The title of this entry is an actual quote from a recent meeting I had with a customer. Well, the actual quote was more like “#$@% OpEx, wake me up when you are ready to talk CapEx”, but I thought I would make it a little more family friendly.
The language notwithstanding, I empathize with the gentleman’s sentiment. It’s no secret that our job as vendors is to maximize our margin and deliver more in bottom line for our company and investors. Customers understand that we are in business to make money and expect us to deliver significant value to you in return for the margin we pocket. However, unlike high-value consumer goods, data center equipment pricing and discount structures are shrouded in mystery.
Last year I was in the market for an SUV. Like any other geek, I spent a lot of time researching on different websites before I actually walked into a showroom. By then, I had a reasonably good idea of what I was going to pay and why. Here is a great example from the website called Truecar.com
As you can see, a buyer now has a better idea on where their dollars are going.
Whether it’s a car or a data center storage system, people expect balance in the vendor-customer value equation. My version of this equation goes something like this:
COGS + Overhead + Margin == Value to your business + CapEx savings + OpEx savings
By looking at each of these variables, we can answer this question: Why do vendors always resort to tricks to oversell the OpEx savings story?
Let’s look first at the left side (Vendor side) of the equation.
COGS: Cost of Goods Sold, the actual cost of making the stuff. COGS is well known and understood, and hence it’s difficult to play games with this variable. After all, everyone has a basic idea about the cost of a SATA HDD or an 8GB DIMM. Now that pretty much every major vendor’s products are running on commodity x86 hardware (all the way from EMC’s VMAX to NetApp’s FAS systems), we all know that the same memory and HDDs are used everywhere, mostly from same vendors like Seagate or Hynix. Only IBM mainframe people can still charge $300K for memory upgrades.
Overhead: Paying the sales reps, engineers, marketers, resellers, distributors etc. This is where wheels start to come out. Consider a product like VCE’s Vblock. How many people will have to be paid when a customer buys one of these slices of heaven?
- The direct sales teams for the VCE.
- Various teams at VMware, Cisco, and EMC.
- Overlay sales teams (business overlays like healthcare and Federal, and/or technology overlay teams like EMC’s BRS).
- 2-tier distribution partners.
- Armies of developers, operations, customer supports, and so on (inside all of those major vendors).
Don’t forget that behemoths like EMC have a large portfolio of products and services, some of which aren’t performing well. When you buy something from one of these large vendors you are also subsidizing their underperforming products and teams.
Margin: Money to grow the business and pay back the investors. Like I said before, we all want people and companies to make honest, decent margins and build a growing business. But the reality of a company with a market cap in the tens of billions is that they are under great pressure to grow the bottom line. Wall Street likes to see high-velocity growth. They don’t care that you are sitting on a mountain of cash—look up CSCO in Google finance if you want an example—they want to know when will you grow my investment. That is why P/E ratio is a simple, elegant way to see through the fog. Obviously getting a 30% QoQ growth is a lot different when you total revenue is $100 million as opposed to $4 billion. The point is that big companies have margin needs that vastly exceed that of an early stage company. After all, volume business can’t cure all ills.
As you can see, big companies and consortia need to make a lot more money from you to build the business and please the Street.
Now, let’s look at the other side of the equation, from a customer’s point of view.
Value to your business: A compelling reason to make a switch from an existing vendor. As a sales leader, I tell my people to always look for and explain the compelling value proposition to their clients. This is important, but I can’t just make it up. Customers know the real value of the new solution the vendor is bringing to their data center, but the articulation may be nebulous. Even so, if you think the value is $1K a year, I may be able to convince you that it’s actually $2K, but I can’t convince you that it’s going to be $100K.
CapEx Savings: How much money you save from the capital expenditure budget. There is nothing nebulous about this. If you are planning to do a 300 desktop VDI project and know the performance, capacity, and scaling needs clearly, you know what you need. There are multiple ways to do this. You can go the old-fashioned way and buy SAN, NAS, switches, and servers; or you can buy a single Nutanix block. CapEx is what you end up paying for the entire solution.
By now you probably have the idea: big vendors have very high overhead and margin needs on the left side of the equation. Two variables on the right side are clear cut can’t be easily messed with. That leaves the third, OpEx, as the workable variable. You can be sure that we will bring our best warriors to battle over it and leave your head spinning.
OpEx savings: How much you save from the recurring operational budget—power, space, cooling, ease of management and, in some cases, support. I am not saying these things aren’t real or important. On the contrary, I do believe in looking at the overall TCO for 3 years and looking at the ROI from both CapEx and OpEx. My point is, just don’t let a creatively packaged, 50-page ROI study convince you that your “real savings” will start in year 3.
When you work for an early-stage company, a lot of conditions work against you. We don’t have the brand name recognition, existing customer base, army of engineers, support people, vast sales teams and reseller networks. But what we do have is very powerful: we are agile and a lot more customer focused. Most importantly, we have much lower overhead and margin needs.
As long as the opportunity is well qualified and expectations are clearly set, a well-run early-stage company should never lose a deal to a large, legacy vendor because of price. Although a big company can probably win a deal or two by going to extremely high discounts — see recent press announcements about NTAP– they aren’t sustainable. In addition, you can be sure that they’ll recoup their loss when time comes to renew the support contract!
At Nutanix, we boldly innovated because we weren’t chained by legacy technologies or installed base. We use that innovation to cut through CapEx so your savings are immediately visible: no NAS, no SAN, and no fabric or iSCSI switches. But we don’t stop there or play gimmicks with OpEx. We slash it in very significant way as well. How about deploying 3000 virtual machines, 10TB of RAM, 624 cores of CPU, 32TB of Flash/SSD and 260TB of capacity in just 26U space! This is why Nutanix sales people can make very compelling CapEx and OpEx saving arguments without the need of a 50 page report. Give us a call and let us prove it to you. I guarantee it will be worth your time and we will make it fun too.