Download - Cloud the Impact on IT Services
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The Cloud's
Impact on
IT Services
Providers
AVENDUS
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Ned May
SVP Research
HfS Research
Puneet Shivam
Co-head IT Practice
Avendus Capital
Jeff Baker
VP, IT Practice
Avendus Capital
Dear Reader,
As the role that the Cloud is playing in transforming the technology
landscape continues to increase, it has become the topic that is on
the minds of many within the industry, and with those that invest in
both software and services. Given this, there isn't a lack of
research reports or bold predictions about how the Cloud will
transform enterprises. However, in covering this market we found
that amongst the available research there was a lack of focus on
what the effect of Cloud would be on providers of IT services. The
companies who have largely been built by providing supporting
services to non-cloud products, or to build custom applications and
linkages between disparate systems, otherwise known as system
integrators. What we tried to accomplish in this report was an
understanding of what the current transformation could mean to
these system integrators, and what we found formed the basis for
this report.
Largely, what we discovered is that the effect of the cloud on the
large SI's is still relatively small, but is increasing rapidly with time.
As Cloud becomes the standard for infrastructure and software,
and enterprises become more global and mobile, IT service
providers are being tested. This new marketplace requires a
different business model than what they've employed in the past.
While the prior decade was one where labor arbitrage was a
winning strategy, the future decade will hinge on technology
arbitrage. The operating mantra of providers during this era needs
to be characterized by adding value, because if they don't their
competition will.
As always, we welcome feedback from each of you and apologize if
anything we've written (or left out) offends anyone's sensitivities.
Please do write to us with your feedback on the report and
suggestions of how we can improve our market coverage.
Best,
Ned May Puneet Shivam Jeff Baker
SVP Research Executive Director Vice President
HfS Research Avendus Capital Avendus Capital
AVENDUS
1September 2014
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1 Methodology
2 Cloud's Dramatic Impact on the Procurement of IT
3 The Impact of Cloud on IT & Business Services Providers
4 The Evolving Professional Cloud Services Provider Landscape
5 Deal Activity
6 Final Recommendations for Service Provider Success
7 Appendix
3 :: 5
6 :: 8
9 :: 13
14 :: 32
33 :: 39
40 :: 41
42 :: 53
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Disclaimer
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AVENDUS
2Disclaimer
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The
promise of IT
and the ensuing opportunity around
its deployment may never have been
greater than it is today.
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Methodology
1
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Methodology
This report is based on a series of discussions with several dozen senior leaders across
the Cloud Services landscape including CEOs of prominent startups, practice heads of
large global services providers, venture capitalists, private equity investors, and a range
of other participants and observers. We also spoke to those who might be considered
Cloud skeptics within services providers. In addition to the insight gleaned from the effort
of gathering this collective wisdom from a crowd which represented roughly 500 years of
hands on experience, HfS and Avendus brought our own understanding and analysis of
the market through our ongoing interactions with participants. We augmented this with
primary research conducted in the IT services by HfS over the last 12 months, Avendus
experience as a leading investment bank in the IT services space, and with secondary
information available in the public domain.
Sizing methodology
HfS and Avendus market sizing relies on a consistent primary methodology that is used
for each service category. Our primary method is a supply side model that builds market
dimensions by estimating revenues from the most significant service providers in each
category. This is augmented by looking at spending models and contract tracking for
each specific market.
Forecasting methodology
HfS and Avendus forecasting combines historic revenue growth projections, contract
run rate projections, demand side survey data, supply side survey data and economic
projections.
This report examines the impact of Cloud computing on the IT Service provider
landscape with a primary focus on consultants and systems integrators. As such, all
discussions regarding Cloud offerings and services are in the context of the enterprise.
We exclude what could best be described as the Consumer Cloud - offerings such as
personal backup, photo storage, etc.
Today one would be hard pressed to find anyone in the IT services industry that is willing
to debate the premise that cloud computing has emerged as an important and lasting
trend within enterprise IT. However, when one digs deeper into the Cloud, any general
agreement unravels from there. For some, the definition of Cloud Computing is a rigid
one that adheres to the framework published by NIST. Theirs is a world where Cloud
incorporates five critical features:
Defining the Cloud
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3Methodology
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4Methodology
1. Self-service You can effectively pull out a credit card and buy it
immediately online.
2. Networked It is offered online.
3. Multitenant One instance of the service offering serves multiple
customers.
4. Elastic It can be rapidly scaled up and down to align with an
individual customers demand.
5. Metered Both provider and customer have clear visibility as to how the
underlying resources are being utilized.
