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Lenovo Turnkey Solutions: How Lenovo’s art of the practical enables clients to practice the art of the possible

New offerings built on a smart long-term strategy

In advance of Lenovo’s Oct. 18 announcement of Lenovo Turnkey Solutions, executives with the company’s Industry Solutions group briefed TBR on elements of the new offering. In building the turnkey solutions, executives emphasized Lenovo’s continued focus in three critical areas: simplicity, core competencies and smart partnering. Keeping in mind Lenovo’s role in the ecosystem — particularly from the perspective of IT services vendors and consultancies — TBR sees Lenovo’s approach as essential to its promise to deliver the art of the practical while enabling clients and partners to practice the art of the possible.

So, what are those three critical areas?  

  • Lenovo’s focus on keeping things simple by “removing complexity of configuring solutions” is beneficial for consultancies and IT services vendors trying to help their clients accelerate adoption, innovation and transformation. By decreasing the configuration to a few key variables, partner enablement and scale through the channel become more manageable. Lenovo’s executives repeatedly emphasized the company brings technology from many vendors to an engagement and “makes the technology practical” to enable a seamless client experience. In TBR’s view, a technology partner that wants to leave complexity to a consultant is exactly the kind of tech partner consultants love.
  • That very division of labor connects to the second point: Lenovo focuses on doing what it does well and leaving its clients’ and partners’ market differentiation up to them. As Lenovo executives noted, their clients do not do IT or hardware; their clients do everything else and can leave IT and hardware to Lenovo, while Lenovo leaves everything else to its clients (and partners). TBR has repeatedly observed that vendors that remain focused on what they do well consistently outperform competitors with more diverse and multifaceted strategies.
  • Lastly, Lenovo’s willingness to develop and provide both niche and broad solutions indicates the company is taking strategic cues from clients and ecosystem partners, rather than trying to tell the market what it wants. Lenovo is serving clients’ and partners’ needs, not focusing on selling Lenovo solutions — of course, they do that too, very much, but it is a matter of focus and strategy.

In summary, Lenovo’s integrated turnkey solution strategy revolves around having a finger on the pulse of customer demand to identify solution areas that can inherently be simplified down to a handful of configurable variables to enable scale through the channel while playing their well-defined role in an evolving and complex ecosystem. Lenovo removes the complexity of multipartner involvement, while staying close to clients and their needs — a smart long-term strategy with plenty of room for sustained execution.

Additional contributor: Jacob Fong, Research Analyst

Lenovo Accelerate 2019 stresses vertical integration, process agility and people

Experience tells these Lenovo executives that the hard work of driving execution at scale and transforming channels lies ahead

While Lenovo has turned the corner on revenue, profits will come from driving scale through the retooled operation. Known challenges outlined during the event include:

  • Services: Lenovo DCG services at the time of the acquisition of the IBM x86 line consisted of holding the paper while IBM executed on the service. From there, Lenovo has built its own break-fix programs, added consulting and education, and aspired to build out vertical solutions through collaborative work with partners and customers. Tuck-in acquisitions to rapidly acquire repeatable frameworks and subject matter expertise will likely arise as Lenovo goes about the painstaking process of creating a people-centric business necessary for solution assembly and maintenance and management.
  • Direct go-to-market pivots: Lenovo will organize its selling functions around solution stacks in addition to general territory reps. To gain the hearts and minds of the traditional territory reps, the company has added monitoring of storage and services attach to quotes to break the existing sales mindset of thinking in terms of server units. Lenovo has multiple transformational initiatives occurring within its go-to-market motions, in some ways reminiscent of the old Hewlett-Packard Co. selling motions of the 1980s and 1990s. Lenovo plans to have more dedicated selling units with deeper domain expertise around:
    • Targeting the hyperscale market where the lead sales point of contact needs deep engineering expertise to engage in capturing the design requirements for custom-engineered systems.
    • Adding dedicated storage reps to push harder to scale out the storage product cross-sell opportunities from the NetApp alliance and China-based joint venture. This team will be led by Dave Mooney, who joined Lenovo shortly after the event as the VP of Worldwide Storage Sales. Motruney has over 25 years of storage experience, most recently as the VP of Worldwide OEM Sales for NetApp.
    • Taking a vertical approach to IoT. While not necessarily distinct from competitors, Lenovo will be taking specific multivendor collaborations built on a custom basis and hardening them to be delivered as solution bundles at scale.
    • Leveraging TruScale to entice channel partners to sell through a new business model — reinforced by arming its channel partners with the entire ThinkSystem and ThinkAgile stacks behind this push.
  • Channel first: Many a firm has made this claim before, and Lenovo is no different. Lenovo claims it has made the activity revenue neutral and has put teeth into the policy regarding noncompliance among its direct sales force. Time will tell in terms of its success.
  • “As a Service” monetizations: Lenovo’s established Device as a Service (DaaS) commercial offering is being replicated for the data center in what it calls its TruScale Infrastructure Services program. Lenovo makes great pains to assert TruScale is not just a new form of operating leases. For DaaS, Lenovo will take back underutilized devices and bring them back into service when the customer requires. For the data center, the service arguably provides true public cloud consumption opex provisioning by only charging for the amount of data storage used on premises. Future service innovations outlined under nondisclosure agreement (NDA) make this offering a service to watch from Lenovo over the next several years.

