The siren song of services

Eager to fatten up thinning margins, hardware makers see services as a quick fix. But CNET's Michael Kanellos explains how plans have turned sour for some of the industry's best and brightest.

Michael Kanellos Staff Writer, CNET News.com
Michael Kanellos is editor at large at CNET News.com, where he covers hardware, research and development, start-ups and the tech industry overseas.
Michael Kanellos
3 min read
Increasingly, large computer companies are discovering the potential opportunities in the market for high-end, value-added services and consullgrni fuhzzch blaaa?

...Sorry, nodded off at the keyboard for a moment.

Once again, the siren song of services is wielding its wreckage in the computer industry.

  Chip giant Intel shut down an e-commerce hosting business and snuffed out a $200 million project that planned to establish a dedicated, for-hire network for global streaming media broadcasts.
  Dell closed an e-commerce exchange where small and large companies alike could explore buying partnerships.
 Hewlett-Packard got burned last November when its $18 billion bid to acquire the consulting wing of PriceWaterhouseCooper fell through. (In an ironic twist, the news came the same morning CEO Carly Fiorina had to give a keynote speech at Comdex.)
 Compaq, which acquired a 20,000-plus army of consultants from Digital Equipment three years ago, keeps reporting flat services revenue.
 IBM has banked on services to return to its former glory for years. But like Admiral Stockdale, they're still looking for the right solution.

Considering woeful tales like these, one might think that major high-tech companies would run screaming from consultants. Just the opposite.

In fact, Microsoft now plans to establish quotas on its sales people for services and maintenance.

"Historically we haven't gotten much," CFO John Connors said recently. "We think we have an opportunity there and we'll be introducing a maintenance (product or program)."

Dreams or pipedreams?
Why the appeal? Simply, it's the dream of achieving higher margins. Services can theoretically deliver higher profit margins than the messy business of manufacturing. There are no chemical shortages or trucking costs. And you don't need to offer spiffs to retailers to sell your product instead of a rival's, or put up with foreign competition that works for cheap.

All a company needs to do is maintain disciplined cadre of exceptionally educated experts to bilk Fortune 500 companies for millions of dollars of billable hours.

A whiff of prestige comes with services too. Consulting firms claim they employ the world's brightest strategic thinkers. They might, but they also hire a lot of guys brandishing class rings who looked like they got hosed off and stuffed into a suit on graduation day.

But these grand plans for consulting revenue rest on very shaky assumptions about human nature.

For starters, people hate getting advice. When you boil it down, that is what consulting firms do--they send officious busybodies to provide obvious recommendations about things that you could be doing better. Then they expect to get paid for it.

Most customers find it hard to get beyond the suspicion they are being exploited. If the service firm is tackling a complex job, the customer winds up feeling like a dope because they can't perform it themselves. If it's a relatively simple job, they wonder why they're getting stuck paying outrageous fees.

Home Depot has become one of the largest retailing empires in the world on the principle that most individuals would rather screw up on their own than hand over the selection of their kitchen wallpaper to someone with "H-A-T-E" tattooed on his knuckles.

The same level of anxiety doesn't attach to computer products. People believe they have a greater amount of control when it comes to shopping. Plus, there's none of that touchy-feely "ongoing relationship" propaganda that seems part of every consulting pitch.

Must I be a "recurring revenue stream" for you? Can't you just sell me a new smoke alarm and be gone?

So how will all of this pan out? Over the next few months, a slew of service announcements will emerge, followed by series of apologies and cancelled projects. The CEO will declare that the company is getting back to basics. Then, some bright young executive will, as they say in the consulting world, begin to think outside the box.