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Life after Lanham - where next for Rackspace?

Stuart Lauchlan Profile picture for user slauchlan February 13, 2014
Summary:
Rackspace's CEO and founder is retiring. Where next for the hosting and open cloud company faces tougher IaaS competition from the likes of Amazon Web Services?

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Lanham Napier

Rackspace is following in Microsoft’s recent footsteps with a change of leadership at the very top following the news that founder and CEO Lanham Napier is stepping down after 14 years.

I’ve always been fascinated by the corporate succession game - especially when it comes to the question of who’s going to step into the shoes of the ‘charisma’ CEO who set up the firm in the first place.

Who replaces Larry Ellison at Oracle has long been a Silicon Valley topic of debate. Over the years there have been many presumed heirs apparent within the company, but of course it’s never been put to the test. When it does happen, how the succession is handled will be stock market sensitive to say the least.

When Bill Gates gave way to Steve Ballmer, the process was handled well and the company ship sailed steadily on. (What happened later may be the subject of other debate.)

But you’ve only got to look at the mess Apple got itself into the first time it lost Steve Jobs and propelled itself into the wilderness years under a series of ‘couldn’t live up to him’ CEOs. Now of course Apple has lost Jobs permanently and Tim Cook is in the unenviable position of having to measure up to the memory of his predecessor.

Challenging times

Napier’s departure isn’t on the same scale of course, but it does come at an interesting time for Rackspace whose performance and strategy continue to be divisive in the market.

For his part, Napier says it’s just the right time to go:

“The transition has been challenging and has taken longer than we anticipated, but our ambitions for this game-changing transition are massive. I wanted to stay at the company long enough to see the transition through, and I feel like we're finally over the hump. Most of the heavy-lifting has been accomplished.”

There’s a tangible suggestion however that sheer tiredness has played a part in the decision as he admits:

“This has been 14-year climb and it's been a difficult climb. Being CEO of this company is a 24/7 gig whether it's a customer escalation some day or something else going on, it's a 24/7 gig. And after a period of time, that wore on me.”

Certainly his decision to go has taken the firm by surprise as a hunt for a long-term successor has only begun, leaving co-founder and executive chairman Graham Weston to act as interim CEO while this process is completed.

The announcement also took the stock market by surprise, sending Rackspace shares tanking on the back of fourth quarter and full year results that saw net income drop to $20.8 million and $86.7 million respectively. Revenues were $408.1 million and $1.53 billion, both up on the comparable numbers year on year.

Public and pragmatic

Rackspace grew its public cloud computing revenue from $87.3 million in 2012 to $116.8 million in 2013, but with the likes of IBM doubling down on the cloud, the competitive landscape is only getting tougher.

Graham-Weston
Graham Weston

Weston cites a new breed of “pragmatist customer, the customer that really does not want to enter into the cloud as a big science project” and who needs the help of specialists as being key to growth for Rackspace in this environment:

“The early adopters of the cloud computing were primarily do-it-yourself tech enthusiasts who were content with essentially wrenching access to raw IT infrastructure.

“Today, a much larger wave adoption is forming around a very different type of customer, pragmatic businesses, millions of them around the world, these businesses will want software engineers to focus on developing work that differentiates them into their core business rather than operating infrastructure and learning the end list succession of complex new tools.

“Unlike the early cloud adopters, the mainstream market doesn't have this type of expertise in house. The 200,000-plus customers we serve today know that they can find cheaper, do-it-yourself hosting with a few keystrokes, but they choose Rackspace, because they know that our services and expertise deliver extra value for them.

“Rackspace has always targeted and served the pragmatist customers in the market, not always the leading edge customers, not the do-it-yourself customers. This is what our core competency has always been.”

The need for speed

This messaging does have some resonance, reckons Jillian Mirandi, analyst with Technology Business Research who argues:

These customers differ from the “first wave,” bleeding edge of adopters that was technically savvy, as they do not want DIY cloud and require more vendor support. TBR recognizes the value of this marketing pitch, and we agree with Rackspace that cloud buyers are changing and require more than just on-demand cloud infrastructure.

But Mirandi reckons that Rackspace isn’t geared up to take full advantage of this customer opportunity:

While TBR believes Rackspace is continuing down the right path, the company is walking down the path, whereas competitors with deeper pockets funded by well-established non-cloud businesses are in full-on sprints. This can be seen by Rackspace’s 16% year-to-year growth, down from 25% is the same period last year.

This is not terrible but is well below industry leaders like Amazon Web Services (AWS), Google and IBM SoftLayer, which are approaching, if not exceeding, triple-digit growth.

As such, Mirandi ominously characterises Rackspace as a fairly priced acquisition target for anyone wanting to get some skin in the IaaS game.

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Over at Forrester Research James Staten has similar speed of execution concerns, but argues the case that Rackspace has developed some important differentiators against the competition:

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 [Managed Service Providers] who have a hard time looking at cloud outside the lens of the traditional hosting business.

But there’s a way to go before Rackspace can be considered an incumbent enterprise supplier, he cautions:

It’s not just conventional wisdom that its 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 mid-market 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.

But playing a long game, Rackspace is nicely positioned, he adds:

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 fulfil 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.

Staten concludes:

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.

Verdict

Whither Rackspace?

The competition from the likes of Amazon Web Services is formidable, both in terms of a more powerful brand and ability to drive down prices.

There’s clearly a need for some renewed momentum and Napier’s departure after 14 years at the helm provides an opportunity to inject some new blood into the company.

Rackspace has a good story to tell, but it needs to tell it louder and with more urgency if the long game is to play out as the firm hopes.

 

 

 

 

 

 

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