Others approach Cloud with a much broader brush. For example, the collective wisdom
fueling the industry today has settled on a description that includes a comparison to
utility computing and for some it is essentially a metaphor for the internet.
For the bulk of this report, we intend to keep the definition of Cloud purposely vague.
This is not meant to establish some precedent regarding our definition at large. At times,
there is a very good reason for a tight definition, such as when establishing a market
size. However, the primary purpose of this report is to gauge the broad impact of Cloud
on the consumption of IT services, and like many emerging technologies, the specifics
as to what Cloud represents is subjective to an individual buyer. This means that to
explore its impact on the related services market, we need to take the broadest view
since the creation of a rigid box around what Cloud does and does not entail would
detract from the primary message of this report.
As such, we define Cloud as:
A relatively new IT delivery model that leverages broad network connectivity to enable
simplified procurement and allows the underlying technology assets to be centrally
managed and uniformly updated. In doing so, it creates a modular approach to the
delivery and consumption of IT.
Suffice to say, this encapsulates a very broad range of activities being labeled as-a-
Service today. This list of acronyms in the business vernacular is long and seemingly
grows with the issuance of each new industry analyst report. At the time of writing, some
of the more prominent as-a-Service models include: Software-as-a-Service, Platform-as-
a-Service, Infrastructure-as-a-Service, DataBase-as-a-Service, Unified Communications-
as-a-Service, BigData-as-a-Service, Hadoop-as-a-Service, Data Management-as-a-
Service, Cloud Management-as-a-Service, Application Development-as-a-Service,
Desktop-as-a-Service, Back-up-as-a-Service, IT-as-a-Service, and Mobile Backend-as-
a-Service. To better make sense of this, we will focus our discussion around four core
areas.
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5Methodology
The Four Layers of Cloud
It is generally accepted that there are three primary types of Cloud offerings
Infrastructure-as-a-Service (IaaS), Platform-as-a-Service (PaaS), and Software-as-a-
Service (SaaS). For the purpose of this report, HfS and Avendus will explore the impact
of Cloud across these three offerings as well as the relatively new opportunity unfolding
around Business Process-as-a-Service (BPaaS). While there is also an ongoing debate
regarding the formal definition of each of these sub segments, we are less concerned
with what goes into them than what comes out. That is, we are focused on the outcome
of these services and in particular how they are consumed by an enterprise rather than
specifics around underlying inputs. In taking this approach, we are able to identify the
unique drivers of adoption and their corresponding impact on IT services providers
without getting weighed down by semantics. Taking this outcome based approach yields
the following descriptions:
IaaS The provision over a network of one or more elements of core IT
infrastructure enabled for easy integration and consumption
PaaS The provision over a network of a software development platform
enabled for easy testing and deployment
SaaS The provision over a network of an end user application enabled for
easy and rapidly scalable consumption
BPaaS The provision over a network of a specified outcome for a particular
business process that encompasses IT and often an element of
workforce augmentation as well
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Cloud's Dramatic
Impact on the Procurement of it
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AVENDUS
6Clouds Dramatic Impact on the Procurement of IT
Clouds Dramatic Impact on the
Procurement of IT
The adoption of Cloud is having a profound impact on the way enterprise IT is procured.
In turn, these changes are creating challenges for IT services providers as there are
times when their traditional marketing and sales models no longer suffice.
As seen in Exhibit 8, the impact of an enterprise IT department moving to Cloud is broad
as it changes the way decisions are made, how IT is procured and accounted for, and
ultimately what role the IT department plays across the firm. What follows are the three
biggest challenges and one misconception that this shift brings to how IT is procured.
Suddenly an individual outside the IT organization can easily provision access to a new
service without involving IT, a phenomena we see as the democratizing of access and
spending on IT. In fact, many of these potential new buyers have already done so and
that likely drove the first wave of enterprise Cloud adoption more than any other factor. It
was not an IT decision but one made within other functions like Sales and HR. For their
part, IT departments also saw a similar democratization of spending as, for example,
internal developers working on a new Mobile Android App could now secure their
Exhibit 1 The Broad Impact of Cloud on Enterprise IT
1. Cloud Turns Influencers into Buyers
Flexible and Agile
Design, Build, Run
Purchase
Complex implementation
Hard coded
Weighted toward maintenance
Long-term planning
Gate keeping
Deep IT skills required
Concentration of large mega apps
Rigid and Vast
On Premise IT Environment Cloud Driven IT Environment
Consume
Rent
Complex integration
Configurable
Focused on new applications
Upfront analysis
Collaborative
Deep vertical expertise required
Proliferation of small discrete apps
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7Clouds Dramatic Impact on the Procurement of IT
development platform and run all necessary testing without having to get approval for the
underlying purchase required to perform the build.