Interchangeably called Lenovo Transform 3.0 and Lenovo Accelerate, the three-day combined customer and analyst event made several things abundantly clear. Lenovo believes it has turned an operational corner, that it has the right people and processes in place, and now all Lenovo has to do to drive growth and lift margins is to execute on these hardening operational best practices at scale across an ever-expanding array of technology assets including a growing contribution of software and services to offset persistent macroeconomic pressures on hardware margins.

HPE buys Cray: Is this the definition of insanity?

We know Moore’s law drives consolidation in the industry. What we do not know, however, is if any two hardware-centric vendors can come together and build a business accretive to the top line. Michael Blumenthal tried this strategy by combining Burroughs and Sperry to create Unisys, and that certainly did not work. More recently Dell acquired EMC, and while jury remains out on that consolidation play, early indications have been positive.

HPE hardware acquisition history

Hewlett Packard Enterprise (HPE) has deployed this strategy multiple times over the years. Today HPE announced it will acquire Cray for $1.3 billion, which equates to $35 a share, or a $5.19 premium over yesterday’s closing price of $29.81. Similar hardware-centric deals HPE has conducted over the years include:

  • Acquiring Apollo after its first-mover advantage in engineering workstations was eclipsed by Sun Microsystems
  • Acquiring Compaq after it had acquired Tandem and Digital Equipment Corporation (DEC), which had likewise struggled as much in business model integration as with technology integration
  • Acquiring SGI, which was hemorrhaging cash but was a strategic HPE OEM partner that HPE could not afford to let fail or be acquired by a rival
  • And now Cray, the last of the venerable high-end niche vendors to double down on higher-margin high-performance computing (HPC)

HPC becomes mainstream as accelerators keep pace with big data compute demands

HPC certainly has growing appeal. That appeal stems from several economic drivers

  • As always, Moore’s law theory gets borne out in reality as cost and form factors decrease to the point where distributed computing (a fundamental tenet of Ken Olsen’s original business plan for DEC in the early 1960s) can be done at the board level if not the chip level. Graphics processing units (GPUs), tensor processing units (TPUs) and field-programmable gate arrays (FPGAs) can keep pace with increasing demands coming from big data analytics.
  • Supply chain excellence and software tuning of these commodity components can allow for custom-designed systems, purpose-built to the compute demands of the HPC customers.
  • IBM certainly keeps innovating in HPC, especially with its RISC-based Power chips suited for analytics.
  • Lenovo has taken a huge bite out of HPE’s share of the HPC space through its design engineering and supply chain flexibility, manufacturing commodity Intel boards at scale through Lenovo’s global manufacturing space. Per Lenovo it went from having none of the top 500 HPC installations in the world in 2014 to having 140 of them in 17 countries in 2018. Much of this success came at HPE’s expense.

Will the acquisition go against type and be viewed as a sane move?

