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Stack to solution: go big, or go home Top of Mind Issues facing technology companies
Stack to solution: go big, or go home
Top of MindIssues facing technology companies
Top of Mind discussion series: Four themes to navigateunprecedented disruption
Theme #1: Stack to solution
Stack to solution is part of an EY Top of Mindseries addressing four key themes that can helpguide technology executives’ actions during thistime of unprecedented disruption. Here weexplore the implications for technology companiesfrom the cloud-induced industry transformationwe call stack to solution — quite likely the biggestchange in the industry’s history.
The four-theme series includes:
1. Stack to solution — technology stacks being displaced by cloud-integrated solutions
2. Hunting for hidden gems — pockets of innovation and troves of data lying untapped within the company
3. In the crosshairs — challenges proliferating from upstarts and activist shareholders
4. Multifaceted security — vulnerabilities and threats multiplying amid technology transitions
To access our collective overview of the fourthemes, go to: ey.com/technology
2 | Top of Mind Stack to solution: go big, or go home
Stack to solution requires rapid implementation of new approachesto sales, marketing, product and service development, talentacquisition, R&D — in short, everything about the way technologycompanies go to market and conduct business. And these changesmust be made in the context of intensifying competition becausestack to solution enables non-traditional competitors — i.e.,companies that have never sold along the technology stack. Theseinclude certain of the leading cloud service providers (CSPs), aswell as new niche technology-enabled services that can launch atlow initial cost and scale rapidly by taking advantage of underlyingcloud services — often, by mashing together multiple such services.
“The biggest mistake technology incumbents make is to pursueincremental changes, because stack to solution demands truetransformation,” says Tim Dutterer, Co-Leader Technology,Parthenon-EY. Many use M&A to help trigger their transformation,but most targets don’t have the necessary scale. Further complicatinga technology company’s stack-to-solution transformation decision istiming: move too early and you lose value while your customerscatch up. But move too late and you may lose the whole game andend up “going home.”
Why stack to solution is so transformationalCloud computing led to this historic stack-to-solution transformationby giving business organizations the choice to hide the technologystack completely from their view, transferring responsibility for it —along with the necessary staff expertise and capital — to a CSP. Inevery technology disruption before the cloud, businesses still had totake responsibility for their technology infrastructure themselves,whether they built it or outsourced it (see “Figure 1: Period ofhistorical change for the technology stack”).
Given the choice, business technology customers are not onlyadopting cloud solutions, they are becoming more results-focused aswell. “The cloud disruption is leading business customers to a moresolution-oriented philosophy, where they may no longer care aboutwhether they’re buying software, storage or security, but are mostlyconcerned with what the right answer is,” explains Jeff Liu, EYGlobal Technology Industry Leader, Transaction Advisory Services.
“The cloud disruption is leading business customers to a more solution-oriented philosophy, where they may no longer care about whether they’re buying software, storage or security, but are mostly concerned with what the right answer is.”
Jeff LiuGlobal Technology Industry LeaderTransaction Advisory Services EY
Sometimes, if you don’t “go big,” you end up “going home” whether you wantto or not. This challenge, and its inherently high risk, lies at the heart of thecloud-induced technology industry structural transformation that EY callsstack to solution. Many incumbent technology companies are struggling withthe stack-to-solution challenge.
Top of Mind Stack to solution: go big, or go home | 3
Stack to solution is a truly disruptive paradigm shiftStack to solution describes how technology companies must morphfrom a paradigm of selling the technology stack (whether as a pureplay in one layer of the stack or a large integrated vendor sellingmany or all layers) to becoming strategically focused on selling thetotal solution. Not only that, but those solutions may be unrelatedto the underlying technology products and services that deliverthem.
But what makes stack to solution such a truly disruptive paradigmshift is that it forces companies to renew their value propositionsand their operating models, at the same time. In terms of valueproposition, for example, it may not be sufficient for enterprisesoftware vendors to migrate to SaaS. Instead, their customers may expect the business insights they need for decision-making. In terms of go-to-market and operating models, stack to solutionimplies major changes throughout the organization.
