Fujitsu Restructures to Shift Focus to Total Cost of Ownership

• Posted: Tuesday, March 31, 2009
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• Author: pradhana
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• Filed under: Business Analysis

By Peter Clarke, principal analyst at Ovum

The new model creates both opportunities and challenges
Richard Christou, Senior Vice President responsible for Fujitsu’s global business outside Japan, understands that this reorganisation means a shift in the UK and Europe from a services-led sell to a product-led sell. There is no doubting the global logic of integrating Fujitsu Siemens’ product development and manufacturing with Fujitsu’s global product operation whilst integrating its sales, services and distribution operations with the new regional companies to be created around the globe outside Japan. However, if the model is to succeed in Europe Fujitsu will have to get the market to shift its competitive focus from price to total cost of ownership (TCO) to protect services margins or carry on selling products and services separately.

This is not a new argument. In fact, Fujitsu’s competitors have been pushing TCO for some years. The development of a product-neutral services business can be seen as suppliers responding to their failure to get clients to see the market any other way. Shifting the market in the way Fujitsu wants will be a major achievement, especially in the midst of the current financial crisis. Either way, the most likely outcome is for Fujitsu to become a high-volume, low-margin business dominated by hardware, with the services business struggling to maintain its quality of service at the price the clients are prepared to pay.

Fujitsu believes this is the right strategy for a hardware-driven market
Fujitsu clearly believes that the market is hardware driven and that this is a good time to go back to basics. So it has evolved a global business strategy to be measured against a hardware target. Responsibility for P&L may remain in the regions, but they will all have to commit to a hardware target and margin. Doubling server sales is a big ask at a time when the debate on cloud computing implies that clients need less servers rather than more and when there are growing concerns about the green implications of proliferation of server farms.

IBM is clearly Fujitsu’s role model, and the recent acquisition of EDS by HP confirms that others in the marketplace think that a product-led sell is the way to go. Fujitsu also sees Dell as a threat to both Fujitsu’s laptop business and Intel Architecture server business. It too is offering services on the back of its product offering. The market is offered the choice between a combined hardware/services offer from Fujitsu, IBM, Dell and HP/EDS and a product-independent offer from the pure-play services companies.

Total cost of ownership – a seductive argument but difficult to sell
How does Fujitsu protect its services revenues and margins with a hardware-driven offer? It is hard to see how this will help the higher-margin application and services business. We must await further details from Fujitsu about how it is going to square this circle.

Christou understands that the danger of the hardware-driven model is competing largely on price thereby eroding supplier revenues and margins. Competing on TCO rather than price alone is a sound approach but there is considerable market resistance. The trouble is that getting a keen entry price for the deal provides the client with an immediate benefit. This is worth having at a time of considerable pressure on budgets. TCO implies that budgets are going to be easier in years to come. Everyone is hoping for that, but at the moment it is difficult to see how this amounts to more than current practice where the client gets a low entry price and the supplier hopes to build revenues from services. /PR

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