In Tough Times, Services Add Value

Not long ago, at the height of the dot-com boom, a few market-share-oriented Internet service providers hit on a new strategy: Give away PC hardware, and charge for Net access. It turned out, of course, to be a going-out-of-business strategy, mainly because the numbers just couldnt be made to work. But beneath the debris of that failed strategy was a nugget of wisdom that enterprise IT vendors should heed as they struggle to cope with todays slumping market: Hardware is a commodity.

If vendors try to pump up hardware demand merely by lowering prices, they might find that they literally have to pay IT buyers to take the stuff off their hands. Thats because its simply impossible for enterprises to meet return- on-investment targets unless hardware comes hand in hand with a substantial value-add of business-process-oriented services.

Some may point to Dell as an exception. The No. 1 PC vendor recently reported better-than-expected earnings as well as market share gains in both desktops and servers. Encouraged, founder Michael Dell vowed to continue his companys aggressive pricing strategy, particularly in enterprise markets. But in time, even Dell may become merely the least unaffordable hardware maker in the market and may find that its own appointment with destiny is just a few steps further down the path to marketplace saturation.

Dells long-suffering competitors—indeed any enterprise hardware vendor coping with dramatically lower prices—should read the tea leaves: In an economy flirting with recession, enterprise customers are less inclined than ever to buy new hardware or upgrade existing infrastructure without a clear and quick return on their investment. When they do dip into their IT budgets, they increasingly expect help in the form of consulting and system integration services to ensure quick payback.

Enterprise IT vendors that recognize this are among the few holding their own in the current market. IBM, for example, has effectively emphasized services. As a result, Chief Operating Officer Sam Palmisano said recently that the company is seeing 60 percent of its revenues and 75 percent of its profits coming from software and services. Vendors such as Hewlett-Packard, Compaq and Novell have clearly taken note of IBMs results and have begun to emphasize services. This should benefit those vendors provided they act quickly and follow IBMs example of making services the core of their offerings, not just a secondary channel for selling hardware.

This is what IT buyers need and, increasingly, what they are demanding.