For this paper, we’ll exemplify stack to solution’s impact by exploringthe following four areas:
• Value proposition• Sales and marketing• Customer segmentation• Product differentiation
“The stack-to-solution model is far better at sensing and responding to changing customer needs as they evolve, which both delights the customer and optimizes incremental revenue.”
Tim DuttererCo-Leader Technology Parthenon-EY
4 | Top of Mind Stack to solution: go big, or go home
Reimagining your layer of the stack as a solutions-orientedvalue propositionOne company we’ve seen make a successful stack-to-solutiontransformation serves as an illustrative example — though it willhave to remain anonymous. This company was a computerperipherals manufacturer whose layer of the technology stack wasrapidly commoditizing; competition was fierce and price-sensitive,margins were shrinking.
Today, the company has repositioned as a document- and image-management solutions provider. And because it increasinglyspecialized in a specific, regulatory-intensive industry, its serviceshave grown to encompass integrated compliance and securityfunctions precisely matched to that industry’s requirements.Further, it is now rolling out advanced analytical services thatleverage the underlying data in its document and image databasesto illuminate the behavior of key workers in its primary industry,enhancing customer decision-making processes.
“By reimagining itself from a traditional device company to asolution-oriented service, this company opened up to a wholedifferent world of opportunity,” says Dutterer. “In a three- or four-year timeline, they’ve completely reinvigorated what otherwisewould have been a dying business, with very low margins and veryslow growth.”
Dutterer further notes that the company’s main route totransformation was via M&A. Company management rapidlyacquired many small services-oriented companies to fulfill theirsolutions-focused repositioning vision. “It’s a whole lot easier to buy the DNA you need and then transfer it than it is to transformthrough meaningful organic change. Executives recognize thatoften the best way to trigger a transformational event is throughacquisition,” he adds.
“By reimagining itself from a traditional devicecompany to a solution-oriented service, this company opened up to a whole different world of opportunity. In a three- or four-year timeline, they’ve completely reinvigorated what otherwise would have been a dying business, with very low margins and very slow growth.”
Tim DuttererCo-Leader Technology Parthenon-EY
Top of Mind Stack to solution: go big, or go home | 5
Velocity of change Multiple decades
Technological catalyst
Impact on the technology stack
Estimate of global value of technology
Technology incumbents(S&P 500)
Hybrid circuits
Birth of hardware,software and services paradigm
Much less than$100 billion
Under 10
About 15 years
Integrated circuits
Beginnings ofdistributed architecture; smaller, more accessible
Over $100 billion
About 40
About 10 years
Microprocessor; network and productivity software
Expansion of distributed architecture and requirements
Over $1.5 trillion
About 80
Less than 5 years
Hypervisor andcost-efficient server chips
Conscious decouplingwith moderate benefits
Over $2 trillion
About 80
Quarters and months
Mobility, cloud computingand big data
Convergence, disruption andnew paradigm
Over $3.5 trillion
About 70
1950s 1995 2005 2010 today
Cloudsolutions
Technology eras and interfaces of change
Mainframecomputing Minicomputer Virtualized
data centersClient-server
Internet
Source: EY analysis; all currency references are in US dollars.
Figure 1: Period of historical change for the technology stack
6 | Top of Mind Stack to solution: go big, or go home
Sales and marketing to keep the customer satisfied, 24/7/365:The shift in sales and marketing between selling the technologystack and selling cloud-enabled solutions can be dramatic. Thinkabout the different models, incentives and enterprise customerexperiences involved in selling licensed software versus sellingSaaS, one of the earliest stack-to-solution offerings.
Licensed software: This model requires a significant up-front saleseffort to win the up-front outlay (of both money and effort) thatbusiness customers must make to license software. As ahypothetical example, let’s say a customer pays $1 million initiallyto license your software and $200,000 per year in a maintenanceagreement — and after four or five years, the software is at the endof its useful life and you’re ready to sell in an upgrade. Typically, ahighly compensated salesperson pursues the initial sale and acustomer service team manages the ongoing relationship. The salesforce’s incentives focus on driving high-revenue up-front wins, noton consistently delighting the customer over time.
