Digital transformation in data centers: Kirk Skaugen, president of the Lenovo Data Center Group, tells CXOTalk how the brand, best known for PC, Motorola and IBM products, is shifting to a customer-centric data center business with a focus on innovation.

“We have built a business unit completely focused on the hyper-scalers that may buy a million servers at a time, what’s called the super seven. We’re now the largest supercomputing company in the world focused on those things that are doing everything from hurricane prediction to cancer research,” Skaugen says. “Then, we also have business units focused on the move to software-defined that are IoT or Internet of Things generation, etc. So, we’re getting very segmented, even in the data center space.”

Skaugen has been Executive Vice President and President of Lenovo's Data Center Group since November 2016. He is responsible for growing Lenovo's global footprint in data center solutions, including server, storage, networking and related software and services. He previously worked with Intel for 24 years, including leadership roles of both the company's Client Computing Group and Data Center Group.

This video was recorded as part of the digital transformation and AI conversation series held at the AI Experience Lab of IPsoft in New York City.

Transcript

Michael Krigsman: We hear a lot about customer experience, but we don't hear about customer experience in the data center. Today, on CXOTalk, that is our topic. I'm Michael Krigsman. I'm an industry analyst and the host of CXOTalk.

I want to say a huge thank you to IPsoft. We are in their Innovation Experience Center in the heart of the financial district in New York City. IPsoft is making CXOTalk possible.

We're speaking with Kirk Skaugen, who is the president of the Lenovo Data Center Group. Hey, Kirk, how are you?

Kirk Skaugen: I'm great. Thanks for having me.

Michael Krigsman: Tell us about Lenovo and tell us about the Data Center Group.

Kirk Skaugen: Sure. Lenovo is a Fortune 226 company. We're in about 160 countries now, and we have 3 main product lines. Obviously, I think we're probably best known for our PC product line after acquiring the IBM PC business in about 2005. We've recently purchased the Motorola business from Google, as well as the server business from IBM — so, the three main product lines and a really global company.

Michael Krigsman: It's an enormous company. You have $45 billion in revenue.

Kirk Skaugen: That's right, about 55,000 employees and $45 billion in revenue.

Michael Krigsman: Tell us about the Data Center Group.

Kirk Skaugen: Yeah, so I think we've been growing as we've branched out, and we have really two initiatives this year. One is to go from a single business to multi-business. Again, with such a heritage in PC, now we're moving into data center and phones and then beyond - smart speakers, those kinds of things.

Then, I think, moving from product-centric to customer-centric, which is really what we wanted to talk about today, is a second initiative because we have kind of a legacy of building product and driving it out to the customer base. Now, we're kind of turning that upside down and being much, much more customer-centric in our data center business.

If you look at the data center business overall, we're now split out into multiple segments, each which have very unique needs. I think, for CIOs out there, it's a very different PC market than, say, the gaming market or even the small business market. The same thing is happening in the data center.

We have built a business unit completely focused on the hyperscalers that may buy a million servers at a time; that's called the super seven. We're now the largest supercomputing company in the world focused on those things that are doing everything from hurricane prediction to cancer research. Then, we also have business units focused on the move to software-defined — IoT or Internet of Things generation, et cetera. So, we're getting very segmented, even in the data center space.

Michael Krigsman: Kirk, when we think about customer experience and being customer-centric, we tend to think about consumer products. When you talk about being customer-centric as opposed to product-centric, can you break that down for us?

Kirk Skaugen: Sure. I think what we're trying to do at Lenovo is get kind of into what we referred to as ameba management, which is, each and every segment has very, very unique needs. The needs of a small business is very different than the needs of a core enterprise and a public cloud. So, each of the general managers has the ability to control their own financial P&L, their workforce, their salesforce and then, ultimately, their product roadmap.

For hyperscalers, they're looking for true customization, probably beyond anything we've seen before, mass customization where there are custom products for each one of those large, public cloud providers. If you look at supercomputing, they're really concerned about power. You're putting 6,000 computers to work on a big, scientific problem and, again, very specific product lines and innovations we're doing around water-cooling. Whereas, a small business might be just looking for simplicity and simplification on how they manage because they

Michael Krigsman: We hear a lot about customer experience, but we don't hear about customer experience in the data center. Today, on CXOTalk, that is our topic. I'm Michael Krigsman. I'm an industry analyst and the host of CXOTalk.

I want to say a huge thank you to IPsoft. We are in their Innovation Experience Center in the heart of the financial district in New York City. IPsoft is making CXOTalk possible.

