Services get a bad name in the financial world, which is mystifying to me.  On Friday of last week, I was speaking with a VC about a great small IT services firm doing a round of financing – the company is self-funded, is cash flow break-even, and will most likely end the year profitable, doing about $7M in sales.  The VC I spoke with was trying to build a valuation on software they MIGHT have later on – completely disregarding their actual legitimate business value.  Did I mention these guys are locked and loaded in some of the biggest shops in the world?

I had the same exact set of conversations ten years ago when Glasshouse was shopping for money.  A hundred VCs couldn’t figure out that a service led business could generate value, but fortunately a few did.  Glasshouse will most likely be the next legitimate IPO in the space, and will be a killer one at that.

If you want to sell IT stuff in a market such as this, and you DON’T have professional services in place, you either have to have a simple appliance or you are screwed.  If it’s simple enough, people can plug it in without thinking too much.  If it requires significant thought in this day and age, they will punt.

Dell has fantastic stuff (they don’t get the credit they deserve for rightfully architecting some brilliant solutions IMHO), but it won’t matter ultimately because in the highest-end, messiest, cluttered up IT shops, people can’t add even the best gizmo on the planet today without causing a catastrophe downstream.

Shops are too overwhelmed, too understaffed, too under budgeted, and too under appreciated to be able to affect wholesale changes internally.  Enter service company X.

If you want to play in the Enterprise, the first thing you need is a seat at the table.  Perot has a seat at the table.  EDS has a seat at the table.  IBM Global Services has a seat at the table, etc.  IGS gets business for anything BUT how fast their super duper gizmo du jour is – by the time it gets to a services led conversation, it is STRATEGIC.  That’s the part that VCs don’t seem to get.  Gizmos come and go – like your favorite pair of sneakers – but services are the equivalent of a wife – far more difficult to disengage from, and enormously costly when it happens.

Picking up a girl in a bar is tactical and transitory.  Getting married is a much more strategic commitment. Dell could have the greatest blades ever (they might, btw) but the relationship to the enterprise is the equivalent of a casual affair.  Perot is married to the enterprise.  The enterprise has to think long and hard about breaking that relationship up.

This is why I love service companies.  They are spectacularly sticky, and when they bring real value, the customer will go out of their way to find MORE things for the service company to take over.  This is exactly how IGS came to become the 800lb gorilla in the IBM portfolio.  It’s why I loved HP buying EDS, and it’s why this move by Dell will prove equally brilliant.

WIth all due respect to my pals at Intel, the enterprise customer’s wallet will spend according to the advice provided by trusted partners – i.e. their service company.  Why?  Because their executives don’t talk to Intel guys about clock cycles, they talk about slightly higher level business constructs – and they talk about them in the board room.  No seat, no talk, no influence.

The key to long-term success in this business is to intersect and influence strategic decisions that invariably require tactical stuff to be implemented to make it work.  Hardware/software guys make the stuff – services guys intersect the decisions BEFORE they are made, while most others fight to the death to become the victor of a decision AFTER it’s been made.

Nice move Michael.

Related posts:

1. Dell Buys 3Par – Everything You Need To Know
2. HP Counters Dell for 3PAR
3. Dell, Symantec, VMware, and Intel events
4. Dell Buys Exanet
5. Seagate buys E-Vault

Tags: Dell, Glasshouse, IBM, IGS, Intel, IPO, Perot systems, Professional services, VC