Lenovo Partners Are Hungry For Higher Margins Up The IT Stack, And The Company Is About To Deliver

Say hello to the new Lenovo.

April 1 marks a huge milestone for the company. That's the date Lenovo said it completes the backend integration of IBM's server business creating what it calls "one Lenovo, one channel." It also marks a change in the company's DNA from a PC powerhouse to a sleeping enterprise giant.

It's been a year of unprecedented change at Lenovo. Not only has the Chinese PC maker been on a buying binge -- gobbling up IBM's x86 server business and Google's Motorola handset division -- but earlier this month it created an Enterprise Business Group and unveiled a global health-care division. On top of that, the company also revealed a major executive shuffle and the hiring of former Acer CEO Gianfranco Lanci as corporate president of Lenovo.

[Related: 5 Ways Lenovo Has Upped Its Enterprise Game]

"What we have seen over the last year is the evolution of Lenovo [from] a PC company to a technology company," said Jay Parker, who was promoted earlier this month to senior vice president of Lenovo's Enterprise Business Group. "Today, Lenovo is now the only company in the world that is in a top position to have IT products all the way from the data center to the pants pocket -- from servers, PCs, tablets and smartphones."

Lenovo's North American business partners, which drive more than 80 percent of the company's revenue in North America, said Lenovo has taken the critical right steps to transform itself and keep up with the rapid pace of change within the IT industry. But they also want more.

"I'm happy to see Lenovo making the right moves to embrace the future of IT," said Jamie Shepard, regional vice president, North America for Lumenate, a Dallas-based national solution provider and Lenovo partner. "Lenovo is trying to move away from its commodity PC identity. With System x and a mission to gain market share, Lenovo needs to disrupt themselves and bring in new blood and new ideas to transform their business."

Lenovo is at a critical point in its growth as a company. Partners said Lenovo, which sells one of every five PC sold on the planet, needs to transfer its success selling PCs and apply the formula to the server market. Next, partners said, Lenovo needs to move farther up the IT stack, giving them higher-margin products and services with which to go to market.

Lenovo's secret to success in the PC space is what will help it succeed selling servers, said Patrick Moorhead, president and principal analyst at Moor Insights and Strategy. "IBM could never achieve the type of scale it needed to make its x86 server business profitable. Lenovo's key to success is scale, innovation and a very good understanding of emerging markets and where the growth is," Moorhead said.

Couple Lenovo's volume play with IBM's value play, Moorhead said, and Lenovo is off to a good start competing against Hewlett-Packard and Dell, especially when it comes to selling high-volume server racks and towers.

But, the world's leading personal computer maker has no plans to abandon the PC, despite the product line's razor-thin margins. In fact, Lenovo said it plans to sell more of them. Parker said PCs are door-openers for partners, allowing them to crack open accounts for more lucrative server and Lenovo storage sales and value-added software and services.

Lenovo, which still lags behind HP and Dell in North American PC shipments according to IDC, has been doubling down on PCs for the past several years. In 2005 Lenovo bought IBM's ThinkPad line of computers. And in 2011, Lenovo bought German PC maker Medio and in the same year entered into a joint venture with Japanese computer maker NEC to sell PCs. In 2013 Lenovo purchased CCE, a Brazilian PC maker.

But as the PC market suffers and margins on computer sales all but dry up, partners aren't shy about saying they need more margin, not because they are greedy, but because they want to stay in business. They said the x86 server market is feeling the same commoditized pricing pressures as its PC brethren.

"When it comes to slim margins, the server isn't far behind the PC," said David Fitzerman, vice president of DFC International Computing, a small Toronto-based SaaS provider and Lenovo partner. "A $1,000 server makes me $60. By the time I get finished telling people what they need, I'm practically losing money on the deal."

This is especially true among Lenovo's newest IBM partners, acquired when it bought the x86 server business.

