Editor’s note: This overview of Rackspace includes the first part of a two-part interview with Taylor Rhodes, who was promoted to president of Rackspace in January. Click here to read part two.

What’s going on at Rackspace? Some of the recent media and analyst coverage of San Antonio’s most celebrated tech startup has had a “sky is falling” quality to it. The conventional wisdom among the short-selling crowd seems to hold that the San Antonio-based cloud services and hosting company is too small to survive, much less thrive, in the face of bigger competitors like Amazon, IBM, Google, and Microsoft.

I recently spent some time at “The Castle,” the ever-expanding Rackspace headquarters off I-35 in Windcrest, and speaking with employees at different levels of the company to get a better sense of the company’s prospects.

Rackspace Headquarters, “The Castle,” occupies the former Windsor Park Mall. The company has transformed the dead mall into a modern workplace that includes sectioned off conference rooms, escalators, and is home to the old gondolas from Brackenridge Park. Photo by Iris Dimmick.

My takeaway: Rackspace is not in any trouble. It isn’t relocating to another city. It’s not a takeover target. The company is growing, innovating, and competing in a market that’s still in its early stages. Rackspace faces intensifying competition in the cloud sector, and pricing has driven down profitability, but the company is pivoting fast to meet the challenges and continue on a growth path. It’s still hiring talented people. Rackspace added 750 new Rackers in 2013, and will hire hundreds more this year.

Rackspace, its executives and sales managers argue, is misunderstood and underestimated. Yes, the fast-growing, lucrative cloud market has become more competitive. And part of the market has become more price-driven as major players forego profits to vie for market share. But this might be a good time to thumb through the Old Testament for a re-reading of David versus Goliath.

It’s as if no one remembers how mega companies like IBM and Microsoft have found themselves chasing smaller, more nimble innovators in the market. Rackspace isn’t a threat to either blue chip enterprise, but there is a moral to the story: Don’t bet against the San Antonio-based underdog and its Fanatical Support service culture, which differentiates Rackspace from all its competitors.

Fanatical Support is more than a catchy slogan. If you are a Rackspace customer, it’s the difference between a knowledgeable person in San Antonio answering your after-hours or weekend service call and competitors who rely on automated call systems to route clients to overseas call centers.

The Search for a New CEO

There’s no feeling inside the Castle of a leadership vacuum in the wake of CEO Lanham Napier‘s recent departure, even if it caught the city and the markets by surprise. Napier at age 43 has been at the epicenter of building Rackspace from a startup to a company that soon will surpass $2 billion in annual revenues. After eight years at the helm, he is a very wealthy man weary of 70-hour weeks. He appears to be interested in a change of scenery and a new challenge.

Napier can go anywhere and do whatever he wants in the tech world, and he probably will. Of all the Rackspace players who founded or helped build the company, Napier, a Houston native, is the least tethered to San Antonio. Rackspace Co-founder and Chairman Graham Weston, who is very tethered to San Antonio and has bet a share of his own fortune on building a better city, has set aside other projects and is focused on serving as CEO while a search for a successor gets underway.

Lew Moorman, the San Antonio native who served as Rackspace president until last summer when he stepped down to devote time and attention to his wife’s health, remains engaged as a Rackspace board member and consultant. It so happened that Moorman was at Rackspace on one of the days I visited. He was his usual animated and energetic self.

Still, the successive executive changes that came with separate decisions by Moorman to step back and Napier to step down set off alarms, with some market watchers speculating there was more to the story.

Rackspace President Taylor Rhodes Credit: Courtesy / Taylor Rhodes

I sat down with newly-promoted Rackspace President Taylor Rhodes to talk about the company’s current footing and its strategic plan going forward. Rhodes is hardly a household name in San Antonio, but inside the company, he’s a trusted leader who some in San Antonio business community regard as the inside candidate to succeed Napier.

