth quarter, compared to 7 percent year-over-year growth seen in the prior quarter.
Those numbers fall in line with a report Gartner issued last week predicting that IT spending would decline by almost a full percentage point in 2015. A big part of those spending cuts involved cutbacks on IT services spending.
That doesn’t necessarily mean that products will no longer be installed on premise. But there is now enough of a shift to the cloud taking place to question how sustainable business models based on delivering IT infrastructure and applications on premise really are.
Adapting to survive
Even if you assume that only a third of the revenue generated by comparatively high-margin installation projects goes away as more customers embrace cloud computing services, many IT service providers simply will not survive.
Of course, many of those cloud services will need to be integrated with existing legacy systems. But those kinds of projects typically don’t command as high a margin as IT services projects that ran on premise. In addition, an on-premise project was usually tied to reselling products that drove additional revenue for many IT service providers.
For the average IT service provider, these shifts create a need to fundamentally rethink how their business is organized. While workloads of all types are clearly moving into the cloud, most of those clouds are semi-autonomous platforms.
IT organizations are looking for external expertise to help them manage those clouds, which creates an opportunity to provide managed services. In fact, the TBR numbers show that managed network infrastructure revenue increased 3.2 percent year-to-year in the fourth quarter.
Embracing recurring revenue
Rather than living and dying by the proverbial IT installation project, IT service providers need to shift to a recurring revenue model based on a monthly or annual contract. Over the long haul, such contracts are generally more profitable for the service provider.
The real challenge comes in managing this transition with a salesforce that historically got paid based on the amount of revenue generated in a quarter. The simple truth is that there are many sales folks across the channel who prefer to get paid in a large lump sum every quarter.
All too often, those sales people are chasing a dwindling number of on-premise deals while ignoring everything moving to the cloud. It’s up to the management of those IT services firms to come up with the right mix of compensation and incentives to make sure that kind of behavior doesn’t ultimately sink the company.
At this juncture, it’s not a matter of if and when customers are going to be moving to the cloud. It’s clear that massive amounts of application workloads are moving there. The issue now is determining how much business there might be in the cloud and how to craft a business model around it. This could very well lead to becoming a smaller, more profitable IT services provider instead of relying on a business model that is clearly becoming less sustainable with each and every passing day.