A definition of insanity is to engage in the same activity over and over again while expecting a different outcome. HPE’s history has been to acquire struggling firms in niche hardware areas in hopes of growing share. With fewer and fewer silicon-centric vendors left standing, the odds of success can certainly increase in time.

The Cray acquisition may well aid HPE in stalling Lenovo’s recent successes in the HPC space, but Lenovo’s operating best practices are well suited to commoditizing markets. Supply chain excellence honed to attack the hyperscale market brings decided cost advantage to the HPC space. Talent recruited from Intel and other firms likewise gives Lenovo the software tuning competencies necessary to extract fit-for-purpose performance from commodity chipsets.

Quantum also looms large on the horizon as the next chapter for the high-end compute requirements to help solve the world’s intractable problems. Seven nanometer wafers may not be the end of the line for silicon innovation, but it is certainly getting close. This acquisition seems poised to satisfy the immediate here and now, while once again being eclipsed by niche innovation elsewhere, with that elsewhere coming in the quantum domain in three to five years.

Recent articles have come out suggesting HPE is cutting back on quantum research, intending instead to extract more life out of the traditional computing space with processors for deep learning and analytics. HPE has certainly acquired a company that has been admired for decades as being the “tip of the spear” in silicon innovation. HPC innovations certainly can work for today, but that tip of the spear will be blunted by the inexorable laws of physics, making further silicon innovation increasingly more challenging. Future offerings in what has been Cray’s core market will come from quantum innovators. Once quantum reaches economic advantage over high-end classical computing, the industry will see yet another round of business exits for those vendors lacking transformation fearlessness. Like many of HPE’s other hardware-centric acquisitions, this move appears to have reasonable short-term impact and limited long-term upside.

Commoditization economics and emerging workloads disrupt the data center landscape

Commoditization mitigation strategies require business model shifts and an ever-watchful eye on exascale cloud entrants

Volume or value?

Toward the end of 2018 in the data center market, two distinct vendor strategies emerged: Vendors began either increasing sales volume or selling lower-volume but higher-value solutions. TBR believes that in 1H19, now that vendors have determined their camps, they will begin to craft competitive strategies directly targeting specific peers. For example, Dell EMC has publicly stated its intent to increase its market share in both servers and storage, and we believe the vendor will target key competitors to gain this share. Similarly, Lenovo’s large-scale data center investments imply significant competitive goals.

In February Lenovo unveiled TruScale Infrastructure Services. This directly competes with Hewlett Packard Enterprise’s (HPE) GreenLake and Dell EMC’s Cloud Flex. It also addresses customer demand for private cloud infrastructure that is financed like a public cloud offering. TruScale is available for Lenovo’s entire stack of data center infrastructure solutions. In April Lenovo unveiled a server portfolio refresh, which likely reinforces its TruScale solutions and increases its competitive edge against Dell EMC and HPE.

TBR believes that during the next few months, Dell EMC and HPE will fight back against Lenovo’s marketing tactics to preserve market share. HPE has an advantage in that it is pursuing value-centric data center sales, so it is likely willing to concede less-profitable sales to Lenovo or Dell EMC. Dell EMC’s stated objective to increase market share in servers and storage will increase competition between the company and Lenovo as both aim to scoop up HPE’s lower-margin customers.

ODM participation heats up as commoditization drives provisioning simplicity

Because data center hardware becomes increasingly commoditized as software capabilities become more advanced, we believe data center vendors will increasingly find themselves competing against ODMs, especially for larger deals. Smaller customers will still show a preference for OEMs as they need the additional software and services provided with OEM data center solutions. Lenovo’s manufacturing capabilities give the company an advantage in the hyperscale space, where Lenovo’s past financials illustrated some successes, and enable the vendor to differentiate from its OEM peers.

On the hyperscale front, ODMs are rising to dominance, but OEMs such as Lenovo remain a force to be reckoned with in the space. As cloud becomes an increasingly central piece of IT environments, public cloud providers seek ways to expand their environments as cost-effectively as possible to preserve profits. TBR believes very large enterprises are likely to explore leveraging hyperscale vendors as well for their on-premises environments if it is cost-effective.