We're speaking with Kirk Skaugen, who is the president of the Lenovo Data Center Group. Hey, Kirk, how are you?

Kirk Skaugen: I'm great. Thanks for having me.

Michael Krigsman: Tell us about Lenovo and tell us about the Data Center Group.

Kirk Skaugen: Sure. Lenovo is a Fortune 226 company. We're in about 160 countries now, and we have 3 main product lines. Obviously, I think we're probably best known for our PC product line after acquiring the IBM PC business in about 2005. We've recently purchased the Motorola business from Google, as well as the server business from IBM — so, the three main product lines and a really global company.

Michael Krigsman: It's an enormous company. You have $45 billion in revenue.

Kirk Skaugen: That's right, about 55,000 employees and $45 billion in revenue.

Michael Krigsman: Tell us about the Data Center Group.

Kirk Skaugen: Yeah, so I think we've been growing as we've branched out, and we have really two initiatives this year. One is to go from a single business to multi-business. Again, with such a heritage in PC, now we're moving into data center and phones and then beyond - smart speakers, those kinds of things.

Then, I think, moving from product-centric to customer-centric, which is really what we wanted to talk about today, is a second initiative because we have kind of a legacy of building product and driving it out to the customer base. Now, we're kind of turning that upside down and being much, much more customer-centric in our data center business.

If you look at the data center business overall, we're now split out into multiple segments, each which have very unique needs. I think, for CIOs out there, it's a very different PC market than, say, the gaming market or even the small business market. The same thing is happening in the data center.

We have built a business unit completely focused on the hyperscalers that may buy a million servers at a time; that's called the super seven. We're now the largest supercomputing company in the world focused on those things that are doing everything from hurricane prediction to cancer research. Then, we also have business units focused on the move to software-defined — IoT or Internet of Things generation, et cetera. So, we're getting very segmented, even in the data center space.

Michael Krigsman: Kirk, when we think about customer experience and being customer-centric, we tend to think about consumer products. When you talk about being customer-centric as opposed to product-centric, can you break that down for us?

Kirk Skaugen: Sure. I think what we're trying to do at Lenovo is get kind of into what we referred to as ameba management, which is, each and every segment has very, very unique needs. The needs of a small business is very different than the needs of a core enterprise and a public cloud. So, each of the general managers has the ability to control their own financial P&L, their workforce, their salesforce and then, ultimately, their product roadmap.

For hyperscalers, they're looking for true customization, probably beyond anything we've seen before, mass customization where there are custom products for each one of those large, public cloud providers. If you look at supercomputing, they're really concerned about power. You're putting 6,000 computers to work on a big, scientific problem and, again, very specific product lines and innovations we're doing around water-cooling. Whereas, a small business might be just looking for simplicity and simplification on how they manage because they don't have their own IT department.

As we look at customer centricity, in the past we had maybe created one product line and just rolled it out. Now, we're having to get much more specific to each and every segment of the market, most of which are growing very, very fast now. The move from people being the main connection and the main data point to the Internet to the Internet of Things, so we're moving from a world where Lenovo was participating in hundreds of millions of PC units to now we're going to with 100 billion devices connecting not just people-to-people, but machine-to-machine as well. The data center is obviously at the heart of all that.

Michael Krigsman: You've organized the business around these smaller, more granular units. Is units even the right term to use?

Kirk Skaugen: Well, again, it's around the customer needs. When we walk into six of the top ten hyperscalers we now have design wins with, again, they're looking for mass customization, power, security, and cost. With Lenovo, we're building about four to five devices a second on the consumer and device side, and we can leverage that into about $17 billion of procurement we do every year to make those hyperscalers be able to build out at mass scale.

Again, a small business is really worried about: How do I deploy my first server, connect my first ten employees together, and not have to build an IT department to do that? We build these general managers in, and the roadmap, taking into account those and putting together customer councils to be able to get their feedback before we even start the roadmap out in time.

Michael Krigsman: There's a very close consultation with customers early in the product lifecycle.

Kirk Skaugen: That's true. We're here in the middle of Manhattan and Wall Street, and it's a perfect example where Wall Street has traditionally pushed the envelope on the actual compute technology of moving from CPUs to more purposeful GPUs and FPGAs, pushing the limits of their network and their storage subsystem, so I think Wall Street is a perfect example where we've had to get 18 months, 2 years, even 3 years ahead of the curve. What are the technology inflection points that are going to happen, and then how do we build products to take advantage of that?

Michael Krigsman: Where does technology innovation fit into this picture as well?

Kirk Skaugen: Well, as I said before, I think innovation is everything. I think we have to be agile in the customer center. We have to empower our engineers.