Today, as Cloud adoption matures around a second wave of adoption, one categorized
by the emergence of the large ISVs offering a broad set of offerings, we are witnessing a
more collaborative approach to buying emerge in the enterprise. This is driven by a
realization that greater benefits will be obtained when individual offerings are integrated
with legacy systems and data as well as with each other. But having driven the buying
decision once, many of these functional areas want to maintain a fair amount of control
so decisions are getting drawn out and more individuals are now sitting around the table
as they are made.
Bottom line: New faces like the head of sales are now sitting at the deal table,
requiring vendors to match this level of professional with experienced business
consultants, which in some instances results in an elongated sales cycle.
One of the most significant changes that occurs for an enterprise as it migrates to the
Cloud is the shift in how spending is allocated. By moving IT from largely a long-term
capital expenditure model to one that is a flexible operating expense, much of the risk
and uncertainty associated with IT development goes away. While upfront
implementation costs do not disappear, the bulk of spending gets tied directly to
consumption and demand thus eliminating the need for forecasting scenarios of usage
that may or may not come into play. In the past, if a business was too aggressive in their
investments in a certain technology they could be straddled with years of excess cost.
However, being too cautious could result in having an IT infrastructure that was unable to
meet business needs. Today, these variances around the accuracy of investments
largely go away in a Cloud based delivery model, freeing up resources once allocated to
forecasting and planning.
Bottom line: Cash is being freed up from large capital intensive projects and will
likely be redeployed to enable enterprises to reinvest for innovation.
One of the other most important aspects to understand about Clouds impact on the
enterprise is that it does not necessarily reduce total IT spend. This is because by
aligning usage with cost, cloud eliminates the uncertainty around its outcome. The
conversation around adoption shifts from one centered on the total cost of ownership to
one centered around the return on investment. That shift will likely drive more spending,
2. Cloud Shifts Enterprise Spend from CAPEX to
OPEX
3. Cloud Shifts Conversations from TCO to ROI
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AVENDUS
8Clouds Dramatic Impact on the Procurement of IT
not less. Further, by being able to tap new pockets of spending in other functional areas,
the aggregate allocation of funds spent by an enterprise on IT may also rise. This is
especially true as Cloud enables quicker and easier deployments that are able to tap into
unmet demand in functional areas that previously had to sit and wait while an IT
department crunched the number to let them know if the initiative was worth the cost,
and if so what place they would occupy in line.
Bottom line: Expect the conversation to change to one of how much can be gained
rather than a primary focus on what it will cost.
Alongside these changes it is important to point out one misconception as well that
Cloud somehow eliminates the need for an enterprise to carefully cost out its ensuing
spend. By some estimates, an enterprise that shifts its consumption of an application to
the cloud can reduce its total spend by well over half as savings from better utilization of
hardware come together with lower licensing and implementation costs. Yet other
estimates show the opposite to be true. That despite the larger upfront cost of an on
premise software implementation total costs are less than what is required for the
equivalent SaaS version. Why the discrepancy? Because like most everything to do with
IT spend, the answer actually depends on the specific. Every enterprise needs to
conduct their own analysis to attempt to determine the ultimate impact on spending of
moving to the Cloud.
Bottom line: Measurable outcomes will need to be demonstrated up front and
backed up quickly for ongoing investments to be made.
4. But Cloud Still Requires One to Crunch
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The
Impact of Cloud on IT &Business Service Providers
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AVENDUS
9The Impact of Cloud on IT & Business Services Providers
The Impact of Cloud on IT & Business
Services Providers
The first step in understanding the opportunity that Cloud creates for IT service providers
is to undertake an effort to remove ambiguity around the related offerings. All too often,
we hear IT services providers dive into the breadth of their Cloud offerings without first
establishing clarity around what primary activity they are targeting. To that end, we
identify five activities that service providers can build specific Cloud offerings around in
addition to the broad category of IT Strategy.
The five opportunities are:
1. Build Infrastructure. This encapsulates the suite of services aimed at enabling
either a third party provider or an enterprise to build out their own cloud
infrastructure for delivering a solution either externally or internally.
2. Transform Applications. This is the series of services built around either
migrating or modernizing an enterprises application to enable integration with
Cloud services as well as services to assist a tier two ISV to ready their own
applications for delivery as Cloud.