Consumption-based pricing models tie to the commoditization march

TBR’s Hyperconverged Platforms Customer Research continues to highlight the correlation between private cloud installments and HCI. Most recent findings indicated that 80% of respondents leveraged their HCI purchase for a private or hybrid cloud environment. Since customers are already turning to HCI for cloud, it is a logical next step for vendors to price HCI like a public cloud solution to deepen the competition.

With their channel partners also engaged, Dell EMC, HPE and Lenovo are the three main players in the consumption-based pricing space. Their solutions are not limited to just HCI, but HCI is one of the solutions that can be purchased in this manner. The key value proposition of consumption-based pricing for data center vendors is the ability to bundle software and services into hardware consumption-based deals. This is likely to boost the margin on the solutions. Further, it guarantees larger deals, as in many cases, these consumption-based pricing deals lock customers in for a predetermined duration that has early termination penalties.

TBR Weekly Preview: March 11-15

We’re going all over the technology space this week, with reports spanning U.S. federal government IT services to long-established hardware and data center providers, plus a couple of European-centric companies.

Wednesday:

  • Talent continues to be the constraining factor on ManTech’s bright revenue growth outlook. Focus in defense and intelligence segments of the U.S. federal market on innovation creates healthy demand for ManTech’s labor-based technical services offerings, such as R&D, testing and evaluation of emerging technology. As a smaller competitor compared to many of its large prime peers in the federal sector, ManTech acutely feels the resource impacts of the security clearance backlog and overall tight labor market. TBR’s 4Q18 ManTech report, written by Senior Analyst Joey Cresta, will explore how ManTech uses adaptive learning, continuous monitoring software and new leadership hires to address the human capital challenges associated with scaling up its labor base to meet robust client demand.

Thursday:

  • As detailed in our initial response, Lenovo achieved its sixth consecutive quarter of year-to-year revenue gains, reporting $14 billion in revenue in 4Q18, up 8.5% from the year-ago compare, even as consolidation opportunities cool in the PC market. Despite these high notes for Lenovo exiting 2018, the company will still face hurdles over the next two years. Its PC and Smart Devices businesses will have to deal with challenging and shifting PC environments. Data Center Group continues to deliver on its promises, but it remains in the red despite improvements to its bottom line. Lenovo’s Mobile business is still teetering in profitability. Read our full report by Analyst Dan Callahan to find how Lenovo will navigate these challenges and tee up for a seventh consecutive quarter of revenue growth in 1Q19. 
  • Our detailed assessment of Atos will note that the company’s Digital Transformation Factory portfolio accounted for 30% of revenue in 2018, up from 23% of revenue in 2017, positively affected by increased activities with clients in areas such as orchestrated hybrid cloud, Digital Workplace and cybersecurity. As Senior Analyst Elitsa Bakalova will report, Atos’ efforts to position as a trusted partner for clients’ digital journeys are starting to pay off, and the new digital services strategy will shape the company’s activities over the next three years.
  • As reported in our initial response, Hewlett Packard Enterprise’s (HPE) revenue fell 1.6% year-to-year to $7.6 billion. While revenue growth is always a goal, TBR believes HPE is more focused on improving profitability in the near term before it shifts to boosting revenue growth. In our full report Analyst Stephanie Long will dive into the long-term strategy of CEO Antonio Neri and how it will impact 2019. Key cost-cutting initiatives and strategic investments, such as in high-performance computing and the edge, will be likely highlights in 2019.
  • Analyst Kelly Lesiczka will be reporting that T-Systems’ portfolio and organizational investments continue to improve its ability to gain wallet share in newer areas and stabilize revenue growth in 2018. Building out its emerging technology portfolio offerings, such as for IoT using DT’s product offerings, enables T-Systems to provide more comprehensive and personalized solutions to clients and generate larger-scale engagements to accelerate growth.

As promised, we published a new report last week by Senior Analyst Boz Hristov on Accenture Technology, and today published a report on TELUS International from Boz as well as a report on Mobile World Congress Barcelona 2019 by Principal Analyst Chris Antlitz.

While we do not have a webinar scheduled for this Wednesday, the next one will be on March 20 featuring Senior Analyst John Caucis talking about healthcare IT services.

