Lenovo’s DCG and Purpose-Driven Innovation

By Charles King, Pund-IT, Inc.  October 5, 2016

Mergers and acquisitions in the tech industry tend to follow a common script with most of the focus of reporters, analysts and other interested bystanders attuned to the acquiring company, not the one being purchased. That makes a lot of sense in most cases but not all, and Lenovo’s 2014 acquisition of IBM’s System x group is one of the outliers.

Why is that the case? Because just as it did with its purchase of IBM’s PC organization and assets in 2006, Lenovo intended the System x deal to fundamentally transform its business and market focus. Prior to 2006, Lenovo was a minor, if well-regarded, China-based PC vendor. Buying IBM’s PC group, which included the Thinkpad and other well-established business product lines, allowed the company to step fully into the big leagues and, eventually, into the global PC sales leadership position it occupies today.

Similarly, Lenovo made decent quality servers and storage products mainly of use to small businesses and branch offices. The System x deal provided the company a full range of enterprise-class, often best-of-breed Intel-based servers and related solutions, including converged system offerings, networking switches, high performance computing (HPC) servers and clusters, hyperconverged systems and in-memory appliances. In other words, System x offered Lenovo the tools it needed to launch its own Data Center Group (DCG) and step into the role of a world class enterprise systems vendor.

Best of breed assets or not, the way forward has not been entirely smooth. Due to Lenovo’s Chinese majority ownership and the use of System x solutions by some U.S. government agencies, the deal elicited considerable scrutiny. IBM competitors made hay as a result, and System x sales fell significantly in the months leading up to the sale.

A number of senior executives and managers also exited the company in 2015. That was followed by a major reorganization earlier this year that was designed to streamline the business, achieve a better expense/revenue ratio and become a tougher, more formidable competitor in global markets. With these issues firmly in the past, Lenovo’s DCG invited a group of IT industry analysts to visit the company’s new executive briefing center in Morrisville, North Carolina to learn about Lenovo DCG’s current and upcoming solutions, strategies and plans.

Purpose-driven innovation

The event kicked-off with presentations by Lenovo DCG senior executives, including EVP Gerry Smith, CTO Peter Hortensius and SVP of global sales and marketing Roderick Lappin who focused on the technological and market drivers behind the company’s strategy. Chief among these was what EVP Smith called the company’s dedication to “purpose-driven innovation” – a catch phrase for Lenovo’s innovative leveraging of its world class systems engineering talent with industry standard technologies and components. The result is a complete portfolio of infrastructure solutions that (via market research studies conducted by TBR and ITIC) rank Lenovo #1 in server reliability and customer satisfaction.

Not surprisingly, the company’s strong focus on improving customer experience and satisfaction has resulted in bottom line improvements. Global sales are up in the year to date (YTD), and revenues in China, where Lenovo is the #1 systems vendor, have risen 14% YTD. But, as CTO Hortensius noted, “Public cloud is changing everything, including cost pressures on private cloud solutions.” In other words, customers expect IT pricing and performance to closely parallel public cloud services, and are using public cloud options to leverage aggressive discounts.

The result is significant pressure on Lenovo DCG’s profitability, and sales challenges for the company and its channel partners. An example – despite solid sales performance overall, server revenues have risen just 3% YTD. According to sales/marketing SVP Lappin, DCG recognizes the need for serious efforts in sales and outreach, and is investing in training to ensure that the company and its partners are on the same page.

The core message from Lenovo’s senior execs: After the turmoil following the System x deal’s closing, DCG’s business has stabilized and is growing, albeit not as quickly as it would prefer. That said, the group’s leadership has formulated and is pursuing a sustainable strategy that is resonating and succeeding with customers and partners. The evidence suggests that this is a reasonable assessment and that this trend should continue.

A closer look: Supply chains/logistics and cloud/Big Data

Other DCG executives offered their thoughts on specific strategic solutions/markets, including converged infrastructure and hyperscale, as well as progress in individual product categories, including servers, storage, networking and services. They shared too much information to detail here so I’ll focus on two presentations I found particularly interesting:

  1. Tim Carroll, VP of Lenovo’s global supply chain, was particularly insightful in comparing the group’s supply chain and logistics practices to what System x experienced within IBM (where Carroll was a supply chain VP for all of the company’s hardware products). Carroll was pleased to find that Lenovo’s manufacturing-related costs and pain points were far more modest that what he had experienced at IBM. Plus, the company’s commitments to high product quality and efficient, speedy logistics boded well for its plans around DCG. Why is the supply chain so different at Lenovo? Carroll believes it there are few incentives to contain manufacturing costs in high-end, enterprise-class servers where customers demand and are willing to pay top dollar for top quality. That makes sense business-wise, but it also underscores the challenges that System x faced as part of a company that preferred to lead sales with its higher priced, higher margin mainframe and Power platforms. However, it also underscores the benefits DCG is capturing now with what Carroll called, Lenovo’s “maniacal focus on cost and efficiency.” Maximizing every dollar spent on manufacturing and logistics results in better margins or expanded pricing options. In any case, DCG has a far larger arsenal of logistical and economic weapons at its disposal than it once did.
  2. Brian Connors. Lenovo’s VP of next generation infrastructures & business development offered his perspective on the market shifts that have occurred due to cloud, and the opportunities that Lenovo sees in providing next-generation private cloud solutions. The company is certainly not alone in that regard. In fact, Connors noted, other IT vendors consider private cloud as a growth opportunity, while public cloud players regard it as a business accelerator. But Connors sees Lenovo having a technical leadership position in cloud “building blocks”, including converged/hyperconverged systems, in-memory database/big data solutions and software-defined products and related cloud offerings. This squares very well with the history of performance leadership that System x enjoyed as part of IBM. The group never aimed to be the cheapest Intel-based server provider on the block—a play that bent or broke some others. Instead, System x and now Lenovo DCG strive to deliver the absolute best x86-enabled performance, reliability, availability and scalability that money could buy. That’s the reason SAP chose System x as its reference architecture for HANA (a position DCG continues to retain). Connors also noted that Lenovo’s market leadership in China should serve it well as demand for private cloud evolves there. Not only are there no legacy platforms to displace, but the company also has deep ties with many local cloud service providers (CSPs) and close relationships with key Chinese government agencies.

Overall, the ability to capture greater supply chain and logistics efficiencies while continuing to leverage its history of strong system innovations should work to Lenovo DCG’s favor.

Final analysis

My time at Lenovo’s U.S. headquarters provided valuable insights into the current state of the Data Center Group and its future plans. The organization’s journey has not been especially easy, but that seems to be the case with any transformative effort. Lenovo considered and intended the acquisition of IBM’s System x organization as a strategic effort that would enable it to enter new markets and compete in fundamentally different ways. It would be naïve to assume that so ambitious a goal would leave the acquired organization unchanged.

But what has emerged appears to be a stronger and more adaptable organization than it was before. Within IBM, System x often seemed to be considered an outsider whose lights were eclipsed by its high-end system brethren. As part of Lenovo, the group and its personnel can expand on their history of technical innovation and solution leadership without inhibition. At the same time, the clear focus on cost and process efficiency imperatives should allow Lenovo DCG to become a fiercer and more effective competitor, characteristics that should be beneficial to customers and partners alike.

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