3. Integrate. This area is a set of services offered to help an enterprise consume
Exhibit 2 The Five Opportunities around Cloud
Strategy Consulting
Transform
Applications
Integrate
Manage
ProvideBuild
Infrastructure
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10The Impact of Cloud on IT & Business Services Providers
a third party Cloud service. It includes integration work between legacy and
cloud as well as cloud to cloud
4. Manage. This can be at either the infrastructure layer, for example managing
an enterprise private cloud environment, or at the application layer, for example
managing the ongoing consumption of a cloud service such as Salesforce.com.
5. Provide. This opportunity encapsulates the efforts of service providers to enter
the Cloud market directly by creating, selling and delivering their own Cloud
service to the market. These offerings can range from global IaaS provisioning;
such is offered by IBM and HP all the way up the stack to targeted SaaS and
BPaaS offerings.
The activities undertaken within each of these five broad types of offering are not
necessarily unique and there is often an opportunity to bridge multiple offerings. For
instance, an advisory engagement for a particular enterprise may include developing a
strategy for rationalizing their ongoing efforts to build private cloud while also developing
a strategy for transforming a legacy application to SaaS and then integrating and
managing it. However, confusion arises because there are now two distinct buyers for
these services as public cloud providers such as Microsoft AzureCloud themselves have
now become a significant market in addition to the enterprise.
Large global IT service providers have mastered the ability to move through an
Enterprise client and maximize the revenue associated with each phase ideally
developing enough trust along the way to enter into a sole sourced deal. But the
dynamics of the Public Cloud market opportunity are unique. First, this is largely two
discrete opportunities one around Build and Manage for infrastructure and a second
Exhibit 3 Two Unique Market Opportunities
Source: HfS and Avendus Research
Serving the Enterprise
Build
Transform
Integrate
Manage
Provide
Supporting the Public Cloud
Build
Manage
Transform
Co
mp
lim
en
ted
by
:
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11The Impact of Cloud on IT & Business Services Providers
around transforming the applications of Tier 2 ISVs for cloud delivery. Specifically these
are sophisticated buyers that often require significant scale. These differences mean SIs
will need to realign the way they approach that market in significant ways. The upside in
this shift means a narrower sales and marketing effort might be needed to address a
growing but consolidating market.
The biggest reason for the divergence across these service areas revolves around the
changing nature of how these Cloud-based offerings are created. In a traditional
enterprise IT deployment, the buyer was responsible for the initial outlay around
hardware and software provisioning. That was the case even in a large IT Outsourcing
deal where a transfer of ownership of the underlying IT assets might eventually occur.
But in Public Cloud offerings like IaaS, the provider of the cloud infrastructure (aka the
seller) is on the hook for all the upfront costs.
As such, this is a business that rewards economies of scale. It is one where only the
largest can effectively compete, as the outlay is so great that only the largest or most
highly capitalized providers can participate effectively. This market is similar to what
weve witnessed occur in telecommunications and mobile phone industries. This is
especially true for IaaS offerings where ultimately it is likely only a handful will succeed
as the spoils eventually fall to those who can drive commoditization at a rate faster than
anyone else. Thats the primary reason you see companies like Dell decide not to
compete in the data center space but instead partner with the likes of Microsoft. More
broadly across Cloud, it is also the reason you see companies like HP adopt
Saleforce.com for its own internal CRM. Forward thinking IT Services understand how
these markets are diverging and they are selectively picking their areas to compete.
Competing effectively in the emerging Cloud Professional Services space requires
providers to change how they package and sell offerings as well. Four of the biggest
changes are outlined below:
A Bigger Table is Required
Given the additional stakeholders involved in most typical Cloud engagements today,
service providers need to grow accustomed to new stakeholders being around the table
as they discuss a deal. This is especially the case within SaaS and BPaaS and these
new participants are not just in a listen only mode. This adds delays to reaching an
agreement on even the simplest of implementation deals. Perhaps worse, the mix of
business and IT personnel risks introducing confusion as different parties may assign
The Economics of Delivery are Changing
Cloud Creates New Demands on Services Providers
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12The Impact of Cloud on IT & Business Services Providers
significantly different meaning to the same set of words. Take careful heed at every
meeting to make sure everyone is using language that is commonly understood. This will
also require a different skill set from providers, whereas the last decade was marked by
labor arbitrage, the next will be defined by technology innovation across areas such as
big data, mobility, and business processes.
Bottom line: This means in turn that business expertise rises on par or above
technology expertise as a critical trait.
