Whose 'value' is it?

Whose 'value' is it?

I don't know about you, but after dedicating part of my holidays to the task of reviewing my investments in the kids' college funds and listening to a boatload of analysts on several financial news channels prognosticating about the 2005 stock market, I've reached the conclusion that nobody has a clue about what will happen in the coming year.

In the world of tech - storage technology, in particular - some analysts say we are looking at a huge uptick in consumer spending (read "iPod") and sales revenue for vendors. The more likely majority of said experts anticipates additional reductions in corporate IT purchases and continued hard times for the folks who labor in the industry's equivalent of the Bermuda Triangle (a.k.a. the micro economy loosely bounded by Silicon Valley and the OC, the land of Coors beer, and Hopkinton, Mass.) that is notorious for never actually shipping promised features and functions to their customers.

Fear and loathing in storage land

Given the almost daily contradictions about IT spending, it is no wonder that a malaise has descended upon the storage vendor community. You hear it in the voices of salespeople, you see it in the faces of tech company CEOs as they equivocate on past/projected upcoming quarterly profits, and you read it in the e-mails from folks - both consumers and vendors - who send their insights to this humble columnist.

For what it's worth, the word I receive from storage managers is overwhelmingly positive, but not for reasons that should give vendors a great deal of glee. More and more consumers seem to be wising up to the fact that they are in the driver's seat with respect to their vendors, which is good for all of us. Let's consider a few perspectives.

One reader writes that he is expecting a continuation throughout 2005 of the current merger and acquisition "trend" that we've been witnessing for the last couple of years. It's a pretty safe bet that this guy is right, but his rationale is more interesting than you might suspect.

Off-shore sleight-of-hand

He argues that more and more storage vendors are having their stuff built offshore to drive costs out of their production cycles. In the process of building products for US$200 that they try to sell for US$1,000, they invite competition from off-brand suppliers that can deliver identical gear, often from the same offshore supplier for a fraction of the cost.

The ensuing price competition gives the impression that the name-brand vendor's "value-add," which he leverages to justify his pricing, is actually of little value because storage products are increasingly commodity wares and everybody knows it. The only way for brand-name vendors to compete is by buying out their competitors, hence the acquisition pattern.

This strategy, our perspicacious reader argues, has only temporary efficacy. More and more off-branders will emerge over time, and there is no way that EMC, Network Appliance or the others can continue to buy off the competition forever. According to the reader, storage managers are blowing wise to this fact, which bodes well for improved acquisition decision-making, but bodes ill for vendors of overpriced gear.

These words are echoed by another reader, who writes that his Fortune 500 company is looking into a new strategy for dealing with vendors. "We want to find a way to shift the risk of overcapacity to the vendors," he comments. He further notes that he is looking for a way to emulate the strategy used successfully by General Electric and the Department of Defense a short while back called a "reverse auction."

This is essentially a competitive bid situation in which a single buyer hosts a time-limited bid system inviting suppliers to compete for his business. He says he was also considering the creation of the equivalent of a Dell "microfactory," in which suppliers will share the risk, but also the benefits, resulting from the deployment of their products.

This kind of out-of-the-box thinking really works, of course, because the reader's company is a big tech buyer. Vendors routinely loan him equipment for testing. And I doubt that he ever needs to buy his own lunch. But it goes to the point that consumers are looking squarely at the price tag of technology today and are more convinced than ever that most storage is a commodity buy.

"How cheap is it?"

But, what about the smaller guy? SMBs may not have the clout of a Global 2000 firm or the ability to engage in reverse auctions, micro-factories or other such shenanigans. But if a rant recently received from a storage sales guy (who calls himself a "lizard" in his note) is any indication, small size is no impediment to smart storage purchasing. Here's a snippet of the conversation:

"Being a lizard, everybody hates you, nobody loves you, but they all need you," he writes. "It has become a self-help salesperson economy, and the 'educator salesperson' is being squeezed out of business. Even though sales are up for my company, and most customers are somewhat intelligent and informed, they all ask, 'how cheap is it?'

"They are trying to commoditize everything under the sun," he continues, "although you can't present it that way and still make a profit. I was on a sales call yesterday, and the guys explained their pain with Exchange and backups and disaster recovery and WAN bandwidth and everything. Did they want to hear our 'pitch,' our value-add? No. We asked a couple of questions about their SLAs and their environment. They just wanted us to give them a price on the conference call."

This reptilian reader went on to note that the Web is providing resources to smaller consumers that they didn't have before to help guide their selections, adding that sales reps are "morphing into account managers/problem solvers/project managers" - not really selling, but instead just supporting the ordering process.

Thin margins from product sales and the expense of direct sales organizations are pushing consumers further along the self-help path, he argues. A couple of years ago, when the economy slowed, storage vendors first took their best accounts from their channel partners and resellers and gave them to direct sales agents. Then, they discovered that the direct sales organizations were too pricey to maintain, and last year, there was a push to move sales back into the channel. However, a lot of resellers were so devastated by the earlier losses of their key accounts that they couldn't afford sales folks either.

Net result, according to the reader: "The caliber of sales guys I'm seeing in the channel is really dropping. Most good reps went to work for the vendors directly, but now the turnover rate is so high that there really isn't any continuity. The personal relationships are broken or fractured, and this has really pushed IT purchasers to do their own homework and to look for the cheapest product rather than the value-add solution."

All three perspectives go to the key point of this month's column: Market rules apply in storage technology. Insurmountable forces are afoot that are driving consumers to take control of their vendors and their product acquisitions. 2005 will see winning vendors that perceive these simple economic realities, and losers who ignore them.

Jon William Toigo is an author, journalist and speaker who has written over 1,000 articles and 12 books, including two on storage. Current titles include "Disaster Recovery Planning" and "The Holy Grail of Storage Management."

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