Is Virtualization Solutions Delivery Fundamentally Changing?

Ever since the rise to prominence of the Intel/AMD based server platform there has been a simple, horizontally integrated solutions delivery model for the hardware, operating system, middleware, networking, and security industries. That model was based upon the concept that vendors of hardware and software typically specialized in one layer of the solution (server hardware, or operating systems, or routers/switches) and that services organizations (VARs and major systems integrators) assembled and integrated these layers of the cake into solutions for the customer.

This was a true horizontally integrated solutions delivery model, with each vendor sticking rather strongly to their layer of the stack and partnering with vendors in adjacent layers of the stack to ensure easy integration by VARs and Systems Integrators. A simple representation of this model is shown below.

The Horizontally Integrated Solutions Delivery Model


Early on, some major vendors had services organizations (IBM certainly pioneered the model of a major hardware and software vendor wrapping their products with services to deliver a solution to customers), but most vendors tried very hard to be “channel friendly” and to not compete with the channel by either taking the margin on the sale of the product, or worse, the margin on the delivery of the services away from the channel by directly contracting with customers to provide these services.

Over time, more and more large hardware and software companies acquired or built their own services organizations. Microsoft entered into a joint venture with Accenture (Avanade) in order to jump start the delivery of services around key Microsoft initiatives. This was a way for Microsoft to use its balance sheet to fund the creation of a services organization that had a Microsoft bias to it, without forcing Microsoft (the ultimate horizontal play) to directly create its own services organization. In 2008, HP reacted strongly to IBM’s ability to deliver solutions by acquiring EDS. In September of 2009, Dell (another highly committed horizontal play) caved into the need to provide solutions, and acquired Perot Systems.

As major systems vendors have moved more and more into the delivery of solutions, a hybrid model has emerged. This hybrid model exists where a major systems vendor has most of the pieces of the technology stack in hand, partners with a few vendors for the pieces that they do not produce themselves and then wrap this stack with their own services. This model is shown below.

The Hybrid Solutions Delivery Model


In November of 2009, Cisco and EMC announced that together with VMware that they were going to integrate the Cisco UCS platform (itself and integration of servers and networking) with EMC storage and VMware virtualization software. Furthermore they announced the formation of a new joint venture Acadia that would pre-integrate all of this hardware and software, and offer pre-integrated bundles called vBlocks. HP followed suit with an announcement with Microsoft to jointly invest $250M to “significantly simplify technology environments for business of all sizes”. These new more vertically integrated approaches start to get us back to the mainframe and mini-computer days where solutions where fully integrated from hardware through applications, and delivered as such by the vendor. As you can see from the diagram below, Acadia is in a position to source almost every layer of the stack (except security and the server operating systems) from either Cisco, EMC, or VMware. HP is not quite as integrated (yet) as Acadia, but is clearly motivated to go in the direction of further integration.

The Virtualization Focused Vertically Integrated Solutions Delivery Model



It is clear that once virtualization started delivering hard dollar CAPEX and OPEX savings to IT executives that these executives wanted this trend of “more for less” to continue. Most IT organizations are far from 100% virtualized, and there are still substantial cost savings to be gained from further virtualization. However, forward thinking vendors (like Cisco, EMC, and HP) see the handwriting the wall and are taking steps now to be able to deliver solutions at reduced costs to their customers. This next round of cost reductions is not going to come from virtualization, but rather from the pre-integration, commoditization, and packing of services with solutions. Therefore the next source of cost reductions to the enterprise will be reductions in the costs that they pay for integration services as these services will be bundled in some of these packaged solutions from vendors like Acadia and HP.

There is great danger in this trend for VMware. VMware has largely been put on the map by a loyal following of specialist VARs (VMware Premier Solutions Providers), who have invested heavily in building and providing a services competency around VMware. Acadia represents a direct economic threat to the services revenue stream of these VARs, a fact which every one of these companies realizes. These VARs have for the most part been in business for a long time and are quite skilled at managing the vendor relationships and technology portfolios, and typically react quite quickly when they start to see the commoditization of an important services revenue stream. While there is not an easy substitute for VMware projects today, the evolution on the part of the systems vendors toward a more integrated model means that the existing VARs will now be actively looking to augment their VMware services revenue with revenue from other sources. This clearly opens the door for Microsoft Hyper-V on the server virtualization front and to Citrix for its XenDesktop and XenClient initiatives.

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