Services and products, a match made in heaven

wrench rust by HVargas (cc) (from Flickr)
wrench rust by HVargas (cc) (from Flickr)

In all the hoopla about company’s increasing services revenues what seems to be missing is that hardware and software sales automatically drive lots of services revenues.

A recent Wikibon post by Doug Chandler (see Can cloud pull services and technology together …) showed a chart of leading IT companies percent of revenue from services.  The percentages ranged from a high of 57% for  IBM to a low of 12% for Dell, with the median being ~26.5%.

In the beginning, …

It seems to me that services started out being an adjunct to hardware and software sales – i.e., maintenance, help to install the product, provide operational support, etc. Over time, companies like IBM and others went after service offerings as a separate distinct business activity, outside of normal HW and SW sales cycles.

This turned out to be a great revenue booster, and practically turned IBM around in the 90s.   However, one problem with hardware and software vendors reporting of service revenue is that they also embed break-fix, maintenance and infrastructure revenue streams in these line items.

The Wikibon blog mentioned StorageTek’s great service revenue business when Sun purchased them.  I recall that at the time, this was primarily driven by break-fix, maintenance and infrastructure revenues and not mainly from other non-product related revenues.

Certainly companies like EDS (now with HP), Perot Systems (now with Dell), and other pure service companies generate all their revenue from services not associated with selling HW or SW.  Which is probably why HP and Dell purchased them.

The challenge for analysts is to try to extract the more ongoing maintenance, break-fix and infrastructure revenues from other service activity in order to understand how to delineate portions of service revenue growth:

  • IBM seems to break out their GBS (consulting and application mgnt) from their GTS (outsourcing, infrastructure, and maint) revenues (see IBM’s 10k).  However extracting break-fix and maintenance revenues from the other GTS revenues is impossible outside IBM.
  • EMC has no breakdown whatsoever in their services revenue line item in their 10K.
  • HP similarly, has no breakdown for their service revenues in their 10K.

Some of this may be discussed in financial analyst calls, but I could locate nothing but the above in their annual reports/10Ks.

IBM and Dell to the rescue

So we are all left to wonder how much of reported services revenue is ongoing maintenance and infrastructure business versus other services business.  Certainly IBM, in reporting both GBS and GTS gives us some inkling of what this might be in their annual report: GBS is $18B and GTS is $38B. So that means maint and break-fix must be some portion of that GTS line item.

Perhaps we could use Dell as a proxy to determine break-fix, maintenance and infrastructure service revenues. Not sure where Wikibon got the reported service revenue % for Dell but their most recent 10K shows services are more like 19% of annual revenues.

Dell had a note in their “Results from operations” section that said Perot systems was 7% of this.  Which means previous services, primarily break-fix, maintenance and other infrastructure support revenues accounted for something like 12% (maybe this is what Wikibon is reporting).

Unclear how well Dell revenue percentages are representative of the rest of the IT industry but if we take their ~12% of revenues off the percentages reported by Wikibon then the new ranges are from 45% for IBM to 7% for Dell with an median around 14.5% for non-break fix, maintenance and infrastructure service revenues.

Why is this important?

Break-fix, maintenance revenues and most infrastructure revenues are entirely associated with product (HW or SW) sales, representing an annuity once original product sales close.  The remaining service revenues are special purpose contracts (which may last years), much of which are sold on a project basis representing non-recurring revenue streams.

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So the next time some company tells you their service revenues are up 25% YoY, ask them how much of this is due to break-fix and maintenance.  This may tell you whether their product footprint expansion or their service offerings success is driving service revenue growth.

Comments?

2 Replies to “Services and products, a match made in heaven”

  1. This is a very insightful analysis but I wonder why a company would voluntarily share its non-remedial services revenue. These activities are one source of differentiation in the marketplace and being able to fly under the radar helps maintain that hard earned advantage.

    1. Sam,Thanks for the comment. Yes, I agree at first this looks like info that a company would want to keep quiet on but the same could be said for any market information such as storage systems/servers/switches sold and the like. I would venture to say that companies have an inherent need to see where they are with respect to others and this will help to convince them that such information can be disclosed if everyone else is doing it. But this is all conjecture.Ray

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