Rackspace Starts A Process Microsoft Just Finished

With Satya Nadella now warming the CEO seat at Microsoft, executive recruiters can shift their attention to another cloud leader — Rackspace — who bids adieu to its 14-year leader, Lanham Napier. While both companies are clearly cloud platform leaders chasing the same competitor, the similarities in the top job stop there. Rackspace's needs in a CEO center more around how it tells its story than concerns about its strategy. 

Where Microsoft is struggling to ensure its ongoing relevancy in a world that is shifting away from the desktop and the on-premise enterprise, Rackspace has strong cloud credibility. Its issues are more around the fact that it isn't a cloud pure play, isn't another managed services cloudwasher, isn't an incumbent enterprise IT supplier, and no longer runs OpenStack. So if you're looking for companies to compare it to in order to value its stock, there aren't good comparisons. And if you’re looking for metrics to use to judge its success, the ones being disclosed don't paint a rosy picture. If you want to understand Rackspace, you'll have to really understand the company and why it isn't what it isn't. So let's start there:

·       It isn't a cloud pure play  it's a hybrid play. Rackspace was an early leader in cloud platforms, arguably its homegrown venture Mosso had the first infrastructure-as-a-service (IaaS) and storage-as-a-service offerings. And it's built upon these assets to create Rackspace Cloud and the open source foundation that may quickly become a de facto standard for public and private cloud platforms in 2014, OpenStack. But the heart of the company and the bulk of its revenues come from traditional hosting, which is not a high-growth, high-margin business.

What separates Rackspace from the pure plays is its recognition that not all workloads are best in a cloud environment — but most can certainly leverage traditional hosting. Its highest value proposition is in helping customers embrace the cloud at their pace by providing credible cloud and hosting environments that share the same data centers, networks and support resources. And how it wins is by providing the expertise in support and consulting to help customers make the right choices between deployment options. 

·       It isn't another managed services cloudwasher  it knows the cloud is better. It’s hard to find a managed service provider (MSP) or hoster out there today who isn’t talking the hybrid game discussed above. What makes Rackspace different is that it has already figured out that cloud computing is more profitable than traditional hosting. This is a serious struggle for most MSPs who have a hard time looking at cloud outside the lens of the traditional hosting business. When viewed this way, cloud looks cheaper, more risky and more expensive to operate. Plus customers can come and go as they please, which upsets the capitalization model. But take this lens off and look at cloud with fresh eyes and you can see that it’s actually more efficient, carries higher margins, and delivers more predictable revenues. Huh? There’s no contract. Loyalty in cloud isn’t set by the contract but by the value delivered and where Rackspace shines is in support and service, where loyalty really lives. Look at its customer turnover numbers if you don’t believe me.   

·       It isn't an incumbent enterprise IT supplier  yet. It’s not just conventional wisdom that it's easier for an enterprise to do business with someone it knows than someone it doesn’t. It’s fact. The contracts and relationships are already in place, you know how each other thinks and have established trust. Rackspace has this with the midmarket but not with the Fortune 500. It’s getting there slowly, but breaking into the CIO ranks of the top companies takes time and persistence. Thankfully some of its long-loyal companies have grown into enterprise leaders and can help with reference calls. But many of the incumbents are now using a Rackspace calling card against them.

·       It no longer runs OpenStack — but is still its best cloud. Rackspace made a savvy strategic move in partnering with NASA to create the OpenStack open source cloud platform software. This IaaS foundation stole the open source momentum from Eucalyptus, brought on the right market leaders, and has never looked back. Now it's poised to be the underlying cloud platform for many key players in the market including IBM Softlayer, HP, Internap, and Red Hat. Most importantly, OpenStack, which underlies Rackspace Cloud, is now iterated, matured, and innovated by the foundation, not Rackspace. This means the San Antonio company’s R&D can be redirected to technologies and solutions that add value on top of OpenStack and will differentiate Rackspace in the future. It’s already built out database management solutions, bought a mobile backend as a service and expanded its application outsourcing business. It’s also expanded its data center footprint globally.

And if you are looking for the most mature, most widely implemented OpenStack cloud solution, it’s hard to argue for anyone other than Rackspace.

So how do you judge this upstart from a cow town outside Austin, Texas? By understanding the hybrid cloud and whether its business model matches customer adoption. As our Forrsights surveys show, enterprises are slowly migrating to the cloud by starting with low-hanging fruit that fits cloud environments both architecturally and economically. From here they are integrating these agile applications with the not-so-agile systems of record that can’t get any closer to the cloud than virtualization and traditional hosting. To get here they turn to managed services as a means of helping fulfill the uneven handshake of cloud performance and hybrid integration. Long term, the economics favor a greater balance on the cloud side, and it takes a partner who knows this and can help empower it to get there. That’s Rackspace’s strategy.  

If you want to measure its success with this strategy, focus on enterprise adoption, customer retention, percent of customer spend on cloud versus traditional (they don’t disclose this) and profit growth from cloud services.

The new CEO needs to tell this story, ensure its execution, and pour funds into cloud innovation. This isn’t a change in strategy but more an issue of speed of execution and investment fortitude.

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Mosso was a Rackspace innovation

I made a correction to this blog post today thanks to a clarification from Rackspace. I had stated that Rackspace acquired Mosso, one of the first IaaS solutions. While technically correct, Rackspace said Mosso was a spin out venture funded by Rackspace itself, then spun back in. Apologies for the correction.