"My business is mid- to high-end enterprise servers. That's where we are seeing the best margins and want to see our business grow," said Tom Hughes, director of alliances for the Technology Solutions Group of Ciber, a Colorado Springs, Colo.-based IBM and Lenovo partner. "I want to know how Lenovo is going to drive that part of the business. We have heard the product portfolio spiel; we get it. My question is very simple. What is Lenovo going to do to drive that high end of the market? We need focus and strong technology. This transcends product lines."

Everything is relative. From Lenovo's perspective, servers have much higher margins than PCs (25 percent compared with less than 10 percent, according to Moorhead) with much more growth potential.

"We know that winning new enterprise business is critical to the success of Lenovo as a company," Parker said. "There is a huge market opportunity out there. Today, Lenovo has a low-single-digit server share, even with System x. Our server business provides higher margins than the PC business," he said.

Partners say Lenovo is off to a good start on its enterprise gambit. But it has its work cut out for it.

"Not everything is going perfectly, but that's to be expected," Hughes said. "For the most part, the marriage [between IBM's x86 server business and Lenovo] has been harmonious. Partners are excited about the prospect of selling value at volume."

For its part, Lenovo said, by April 1 it will have completed the merging of its PC business with the IBM x86 server business, including fully integrating both channel programs.

But still, some longtime IBM partners that have joined the Lenovo channel ranks want to see Lenovo move faster up the IT food chain.

"I can't take my business to the next level with Lenovo," said one Lenovo partner who asked not to be identified. "More of my customers are moving to the cloud or a software-defined model. Hardware sales alone can't take us where we need to go."

Parker acknowledged Lenovo's need to expand its data center, storage and networking portfolio. But he said Lenovo would be taking a two-pronged approach to drive its server business. One is leveraging the brainpower of the former IBM engineers that now work at Lenovo. The second is focusing on in-the-trenches server sales.

Key to Parker's new enterprise server and storage drive, he said, is to "dramatically increase" the number of Lenovo partners that can sell System x servers.

"I don't believe that the current number of partners we have is sufficient enough to drive the growth that we want," Parker said. "Our goal is to grow share within the current partner network, but it's also to grow the overall numbers of partners so we can keep up with the growth we aspire to."

Parker also said part of his enterprise sales drive will be winning more midmarket server business. "We are No. 1 in SAP HANA. However, [System x] has been largely absent when it comes to mainstream servers and workloads. That represents over half of the market opportunity here in North America."

As for Lenovo's new acquired IBM brain trust, the company said it would still invest heavily in research and development. Lenovo spent $730 million on R&D last year, which was a 62 percent increase from the prior year. In addition to that, Lenovo said it invested $900 million on new R&D facilities to develop server, tablet, smartphone and cloud technologies.

But partners say Lenovo's fastest route to get higher up the data center food chain is to build more partnerships with software companies.

Lenovo is aspiring to an older Dell business model, before it began dabbling in software and services, Moorhead said. And similar to Dell, Lenovo has some of the same type of partnership agreements with software partners such as SAP, EMC/VMware and Nvelo.

"The way the IT world is moving, the server is actually becoming more important than ever," Moorhead said. "As Dell has proved, the disaggregation of servers, networks and storage is a highly effective way to teach old hardware new tricks," he said.

Partners such as Lumenate's Shepard praised this decoupling of hardware and software and said Lenovo's next step needs to be inking deals with Nutanix, SimpliVity and Scale Computing.

"More of my business is moving away from hardware and moving to a more software-defined world," Shepard said. "Lenovo also needs to move to a place where their servers will be the hardware of choice to run the software-defined data center."

Parker, who is now responsible for the company's server and storage business, declined to comment on future products or partnerships. He did say, however, that Lenovo would have some interesting news at the end of April when the company holds its annual Accelerate 2015 partner conference.

This article originally appeared as an exclusive on the CRN Tech News App for iOS and Windows 8.

PUBLISHED April 1, 2015