SaaS: In the SaaS delivery model, however, prospective customersoften can try before they buy and be instantly in business, which byitself is a paradigm shift and competitive advantage. In addition,revenue flow is symmetrical: let’s say $400,000 per year (plusfuture price increases) for as long as you can retain that customer.Consequently, SaaS providers have invented a completely differentsales and delivery model that incentivizes continuous just-in-time,always-on customer service. “They have matched their revenuemodel with an integrated sales and service team that createsconstant service, and is much more responsive, much more mappedto the year-on-year revenue of the business. This model is far betterat sensing and responding to changing customer needs as theyevolve, which both delights the customer and optimizes incrementalrevenue,” explains Dutterer.
While incumbent software companies are migrating to SaaS, makingthe necessary cultural and business behavior transformationthroughout their operating models is extremely difficult. Of note,EY recently published a related paper, The trouble with culture:unlocking merger value is really about business behavior.
Segmentation: low initial cost, “mash ups” yield broaderopportunityAn important aspect of stack-to-solution offerings is that they areeasily tailored to meet the varying needs of different customersegments. Another is that they can be deployed with a much lowercost of initial ownership than the historical offerings they replace.Combined with the responsive sales and service model alreadydescribed, these attributes are leading to the rapid emergence of amultitude of new technology-enabled services.
“There are opportunities opening up in the small-to-medium-sizedsegment of the enterprise landscape because stack-to-solutionofferings can be delivered for a much lower cost,” Dutterer says.“That expands the market, and I think it empowers these new stack-to-solution companies to think harder and more proactivelyabout different ways to target different customer segments.”
Stack-to-solution offerings:
•Easily tailored•Lower-cost deployment
Top of Mind Stack to solution: go big, or go home | 7
This opens up a lot of opportunities for investors, a fact made clearby the 15-year high in US venture capital investment in the firstquarter of 2015.1 “From an incumbent perspective, it means evenmore new and non-traditional competitors — and it also meanscompanies need to figure out how they’re going to tap in and acquiresome of these gems that are growing and becoming much morewell-capitalized than they ever were in the past,” Dutterer adds.
Further accelerating the proliferation of new competitors is thatsome are forming rapidly by combining multiple existing services to address a new market need — what’s sometimes called “mashups.” Says Dutterer: “When you look at the skills needed andinfrastructure required to get a new technology-enabled service up and running, the time and investment capital required isdramatically decreased. All these factors together point to a nearfuture with such dramatic proliferation of technology innovationthat it’s going to be hard to comprehend, despite our being pre-conditioned by now to expect fast-paced innovation.”
Stack to solution
• Stack vendors replaced by cloud services and solutions
• Defining new paradigms: market, organizational structure, pricing, support, value proposition, competition, metrics
“The biggest mistake technology incumbents make is to pursue incremental changes, because stack to solution demands true transformation.”
Tim DuttererCo-Leader Technology Parthenon-EY
1 “Startup Funding Hits 15-Year High While Valuations Set Record,” Dow Jones Institutional News, 20 April 2015, via Factiva, © 2015, Dow Jones & Company, Inc.
8 | Top of Mind Stack to solution: go big, or go home
Stack to solution alters product differentiationA classic technology industry debate is about where to place criticalintelligence, in the network or in the network’s nodes. During therise of the PC, nodes predominated. But smartphones and othermobile devices are rising more or less in tandem with stack-to-solution cloud services, which draw intelligence back into thenetwork (which, in turn, powers those mobile devices).
This stack-to-solution shift has tangible implications for productdifferentiation. To see why, consider the internet of things (IoT):instances of the IoT typically envision solutions delivered by a smartnetwork with centralized intelligence and control in the cloud,combined with relatively “dumb” sensors as network nodes. “TheIoT is a powerful example of both a smart network and a stack-to-solution platform,” says Barak Ravid, Co-Leader Technology,Parthenon-EY. “Its promise is to deliver a solution — fitness, say, asopposed to an activity-tracking device. But in that smart networkvision, standardization, not differentiation, is the key requirementfor IoT devices. That creates a large product differentiationchallenge for the device makers,” Ravid explains.