Rhodes joined Rackspace in 2007, the year before it went public, after leaving Dallas-based EDS. He’s quietly risen through the executive ranks over seven years, succeeding in every major role he’s played at the company, leading international business growth on four continents, supporting its global sales and marketing network, and most recently, as Chief Customer Officer overseeing the company’s customer-driven service culture.

Rhodes, a fourth-generation Arizonan and Phoenix native, is a former U.S. Marine infantry officer with an engaging personality and good sense of humor. He’s bullish on Rackspace, respectful of the competition, but not intimidated. He and his wife Stacey have three children: girls Peyton, 14, and Parker, 12, and a son Pierce, 9.

Rackspace President Taylor Rhodes with wife Stacey (right) and children (from left) Peyton, 14, Parker, 12, and Pierce, 9. Courtesy photo.

Rivard Report: You’ve had a low public profile over your seven years at Rackspace while Graham Weston, Lanham Napier and Lew Moorman played more public roles. Your background also is a bit unique here. Rackspace isn’t a company with many former Marine infantry officers.

Taylor Rhodes: My Marine Corps experience was a wonderful one. As a young man, I served five years as an infantry captain. I deployed to the Persian Gulf and Africa. Following my service, I realized that I had learned a lot about leadership and about people because the Marine Corps is a people business.

Rivard Report: How did you go from the Marines into business? 

Taylor Rhodes: After the Marine Corps, I went to the University of North Carolina in Chapel Hill and earned my MBA. I then joined Electronic Data Systems, or EDS, which was Ross Perot’s company in Dallas, before it became part of Hewlett Packard. EDS was an industry leader at the time. IBM and EDS were the preeminent IT services companies. It was a proud brand and a $22 billion company. But then EDS began to lose its way. It started doing lots of deals at any cost. The lesson for me there was that EDS began to lose its way with the bad deals and the hunger for revenue, and in the process, it lost the emphasis on what had made it special. I left EDS in early 2007, about a year before the HP acquisition, and came to Rackspace.

Rivard Report: Rackspace was still privately held in 2007. Was the company attracting attention in the Dallas tech world?

Taylor Rhodes: I had never heard of Rackspace. Here we were in the same state, same general industry. A colleague of mine had left EDS and gone to work for Spencer Stuart, the executive recruitment firm. He was a Harvard Business School grad and used his network to get in touch with fellow alum Lanham. At the time, Lanham was looking to add more seasoned people to Rackspace management. The company had gone from almost nothing to a couple hundred million bucks and Lanham was saying, ‘You know, we have to build some legs under this thing.’

My friend Bret told me, and I quote, ‘Hey, you gotta come to San Antonio and meet these crazy guys. I think they’re on to something and it’s really interesting. And Taylor, when we were at EDS together, you and I would lament all of the bad things that big EDS was starting to do in terms of losing its focus on people, losing its focus on customers, trying to use contracts as a way to shackle customers rather than a way to deliver value. These guys have put people and service back on top. And you know what? They’re starting to kick butt.’

Among other small startups, Rackspace hosted the first three servers for YouTube, which remain behind glass at the Open Cloud Academy in teh Weston Centre. Photo by Iris Dimmick.

I came down to San Antonio thinking it was a lark, a favor to a friend. I met Lanham, Graham, Lew, and spent a bunch of time with all the Rackers. I found that Rackspace was succeeding not because it had scale, the best tools, best processes, but rather because it had convinced a group of humans that it was serious about building a great place to work where people would feel engaged and volunteer their best for customers.

The real trick that Graham and Lanham had discovered was that exceptional customer service could never be commanded; it would only come from building a culture in which Rackers would say, ‘I love this place so much, I love what we stand for, and therefore, I’m willing to run through walls for customers.’  They had unlocked that passion.

Rivard Report: That kind of commitment would appeal to a Marine veteran.

Taylor Rhodes:  It is the same ethos: Team is everything here. When I got here in 2007 they had just come up with our vision statement, which is still on our doors today: “We want to be recognized as one of the world’s greatest service companies.” Simple. Full stop. It doesn’t say anything about technology. It says we want to be recognized as one of the world’s greatest service companies.