Key findings from TBR’s 2H18 Hyperconverged Platforms Customer Research

  • TBR forecasts the HCI market will reach $15 billion by 2023, representing a significant growth opportunity for data center vendors.
  • Survey incidence data indicate that the majority of potential customers have not yet begun their hyperconverged infrastructure (HCI) journey.
  • Emerging solutions, such as Lenovo’s TruScale Infrastructure Services and AWS Outposts have the potential to shake up the HCI market.

Opportunity for successful HCI vendors is great, as the market will rapidly expand through 2023

The HCI market evolves to meet customers’ changing demands. As customers embrace digital transformation, the opportunity in HCI increases, and vendors invest and adapt to become agents of change for customers. TBR estimates the HCI market will increase from $4.6 billion in 2018 to $15 billion by 2023 as customers leverage HCI for a wide array of needs, both traditional and emerging.

A majority of potential customers have not yet purchased HCI, creating opportunities for all HCI vendors to gain customers. Incidence data from TBR’s research show that only 27% of companies surveyed purchased HCI. This demonstrates the massive opportunity that remains for vendors to gain net-new customers in the space. Converged infrastructure (CI) leaders Dell EMC and Cisco have a distinct advantage over other HCI peers, as their CI legacies have afforded them incumbent status with existing CI customers. Despite the incumbent advantage, there is opportunity for any vendor to capitalize on emerging buyer preferences. For example, software is an increasingly central piece of the HCI story, and with 79% of respondents indicating that they would consider consumption-based HCI purchases, strategic marketing and investments can enable any HCI vendor to rise through the ranks.

While Lenovo is not a leading vendor at this time, 30% of respondents indicated they considered Lenovo for their HCI purchase. Lenovo’s restructured portfolio, its recent unveiling of TruScale Infrastructure Services, and the rapid positive changes in its overall data center business are likely to bolster gains for the vendor in HCI as well. Although Dell EMC’s and Cisco’s leadership in the HCI space has been established, the opportunity in HCI remains vast, even for fast followers in the space. Digital transformation only stands to reinforce this trend as HCI becomes more widely adopted.

Customers leverage HCI for private and hybrid cloud installments as security remains a top concern with public cloud adoption

It is clear the private and hybrid cloud value proposition is a benefit HCI buyers are looking to achieve, with 80% of respondents indicating they leverage HCI for private or hybrid cloud installments. A majority of customers (60%) leverage their HCI for database management, and many of these customers indicated their database management use was for mission-critical purposes. This underscores the need to protect critical and sensitive data. TBR’s research showed that buyers are making additional investments in security in conjunction with HCI, particularly network security.

Graph depicting 2H18 security software purchased with hyperconverged

Going forward, the emergence of AWS Outposts in the market will challenge current HCI deployment trends as Amazon Web Services (AWS) messages its Outposts offering as being able to seamlessly integrate with AWS public cloud, addressing a key driver behind HCI adoption for private cloud installments. AWS Outposts are expected to hit the market in 2H19, so it will take some time before the impact of Outposts is known. However, that AWS is making its Outposts offering available as a managed service will improve ease of use, and will likely increase demand, especially among existing AWS customers as the underlying hardware of Outposts will resemble that of AWS’ public cloud environment.

Lenovo unveils on-demand service for data centers, joining competitors

Lenovo’s Data Center Group (DCG) has unveiled TruScale Infrastructure Services. A Hardware as a Service (HaaS) solution with subscription-based pricing, TruScale makes DCG’s entire ThinkSystem and ThinkAgile portfolio available to customers “as a Service” through both Lenovo sales associates and channel partners.