Ravid notes that the product differentiation challenge is not limitedto IoT; it’s propagating as stack-to-solution approaches grow.“Server manufacturers work to separate themselves from the packthrough advanced, sophisticated functions. But today, data centeroperators want an army of standardized machines, because ifthey’re all dumb and exactly the same, then I can manage themfaster and more efficiently with clever software and analytics,”Ravid explains.
Given this context, the key issue in product differentiation is nolonger about sophisticated features and functions. Instead, it’sabout moving up the technology stack and offering more of asolution.
A time to transformFor most incumbent technology companies, the time to think abouta stack-to-solution transformation is ending and the time to act is beginning. “Technology companies have many more signalsavailable today to measure disruption and help you decide how you should change, where you should go. Listening to all of those,and bringing them into your strategy conversation, is much moreimportant than ever before — and much harder. But the stakes, too, are much higher than they previously were,” says Ravid.
As suggested by the illustrative peripheral manufacturer example,companies may continue to survive through point offerings alongthe technology stack, but with very low growth prospects and slimmargins. Consequently, EY’s Liu, Dutterer and Ravid all agree thatthe biggest stack-to-solution risk for technology companies isinaction.
“The transition is difficult, it’s risky, it requires capital — and itrequires courage,” says Ravid. “So many companies are still tryingto get comfortable with what they have to do. But meanwhile, thepace at which competitors arrive is so much quicker than it was.And the pace at which those competitors can execute and reallydisrupt your business is much faster than it was.”
So we counsel technology executives to act now to identify theirstack-to-solution opportunities — before someone else does it for you. n
“The transition is difficult, it’s risky, it requires capital — and it requires courage.”
Barak RavidCo-Leader Technology Parthenon-EY
Top of Mind Stack to solution: go big, or go home | 9
Figure 2: Stack to solution takeaways
1.Cloud’s impact goes beyond IT infrastructure to business model, go-to-market and operational execution.
5.Reimagining yourself with a “total solutions” value proposition opens new worlds of opportunity.
2.Cloud solutions influence customers to care less about the tech they’re buying and more about the solution — or “answer.”
6.Total solutions vendors never rest: they’re in a continuous sense-and-respond relationship with customers, always iteratively improving.
3.Stack to solution demands tech companies pursue high-risk transformations to sell total solutions; inaction is even riskier.
7.Stack to solution drives narrower customer segmentation, leading to a proliferation of new competitors.
4.Tech companies undertake stack to solution transformation through M&A, rather than organic R&D.
8.Stack to solution challenges traditional notions of product differentiation.
10 | Top of Mind Stack to solution: go big, or go home
• How do I grow “up” the technology stack?
• What technology acquisitions could enable us to move up the stack more rapidly?
• How can I reimagine my value proposition in a solutions context?
• Which verticals are most interesting for my solutions growth?
• What should be my partnering strategy?
• Is my core competency as a technology enabler or as a solution provider?
“Technology companies have many more signals available today to measure disruptionand help you decide how you should change, where you should go. Listening to all of those, and bringing them into your strategy conversation, is much more important than ever before — and much harder. But the stakes, too, are much higher than they previously were.”
Barak RavidCo-Leader Technology Parthenon-EY
Questions to consider:
Top of Mind Stack to solution: go big, or go home | 11
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Technology sector contacts
Pat HyekGlobal Technology Industry Leader +1 408 947 5608 [email protected]
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Find out moreStack to solution: go big, or go home is part of a series of top-of-mind executive briefs providing separate deep-diveanalyses of four disruptive technology transformation themes:stack to solution, hunting for hidden gems, in the crosshairs and multifaceted security.
For more information, or to discuss the diagnostic tools EY hasdeveloped to show how these themes might affect your ownorganization, contact Jeff Liu, Tim Dutterer or Barak Ravid;their contact information is listed below.