We pride ourselves on having some of the fastest innovation in the market, but we also realize we can't do it ourselves. Part of our vision is to be the most trusted data center partner. That was when you talked to people like Intel, Nvidia, Broadcom, Microsoft, Red Hat, as well big software companies like SAP and others, Nutanix.

We aim to have the best partnerships as well. Rather than it be a win/lose, we're always talking win/win, not only with our partners, but how do we deliver that with the customer base.

It's not uncommon when we're rolling out a new technology to do multiple thousand customer visits over the course of a few months, even, with our technology partners so that we don't have to do it all ourselves. Part of that customer centricity and trust is making sure we don't think we have to do everything internal; don't do everything proprietary.

I've been in the industry, I joined in 1992, and there's one thing that's happened. The old data centers where these big propriety computers — where the chip, the motherboard, the hardware, the operating system, and the applications — all came from one company. For 25 years, whether it's workstations, servers, or storage, now networking and telecom, everything is moving to a horizontal model of industry standard hardware, industry standard operating systems, industry standard applications. That just means, in my opinion, the people who partner best in that ecosystem are going to be the best, have the best response to the customer, without driving a lock-in for the customer.

Michael Krigsman: One of the most interesting parts about this to me is, when you acquired that data center business from IBM, it was more or less a commodity kind of business. You have been innovating, and the results, your growth results, have proven out that you can take a commodity kind of business and innovate it around it.

Kirk Skaugen: Yeah, I think some analyst firms have us now as the fastest or near the fastest growing software-defined company in the world. We don't have the legacy of some of our networking and storage competitors. As the world moves from pure hardware to what we call a software-defined data center with more commodity differentiated building blocks and software applications on the top, we're very well positioned for that. Our goals are to double, triple, or even quadruple our market share in the transition from the traditional data center to the software-defined data center.

You're right. Innovation is key, so you have to understand the customer. You can't just take off-the-shelf building blocks and slap them together. We need to start, in some cases, two years ahead of the product. Sit down with the engineers and understand the unique needs of their data center because, again, as you're building scale where people are buying 10,000, 100,000, even a million servers for their data center--something that was unfathomable probably 15 or 20 years ago--you need to know what's the temperature that they're operating their data center in. What's their power requirement? All these very unique attributes that are sometimes customer-by-customer.

Then you have to have the ability to do massive customization but still give them the economics. We're trying to balance, at Lenovo, taking advantage of being, I think, the fourth largest device company in the world between our tablets, PCs, phones, and VR/AR devices, but be able to meet the unique needs of the data center customer at the same time with that kind of value.

We just met our goal of being the largest supercomputer company in the world about two years ahead of our goal. People ask why we did that. Well, it is supply chain. It is the ability to architect the data center at scale all the way down to the node, all the way to data center. But, we've actually built vertical scientists that are experts in weather forecasting, modeling, genomics, and these kinds of things, so we can actually work with the customer on their applications and tuning their applications. That's an example of supercomputing.

If you look at SAP, SAP runs their internal HANA on Lenovo, so there we actually have put a couple dozen people at SAP's facility to optimize the hardware and the software together. We're quite proud now that about 90-plus of the world record workloads are now running on Lenovo, which is far above our competitors. People ask, how did we do that? Well, it's partnering better, and it's getting deeper relationships with our customer base and the application vendors. That's all kind of part of customer centricity.

What we did to kind of put our money where our mouth was this year is we have now doubled, once again for the second year in a row, the amount of compensation that a Lenovo employee will get based on customer centricity: on-time delivery rates, quality rates, quote times, all these kinds of things. A person, every person at Lenovo has to have a customer-centric goal, and they can make up to 40% more of their annual kind of bonus if we hit the accelerated customer metrics. The Lenovo employees will win if and only if we deliver on our customer centricity goals.

Michael Krigsman: That's really interesting. You have actual financial metrics in place for your employees that are tied to customer success.

Kirk Skaugen: That's right. Every single employee. Last year, it had a range of 10% to 20%. This year it has a range of 20% to 40%. Not just a bonus on top, but actually the ability to be taken away if we can't meet our goals.

Things like we have a briefing center now at our corporate headquarters for the data center in Raleigh. When we leave, our net promoter score is about 71%. We're really encouraging customers to get in.

Our challenge, probably, continues to be our brand. I think everyone knew IBM was in the server business. Not everyone knows Lenovo is in the server and data center business.