For a monthly fee, customers will gain access to data center infrastructure, which can be installed at the customer’s location of choice. Cost will be based on power consumption, as power consumption is a relatively accurate way to measure usage without compromising infrastructure security. The hardware remains Lenovo-owned, -maintained and -supported, and with no minimum usage requirement, customers gain the financial flexibility available through public cloud offerings without the risks associated with taking data off premises. — Stephanie Long, Analyst

Lenovo unveils TruScale Infrastructure Services, consumption-based data center pricing

In February Lenovo’s Data Center Group (DCG) unveiled TruScale Infrastructure Services. A Hardware as a Service (HaaS) solution with subscription-based pricing, TruScale makes DCG’s entire ThinkSystem and ThinkAgile portfolio available to customers “as a Service” through both Lenovo sales associates and channel partners. For a monthly fee, customers will gain access to data center infrastructure, which can be installed at the customer’s location of choice. Cost will be based on power consumption, as power consumption is a relatively accurate way to measure usage without compromising infrastructure security. The hardware remains Lenovo-owned, -maintained and -supported, and with no minimum usage requirement, customers gain the financial flexibility available through public cloud offerings without the risks associated with taking data off premises. Further, the monthly pricing structure includes installation, deployment, management, maintenance, remote monitoring, system health checks and removal of the hardware once the subscription expires. Pricing details of the solution have not yet been disclosed and are likely to be determined case-by-case. The solution is currently available only in English and priced in USD and Euros.

DCG’s late-to-market status will be advantageous in the consumption-based pricing realm

DCG is a fast-follower in consumption-based pricing, as Hewlett Packard Enterprise (HPE) and Dell Technologies have offered consumption-based pricing for over a year. While these offerings have greater market longevity, as they are typically multiyear agreements, customer adoption remains relatively nascent for consumption-based pricing models. These deals are more complex than traditional hardware sales, and therefore require a mindset shift in some ways to promote adoption, just as cloud did initially. DCG’s entrance into the market times well with customer interest, and the vendor’s later arrival to the space will not prove to be a major inhibitor to growth.

The total inclusion of DCG’s channel partners, in addition to its direct sales force, in providing TruScale, is an asset and distinction for the group. Because Lenovo’s services portfolio is not as mature as that of vendors such as Dell EMC, providing channel partners with this opportunity will prove to be a win-win as it enables channel partners to sell attached services while affording Lenovo a more passive revenue stream. Involving the channel has been an initial challenge for some vendors offering consumption-based pricing as the partners need to be incentivized to pursue it over a traditional hardware sale, in which they would get a lump sum payout versus a subscription-like payout. TBR believes that because Lenovo has arrived to market later than peers with its consumption-based pricing offerings, it was able to work out channel partner challenges before going live with the solution.

Lenovo optimizes to gain share in a market poised for fragmentation by use case

TBR perspective

At Lenovo’s Transform 2.0 event, Chairman and CEO Yuanqing Yang (“YY”) laid out the Lenovo strategy crisply in his opening remarks, relying on multiple proof points from analyst firms in the process. The company has been gaining share in a market in the aftermath of consolidation, and it sees nothing but brighter days ahead. The source of Yang’s optimism rests on scale, a traditional lever that has pulled commodity component manufacturing to Asia for decades. How Yang believes Lenovo wins stems from the company’s supply chain best practices, where it can optimize the full stack of compute to serve the full stack of instances on the one hand and create a vast array of endpoint devices for humans and machines alike on the other.

The tight partnership with NetApp (Nasdaq: NTAP) was the biggest news at the event. The venture essentially melds the Lenovo and NetApp product lines in a manner similar to the scale advantage amassed when the former Dell and EMC merged to form Dell Technologies (NYSE: DVMT). The two companies have also created a joint venture in China, with Lenovo having 51% ownership as required by Chinese law, and plan to develop a line of storage products to meet the unique requirements of customers in China while leveraging Lenovo’s scaled manufacturing footprint in region.

Supply chain alone cannot help vendors differentiate, as many past Asian manufacturing giants have come to learn as overlapping channels confused markets and compressed middleman margins in the bygone era of transaction selling. Services selling requires an equally as deft and varied set of commercial offers to fit the financial strategies of the business entities Lenovo targets, and the seeds of these early “as a Service” commercial offering wrappers have been in flight for several years.

Commercial flexibility, while lagging the supply chain competencies, remains far ahead of the professional services wrapper commodity components required in the pivot to selling outcomes or solutions. Lenovo’s partnerships with leading systems integrators will be imperative for enterprise adoption as the business translation and advisory services increasingly relegate the compute and device acquisition to a derived decision.