Microsoft cost cuts reflect changing balance of power, says Karl Havers.
At first sight, Microsoft's decision to chop $1bn from its costs, announced by chief executive Steve Ballmer earlier this month in an e-mail to staff, might look like the first chill winds of a downturn in IT. When the world's biggest software business has to reach for the axe, it has to be bad news for everyone, doesn't it?
Well, no, unless you are an old-school IT salesman with a penchant for shifting boxes. In fact, this round of cutbacks from Microsoft is one of the clearest signs to date that the industry is reaching a new level of maturity. And the way the industry does business is going to have to mature with it.
As Ballmer pointed out in his e-mail, the cost cuts really involve "rethinking the way we do things". This message's relevance goes way beyond Microsoft. Over the past 10 to 15 years, the IT industry's rapid growth has been marked by land-grab and technology push. But as a technology and sales-led industry turns into a customer and service-led sector, this is set to change to customer demand-pull, and few technology companies have worked out how to do this well.
Under the old model, you could grow your business by developing the fastest or biggest product in its market and sending out a team of highly incentivised salesmen to flog it. Nowadays you have to start by examining what customers want, how you can give it to them, and what payback it will deliver to their bottom line. Then you look for the best way of delivering that proposition.
A skewed approach
At this point, it becomes clear that a skew has developed between the attributes suppliers now need to bring to bear, and the way their salesforces are organised, managed and remunerated. Direct and indirect channels have also got out of kilter, reflected by the huge number of organisations currently reviewing the way they go to market through value added resellers and examining whether they need a more direct customer relationship.
In addition, the return on many overly complex channel marketing initiatives is poorly understood, let alone managed. This shift towards greater maturity is also evident in regulation, with tighter accounting standards focusing minds on revenue recognition, financial control and sound business risk management.
So, what has changed? Two things: what the salesforce is selling and to whom.
The service element has become increasingly important, to the point where the product itself is just a building-block. The buyers have not the slightest interest in the technology itself, they only want to hear how it will improve operational processes and what its impact will be on operating as well as capital expenditure.
For a rep with a background in selling kit rather than building business cases, and the company employing that rep, this can be bad news - and a wake-up call for a rethink.
All these pressures can be seen in the way the industry is restructuring itself. Compared to selling a single product, providing services requires greater resources and support and a broader range of offerings. This calls for collaboration and, increasingly, consolidation.
The spectre of monopoly
As for the spectre of monopoly, once products get past the point of mass-usage, other factors come into play. Take soap powder: we all struggle to think of a manufacturer apart from Unilever and Procter & Gamble, but nobody cares. There is still room for niche players to tackle specific segments below the radar of the dominant players, and the same will be true of technology.
So, far from being bad news, the Microsoft announcement is an inevitable milestone in the industry's development. To draw a parallel with another industry, having begun to pass the age where we had to build the car ourselves, we are now leaving the era of the Model T. Customers are fed up with being able to get any model, so long as it is black. Now they want synchromesh gears and an individual choice of optional extras.
The good news for the IT industry is that there is massive scope for new service options. It is time to train and incentivise salesforces to sell them not on the basis of technology, but on their real bottom-line benefits to the customer. Those who do this right will win.
Karl Havers is the European head of technology at Ernst & Young