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HPE follows Dell to network edge in a bid to kickstart new revenues

Last week saw Dell announce its latest strategy to target the ‘Distributed Core,’ with a new IoT division and a $1bn three-year plan. This week, rival HPE has made similar moves, with a new strategy called HPE Next – which sees the company streamline and realign its activities around three key areas of focus – Intelligent Edge (edge computing and IoT), hybrid IT (data centers) and services (consulting and support). The edge side of this three-pronged strategy will put HPE head-to-head with Dell, and also enable it to move more deeply into the mobile operator market, where the edge is becoming critically strategic.

The impetus for change is coming from stagnating results – revenue from core businesses is starting to peter out, and that new opportunities are needed. HPE says it will grow its revenue by 5% in FY 2017, and with the new strategy, expects to increase that growth to 9.5% in FY 2018. Notably, like-for-like revenue in the first half of 2017 shrank 11.5% year-on-year to $15bn, and operating profit fell 19% to $1.76bn – hence the need for some new business in high profile areas like edge cloud.

Notably, HPE says that organic revenue growth will be between 0% and 1%, and so it expects to fuel expansion through acquisitions. Aruba its last big investment, clocking in in at $3bn back in 2015, and while we don’t expect acquisitions on that scale, HPE is likely going to start writing checks for companies that can provide it with growth at the network edge.

With growing concerns over the impact of privacy and data protection legislation on growth in the cloud, the network edge has become a topic of much discussion – a place that can sort through data before it is sent to centralized cloud applications, with the potential to provide huge savings in both bandwidth costs and the amount of compute cycles needed to sort it once it has arrived in a data center.

Latency is the other major potential benefit of edge computing, as these systems don’t have to wait on a cloud application to receive data, process it, make a decision, and send a command back to the edge. In high value applications, this could help with things like emergency shut-offs, or simply to eke out fractions of percentages in efficiency improvements that add up to a significant amount over time.

For MNOs, asserting a premium position in the value chain, by harnessing their control of the connectivity between edge and central cloud, is as essential to revenue growth as it is to HPE. For that reason, we can expect to see operators as a significant target for HPE services and platforms (as they are for Dell), to help move beyond the traditional enterprise sector to a particularly hungry new segment.

The network edge will require a plethora of gateways, local computation, and wireless connectivity, and HPE is banking on being able to provide that equipment and a contract for support and associated services and software. Evidence of the new approach can be seen in the new Manufacturing skew of the Express App Platform offering, which HPE is pitching at factories embracing digital transformation – promising a six-click automated process for installing applications from the Cloud28+ platform.

“As industries transition legacy industrial infrastructure like manufacturing firms, manufacturing floors, transportation systems, energy infrastructure, and even cities themselves, as they move to the digital world, we’re seeing an explosion of data at the edge. And we believe this movement toward the edge will eventually disrupt the cloud,” noted CEO Meg Whitman, in an analyst call outlining the new plan.

Under the HPE Next realignment strategy, Intelligent Edge is one of three key areas of focus, along with Hybrid IT and Services. The third is the easiest to explain and accounts for the majority of HPE’s current and potential revenue – with Consulting, by the company’s calculations, enjoying a total addressable market (TAM) of $54bn in 2017, and Support having a TAM of $62bn.

Hybrid IT holds second place in TAM terms, at $112bn, and the emerging Intelligent Edge is a comparative minnow, with a TAM of just $28bn, but with the highest growth potential. The new IoT and edge computing platforms fall under the Intelligent Edge, which HPE divides that market into two broad sectors:
• Core – wireless LAN access, aggregation and core switching (LAN), with a TAM of $22bn in 2017
• Adjacencies – Industrial IoT hardware and platforms, SD-WAN, cloud-managed WLAN and edge security, with a TAM of just $6bn.

The Hybrid IT label covers all manner of computers, from tower servers to rack servers, as well as the High Performance Computing (HPC) variants that will almost exclusively be housed inside data centers. Growth areas in this area include hyperconverged infrastructure (software-defined IT, virtualizing all the old conventional hardware-defined systems), flash storage arrays, and composable infrastructure (where physical resources like storage and network fabric are treated as services, pooled together).

There is little point enabling platforms to make customers more responsive and agile, if HPE does not apply the same thinking internally. With the HPE Next program, president Antonio Neri said that the company is looking to save $1.5bn in the next three years, and to reinvest $700m into its R&D and marketing departments. We believe “optimize the workforce” is a euphemism for aggressive job cuts, but HPE is also going to be trimming the fat in its real estate footprint and internal systems.

HPE Next will see the company transition from having 27 platform offerings to just seven, reduce manufacturing locations from 17 to seven, consolidate 33 supported service languages into 10 languages in centralized hubs, and reduce its Processes and IT Department’s 1,000 processes, 950 applications, and 10 ERP (enterprise resource planning) systems to 100/350/one.

The end goal is to create an organization that is more responsive. In the current system, there are six or seven levels between a CEO and the country lead, with complex regional structures underneath that. After the transition, there should be just three or four levels, and a simplified reporting structure. Similar simplifications are being made to the sales structure, moving the decision making to the frontlines and reducing the 400+ compensation plans to just 25 core plans – with no more than three sales people being compensated per deal (down from 30+).

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