One-Stop Shop vs. Best-of-Breed

November 17, 2015
By: Special Guest
Eric Chiu, Founder & President, HyTrust

The sheer size of the deal between Dell (News - Alert) and EMC—Dell will pay $67 billion in cash and stock for the cloud computing company—has sparked all kinds of comment. One of the most interesting comes courtesy of a blog in the Harvard Business Review: The most important takeaway from this mega-merger is “the strategy behind the deal is more critical than the details of the deal itself.”

It seems cavalier to dismiss $67 billion as “details,” but the point is valid nonetheless. So what exactly is this all-important strategy? And not to focus on the details, but how can it possibly justify a valuation of this magnitude—the largest ever technology deal of any kind?

In simple terms, it’s the old question of ‘one-stop-shop’ versus ‘best-of-breed.’

Consider the landscape. One big example is major rival Hewlett-Packard (News - Alert), which is nearing the completion of its initiative to split into two distinct companies. One will bring all PC and printer operations under one roof, while the other provides software and services to corporate clients. That’s seen as the best way to be nimble—a critical characteristic in this dynamic market.

Dell and EMC (News - Alert) are going just about exactly in the opposite direction. Dell began as a PC maker with a direct sales model, but it has long been mutating into a broader solutions provider: Back in 2009, it spent $4 billion to acquire systems integrator Perot Systems. Now, the embrace of corporate software, storage and security giant EMC makes its portfolio of technology and technology services much larger. (The crown jewel may be its huge stake in cloud and virtualization software and services behemoth VMware.) It truly is a one-stop shop.

I’m sure different disciplines have their own perspective on this, but from my own experience in security, I can see the potential shortcomings.  The concept of a one-stop-shop may have appeal in the theoretical sense, but it has almost never worked out particularly well for security. Even today, the venture capital money is flowing to security startups, perhaps faster than ever before, as enterprises seek out smaller, best-of-breed product companies that can keep pace with the changing threat environment.

Again, this is an industry in constant forward motion—the migration to cloud and virtualization computing models has changed the technology landscape, and threat vectors have changed along with them. That leaves traditional conglomerates behind, while smaller companies like ours win comprehensive contracts with Fortune 500 customers as they move even more rapidly to the cloud. They need best-of-breed providers just to keep pace.

VMware makes a striking example of this phenomenon. It was acquired by EMC back in 2004, but the parent company then spun off 15 percent as a separate IPO. I would argue that this gave it a level of independence that has paid rich dividends: It has exhibited a degree of continuing innovation in both technology development and business initiatives that would have been difficult, if not impossible, had it been tied solid to EMC’s core mission.

By any definition, it has unlocked the value of a rapidly growing market that is in many ways distinct from its parent company. For corporations that must always walk a fine line between landscape shifts in technology and the regulatory pressures that hover overhead, providers like VMware have the agility to help them keep pace. Size isn’t necessarily the issue; it has to do with a focus that leads to flexibility.

Yes, every enterprises appreciates the value of a one-stop shop—it’s always convenient and often economically beneficial. But in technology, where entire platforms can morph from leading edge to legacy virtually overnight, even the most basic considerations are always more complex.

Corporate customers should and will consider all these factors when they go about choosing a vendor.  In some situations it might even be an easy call to go with the one-stop-shop. But in areas such as virtualization, cloud, security, application containers and so on, the best-of-breed alternatives continue to have a major advantage.

For their part, Dell and EMC will have to make difficult decisions on where to consolidate (think hardware platforms) and where to give employees the freedom to innovate, regardless of other divisions with contradictory priorities. Maybe they can pull it off, but it should make for a fascinating case study someday. 

Eric Chiu, HyTrust

About the Author: Eric Chiu is president and co-founder of HyTrust, the cloud control automation company. He previously served in executive roles at Cemaphore, MailFrontier, mySimon, and was a venture capitalist at Brentwood/Redpoint, Pinnacle, and M&A at Robertson, Stephens and Company. He is a recognized security, cloud computing and virtualization expert.

Edited by Maurice Nagle