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From around the web …a new path forward?

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If you are a frequent visitor to social media channels every now and then you may run into something that catches your eye. In this case, for me, it was only a short time ago that I saw this promotion of a McKinsey report by T.C. Janes.

If you aren’t aware of T.C. Janes he has spent 18 years at HPE, the last six years as Client Chief Technologist (2014 – 2020) and whenever I had a chance to talk with him, I never ceased to be amazed by the breadth of his industry knowledge.

And yes, he was very aware of NonStop and of the benefits NonStop systems provided those enterprises where NonStop had been deployed in support of mission critical solutions.

nsi mar 21

What was somewhat coincidental or even serendipitous about coming across this promotion was that it occurred even as I was following HPE updates concerning the release of its Q1 FY21 financial results.  As I read through the press release and the transcript of the analyst briefing that followed – the subject of a separate article in this issue of NonStop Insider, HPE Corner, it wasn’t hard to miss the transformation under way within HPE as it began reporting revenue from sources such as GreenLake.

What this highlighted was how HPE was making the move to a more software-like revenue creation model where monthly payments were the focus. This has clearly been the beginning of a major sea-change for HPE as it continues to become more software oriented, shifting emphasis away from pure box sales.

What follows here in the McKinsey report is that there will be many more major vendors following HPE’s lead and this is encouraging news for the NonStop community too as we are witnesses to the ongoing transformation of NonStop into a pure software play – yes, as an option, but it’s a clear guide to where NonStop is ultimately headed.

Whether you are just interested in how HPE continues to transform itself or simply curious about how this HPE journey compares to what other IT vendors face, including those in the NonStop vendor community, then this selection of observations by McKinsey should prove an interesting read.

What follows here is edited content from the full McKinsey & Company article which can be viewed in full at –

Hardware’s business-model shift: Finding a new path forward

March 3, 2021

By Himanshu Agarwal, Chandra Gnanasambandam,
Mitra Mahdavian, and Srinath Nagarajan

IT-infrastructure providers face an unenviable challenge. Technological change has led their customers to view hardware appliances as commod­itized. At the same time, cloud-based vendors and hyperscalers have set new norms for simplifying customers’ experiences of purchasing IT infra­structure.

As a result, savvy chief information officers (CIOs) and IT buyers now demand a cloud-like experience even when buying on-premises IT infra­structure, such as pay-per-use models for on-site equipment to help them manage the complexity of their hybrid deployments and IT needs.

Given these forces, IT-infrastructure OEMs have little choice but to reinvent their business models to increase the share of recurring revenue from subscription, software, and services. Yet many OEMs struggle with their business-model-transformation strategy and its execution.

IT-infrastructure OEMs have little choice but to reinvent their business models to  increase the share of recurring revenue from subscription, software, and services.

IT-infrastructure providers typically adopt a combi­nation of different approaches to reinventing their business model. When done right, IT-infrastructure providers can see an increase in market share and improvements in customer experience.

For example, Hewlett Packard Enterprise (HPE) says its Greenlake 3.0 solution—a bundle of traditional computing and storage hardware with software products and services that is priced using a single “unit of consumption” such as terabytes or number of virtual machines—has onboarded more than 1,000 customers with over $4 billion in total contract value within three years of its launch.

In 2019, it also said that the consumer-satisfaction rating for the Greenlake 3.0 solution is more than 80 percent, which is in the 99th percentile for IT-service delivery.

Furthermore, we believe that investors will reward new business models with a higher enterprise value if providers can consistently demonstrate that revenue is recurring in a manner that’s disconnected from the life cycle of the hardware and that’s subject to low customer churn while sustaining or expanding profit margins.

Drawing a parallel, software companies that underwent successful business-model transitions from perpetual software-license models to software as a service (SaaS) or SaaS-like recurring-revenue models were rewarded with higher enterprise valuations. Recognizing the migration of value from hardware to software, some IT-infrastructure providers have restructured their products and offerings to separate the use of embedded software from the hardware to offer it on a stand-alone basis.

However, embracing a software-led product restructuring presents a risk of loss in market share to other hardware-appliance vendors.

To manage (risks), hardware companies need to avoid the trap of offering embedded software on its own without added features or functionality.

Customers rarely perceive such offers as sufficiently differentiated and independent from the underlying hardware. Such moves done poorly could prove counterproductive since customers often view them as mere payment-model changes.

In our experience, companies that successfully restructure their solutions to be software-led follow three steps:

First, they disaggregate the hardware appliance down to its granular features and performance attributes (throughput, input/output operations per second, and latency, for example) and match them to their users’ performance needs.

Second, they create a wholly new solution entirely of software, operable on any hardware appliance featuring an integrated control center to manage hardware-performance attributes and adjust underlying hardware or virtual resources as needed.

Finally, they offer several value-added software features (performance monitoring and administration, advanced analytics on usage, and proactive maintenance of underlying hardware, for example).

Only with these changes do customers view the software form-factor product as a viable stand-alone offer independent from the underlying hardware appliance.

IT buyers desire a seamless purchasing experience from their on-premises OEMs that parallels the experience they get from their cloud-service providers.

IT-infrastructure providers can respond to these demands with cloud-like subscription-pricing models for both software and hardware.

Companies that introduce software products (through one of the approaches already discussed) often offer the hardware on an up-front-payment model while increasing profitability through subsequent sales of software on a subscription model.

Even for traditional hardware products, IT-infrastructure providers are innovating on pricing models by offering hardware with turnkey on-site deployment, flexibility to scale on demand, and seamless periodic upgrades. Also, they can offer customers the option to pay on a per-use or consumption model.

HPE Greenlake, for instance, is a leading example of such a cloud-like subscrip­tion model for hardware.

Almost all major infrastructure providers offer cloud-like subscription-pricing models for their storage, server, and hyperconverged offerings. And cloud-like subscription-pricing models for hardware appliances are gaining adoption among customers. Yet these cloud-like recurring-pricing models are easier to pull off for high-margin, software-only products than for hardware appliances.

For that reason, cloud-like pricing models for hardware appliances are suitable only for certain offerings and providers. Companies that launch and scale hardware appliances successfully make this pricing model’s economics viable by using contracting levers such as minimum contract commitments or cancellation fees.

IT-infrastructure providers looking to change their business model will likely need to come up with their own tailored combination of the models we describe here to pivot away from appliance-based, low-margin, lumpy revenue to sustainable recurring-revenue business models.

The right combination of business-model moves to achieve these aspirations is company specific and needs to be decided based on in-depth research into, first, customer demand, buying preferences, and life-cycle journeys and, second, company opportunities to unlock additional value with premium pricing, new upsell and cross-sell pathways, and new total-addressable-market unlock.

Again, to read the article in full, follow the hyperlink (above) or cut and paste the url (below) into your browser: