The business side of HPC

John West at InsideHPC has, as usual, an interesting article on rumors of SGI abandoning a bid because of “margin games.”

The new CEO also issued a hard-line stance against doing business with customers that want to play margin games. In recent quarters, Rackable???s margins had dipped into the negative as it battled with Dell and others on price. Moving forward, Barrenechea wants no part of what he termed ???unfavorable business???

The market is changing as business gets more challenging. The drive to lower and negative margins will drive vendors from the market. At some point those purchasing gear will have to decide if the cost they pay for driving the price and margins into the ground is worth the benefit they get for doing it. If you make it impossible for your suppliers to make money, you guarantee you will have fewer suppliers, fewer choices.

There are some interesting metrics in business. Such as the cost of buying $1 of business. If the cost is greater than $1, you lose money. If I spend $0.50 for every $1 I pull in, then I will make money. Decreasing margin to drop your price (you have fixed costs you can’t really change) means at some point, you may hit zero margin, where the costs == the revenues. At that point the business becomes unprofitable.

So the next question you have to ask is the strategic one. Dropping margins is a tactical move. Up until you cross a number of specific minimums. Then it becomes strategic … that is, you won’t make money from this, but will it help you make money elsewhere?

Unfortunately, it is a significant misnomer to believe that giving a customer X a zero (or negative) margin means you will get more profitable business. On the contrary, customers Y and Z will learn of the price and demand similar pricing.

Some strategy. Its a sure way to make a loss.

So, you have to look at the big picture. Which means, sometimes, walking away.

You can’t afford negative margins, ever. You can’t afford onerous terms and conditions which increase risk without allowing an increase in reward.

As some I have spoken to at a number of large HPC vendors have stated to me, no one is really interested in the top50 systems. You can’t make money there. The margins aren’t sufficient to support the business. Or they are negative.

And that is a signal to walk away.

Congratulations to the new “SGI” CEO for doing this. It was the right call.

For the people impacted by the loss of machine, I’d suggest working with the supplier to make sure they can make a positive margin on the deal before making the deal. If they can’t make money on the deal, in this business climate, they won’t be around long enough do support the machine. Is this what you really want?

I have said something like this before.

This driving of the margin into the ground is a direct result of sellers who are willing to buy business,. effectively pay their customers to take their product. Business lives, and dies, from margin. Make it too low, and companies, like LNXI will starve. Make it too high, and fewer people will buy your stuff.

There are some companies, online now, that are happy to do this in order to capture the revenue. When you sell a few million servers and desktops a year, you can, in a holistic sense, afford to lose money on a few. Especially if these few are used to prevent competitors from getting the revenue.

Drives them out of business. Quite predatory, but no one ever said business was anything other than a contact sport.

Sure, you can argue that businesses make a conscious choice to do this. And some do. Some are willing to shift money around and pay for loss making aspects of business.

Well, I’ll argue that this is a situation in the past. I am not sure that any CEO worth their salt will voluntarily support a continuous loss making endeavor, when they need to cut costs. They can reduce their bleeding and their cost basis in one fell swoop. And if they do approve of this, it is likely that they won’t be CEO for much longer.

Business can’t afford making losses or massive risk on large deals any more. Expect more deals to be walked away from.

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