That simple vision set the bar high for us and has been the driving force behind everything and everybody. What would it take to become that, we asked ourselves? Well, it was going to take something like Fanatical Support. We asked ourselves a lot of hard questions. What do we mean by Fanatical Support? How do we make that come true? How does that translate into the people that we hire and the services that we deliver? How do we really treat our customers when we mess up?

Rivard Report: Service seems to be a lost value in the marketplace, something we can’t afford anymore. What most companies call service is some off-shore call center.

Taylor Rhodes: We set a simple example of Fanatical Support. We looked for ways to make it tangible. We said Rackspace will never have an automated call system. ‘Press one for this, press two for that.’ You call the Rackspace number today and within a few rings it will be answered by a very helpful human who will get you to exactly who you need to talk to. It sounds simple, but it makes us accountable and accessible to our customers any time, day or night.

(From left) Don Skalak, Taylor Rhodes, Fanatical Jacket winner Cory Stone and Graham Weston. Stone is the recipient of the “Fanatical Jacket Award.” The Jacket is the most coveted award at Rackspace, awarded once a month to an employee that has gone above and beyond to provide Fanatical Support to Rackspace customers. Photo courtesy of Rackspace.

Rivard Report: How does Rackspace afford that level of service? Other companies seem to believe it’s not affordable.

Taylor Rhodes: When I joined Rackspace, pre-IPO, the market was saying we would never be able to scale this business. We knew that if you could manage and control a key metric, churn, which is how many customers leave us over time, you can grow your installed base of customers at a much lower cost than what it costs to replace a customer that leaves you.

The quality of our service results in customers staying here longer, growing with us, buying our new products, and telling other people about us. It’s the world’s most effective form of marketing.  So that’s how Fanatical Support pays off for the business.

We feel very comfortable in saying that we’re the industry leader on service. You have Gartner and other analysts write that every single year in their Magic Quadrant Report. Rackspace is recognized. We’ve done a fantastic job cementing our industry position. If you are looking for a service partner you’re going to contact Rackspace.

Rivard Report: Some consumers will pay a premium for service. Others care more about price. Are there enough customers who require good service and are willing to pay for it?

Taylor Rhodes: Every industry has its premium position players as well as the price driven players. The cloud computing market is big and growing rapidly, so there’s plenty of room for multiple providers to succeed with different approaches. In every industry there will be customers who choose one or the other. From the very start of the IT services business there was part of the market that has said, “I don’t want to run all of my computing. I can’t do it. Or I choose not to do it because it’s not my core business.”

I don’t think cloud computing changes that. There will always be a part of the market that chooses to buy the lowest cost point and wants to do everything themselves. Then there are others who think it’s smarter to take some of what they would pay for hardware, software and engineers to do all their computing themselves and instead pay a service partner a monthly fee to do all or part of that computing for them.

I describe the choice in simpler terms: You can buy a lawn mower and fuel it and maintain it and mow your own lawn. Or you can pay a lawn service and use your Saturday morning to do something else that is more productive.

We think it’s pretty interesting that in the market right now there is a conversation happening about whether Rackspace – with $1.5 billion-plus in annual revenue —can compete and survive with the big scale players like Amazon, Microsoft, Google, etc. Those companies clearly do have scale advantages. They are large and they will play to the advantages around their scale by positioning more around price. If price is your number one criteria, and you’re willing to do everything yourself without much access to expertise or support, you should go to them.

Rackspace is going to be a little more expensive. We’re going to bundle extra services in with the technology and are going to help run our customers IT environment. This allows our customers to focus on their core business. One way to look at it is that our big rivals have larger economies of scale.  But we offer very valuable economies of expertise.

Coming Tuesday: Taylor Rhodes talks about the future of cloud computing, a market still in the early stages of development. 

*Featured/top image: Rackspace encourages its employees to personalize their desk space with pictures, flags, decorations, etc. Photo courtesy of Rackspace.

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Robert Rivard

Robert Rivard is editor and publisher of the Rivard Report.

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