I think, in the Global 1000, we're growing over 200% year-on-year because those were kind of legacy IBM customers that knew us very well. In the small market, they're just now starting to understand that, yes, we make ThinkPad notebooks, but we also make servers. That's part of what we're doing in terms of bringing people into our briefing center, doing interviews like this to get our brand out there.

Michael Krigsman: What are the metrics that you're using to look at the Data Center Group at your business?

Kirk Skaugen: Well, I think at the most basic level, right? A year and a half ago, we had been shrinking a bit as we looked to retool our business, so we're looking at basic indicators. One is our market segment share, which we're feeling is growing rapidly again. Again, our goal is to grow at least double the market. We're obviously looking at revenue growth and, for our shareholders, profit growth. Those are the three metrics.

We look at that by segment, and then we look at it by geography. Each of our geography presidents from China to Asia Pacific, Latin America, we have a view. From a pure data center for Lenovo shareholders, we're looking at revenue profit. We look at attrition rates, obviously, to make sure we're keeping the best people, which we think we are, in the industry because, at the end of the day, it's people first, like we said. Those are the big ones.

I think, in general, that's what our board is looking for is just general performance. There are not 50 indicators. Of course, there are smaller indicators, but it's a simple company from that perspective.

From a technology indicator perspective, with each of our big partners, we're looking at what are the major technology trends they see coming, and then we want to be best and first. How do we deliver the most optimized solution that's good for them, good for us but, most importantly, good for the customer base?

If we look at all the major hardware and software technology trends, we metric ourselves on being at the leading edge because we're not trying to protect that legacy heritage. We're not trying to keep a customer one more year on the old stuff. We're not trying to protect margin from the old stuff. We're trying to move people rapidly forward to the best technology for them.

Michael Krigsman: What are the implications of IoT on data centers and on your customers and also especially what you're doing?

Kirk Skaugen: Well, I think you traditionally had looked at maybe three to five server vendors, three to five networking vendors, three to five storage vendors. I think the industry is going to continue to consolidate. If you look at the PC world, it's done the same thing. Lenovo now owns 95% of NEC, 51% of Fujitsu in Japan, for example, so we've continued to consolidate through acquisition. I think you're going to end up with fewer larger companies, so you have to find the most trusted partner, most importantly, that's going to be with you for the next decade.

These are turning into global markets, even with all the noise in the marketplace. I think you need to find someone that's most trusted and that can take you global. If you're in China, you need to find someone that can take you outside of China. If you're in the U.S., you need to figure out a way to get into China and some of the emerging markets in Africa, Latin America, Eastern Europe, Asia Pacific.

For this transfer to IoT, it's going to need a step function reduction in price. You're going to have to get way more performance at a much better price in order to deliver the scale that we're talking about here. What we're trying to do at Lenovo is just be that most trusted partner for the next decade in this transformation.

Michael Krigsman: Finally, you're probably the best person to ask for advice for CIOs, for folks in the enterprise who are working with data centers, investing in data centers. What's the advice on how to get the most out of that data center investment?

Kirk Skaugen: Well, I think, to find the best set of partners, the partners you can trust. This market is going so fast. Even for me who works 7 days a week, 364 days a year, it's very hard to keep up with the technology, so you need to find a trusted partner, a trusted sales resource that'll help understand your unique requirements, build a partnership ecosystem that can keep you informed of the technology changes, and help you make big bets.

Michael Krigsman: Why is the partner so important as opposed to, "Well, you know, let's get our engineers to look up the spec books and we'll make a choice"?

Kirk Skaugen: Yeah. I think the innovation is happening at such a global level now that, unless you're in 150, 160 countries, the innovation is coming everywhere, right? It's coming out of Israel. It's coming out of China. It's coming out of Egypt. It's coming out of Vietnam. It's everywhere.

I think you need a global company to help build perspective. That doesn't mean you have to agree with everything that your vendor or partner is bringing to you, but you need to have the aspects of… us.

We have an incubator group that's out investing hundreds and hundreds of millions of dollars in startup companies. We can bring those into an IT manager and say, "Hey, here's what Lenovo thinks is interesting technology." In a very quick, speed-dating kind of day, you can get access to 50, 60 companies that you don't have to go out and do research for yourself. I think that's what a large, global company like Lenovo can bring to you, which is just consolidating a lot of research, not just from our big partners, but from the investments that we're making and where we're betting the company.

Michael Krigsman: Great. Kirk Skaugen, thank you so much.

Kirk Skaugen: Thank you.

Michael Krigsman: We've been talking with Kirk Skaugen, who is the EVP and president of the Lenovo Data Center Group. Subscribe on YouTube. Thanks so much, everybody. Have a great day.