New Skills and Shortages at Play
As SaaS offerings start to standardize at least some of the most simplistic of underlying
processes, they begin to lead consultants and integrators deeper and deeper into a
clients industry specific needs. Value-add will come from service providers innovation in
delivering business-relevant information and impact more efficiently than traditional
services allow. Vertical expertise can add-value through various means including a
unique understanding of a clients needs, increased speed-to-market, re-useable IP, and
overall client engagement. This requires IT service providers to bring more to the table
than building to plan, but rather by being able to innovate on behalf of clients. In order to
do so, IT service providers will need to build out these capabilities, and this will in turn,
create strain around the ability to find the right professionals with industry insight. In a
similar fashion, as the need to address business problems via a mix of IT and business
centric offerings increase, it puts more demands on IT service providers to develop
solution architects who need to possess more of a business centric ability to bridge
multiple worlds more effectively, versus the traditional role of someone who has gone
deep, say around network management skills.
Bottom line: Business and industry centricity begins to trump technology
centricity.
Change in Nature of Projects for SI
In the short to medium-term, we are seeing a rise in demand for systems integration
driven by cloud initiatives. However, this activity is of a different nature than the
traditional large scale on premise implementations in the past. These new deals are in
the six figures not seven, and they last for weeks or months not years or decades. As
indicated with the current skills shortage today, they also require a deeper understanding
of industry needs and business processes than prior integration work.
Bottom line: Individual engagements shorten and shrink though aggregate volume
may remain.
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13The Impact of Cloud on IT & Business Services Providers
The Potential Convergence of IT with BPO
While we are seeing significant traction around automations adoption by BPO providers,
the impact of Cloud delivery models has yet to drive a similar level of change. With most
Outsourcing deals still revolving around the lift and shift of technology and jobs, there are
only a limited number of deals where BPaaS offerings are effectively combining IT
delivery and embedding it with business processes to deliver a cloud based service. Yet,
there are real examples of this opportunity today such as Wipros recent new offering in
F&A and more are on the way all the time. Service providers are working on these types
of initiatives, which will standardize their delivery models while reducing cost and
allowing them greater reach. These offerings have the potential to leapfrog SaaS and
truly fuse people, process, and technology to enable the standardization of non-core
processes like never before. For example, PaaS platforms like Apprenda could serve as
a way for IT service providers to accomplish two things: 1) begin generating revenue
from non-linear sources; and 2) combine IP with a business process such as application
development and management.
Bottom line: While relatively nascent today, BPaaS has the potential to disrupt the
disruptors in Cloud.
As-a-Service Model Provides Opportunity For Incremental IT Spend
Cloud based applications and SaaS offerings provide a large opportunity for incremental
services spend as corporations look to add functionality on top of their existing systems
and require both domain led consulting services and the requisite systems integration
work required. PaaS and TaaS can substitute for traditional services and open up new
revenue opportunities that are long-term in duration. Next generation services around
analytics, big data and mobility, are large new market opportunities for IT service
providers that offer higher margins than traditional implementation and systems
integration work.
Bottom line: While many believe the pie is shrinking, our view is that the pie will
shift to other areas of IT spending focused more on innovation, rather than cost
reduction.
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The
Evolving Professional Cloud Service Providers Landscape
4
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14The Evolving Professional Cloud Services Provider Landscape
The Evolving Professional Cloud
Services Provider Landscape
Cloud based delivery models are bringing a myriad of new pressures to the IT services
market. This is coming at a time when many traditional IT services providers have only
recently stabilized from disruption that ensued following the enterprise adoption of the
offshore model. Yet, if the adjustment to offshore delivery was painful for those who were
delayed in responding to that trend, providers are warned that this one may be
catastrophic if they wait. This lesson does not appear lost on those that were laggards in
the last round and we are witnessing some of the most aggressive moves by these firms.
Conversely, it is important to note that the enterprise migration to Cloud may prove even
more problematic for those providers that were early and aggressive in responding to
offshore threats by building their own capabilities in that regard. That is because while
the offshore wave was about labor arbitrage enabled by the Internet, this wave of
disruption is one fueled by technology arbitrage and that means strength and
therefore proximity of relationships will trump labor cost. Further, having succeeded
in this last wave of disruption, theres the risk that a certain level of hubris might cloud
their ability to effectively see and respond to this new wave of change.
Exhibit 4 Cloud Industry Value Chain
IT Infrastructure
HardwareColocation
IaaSCloud enablers PaaS
SaaS
BPaaSEnd User
Facility
Systems
Infrastructure
Software
Application
DevelopmentApplication
Presentation/
Action
Professional Services
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15The Evolving Professional Cloud Services Provider Landscape
New Entrants Appear
Today, there are no less than five groups of potential new competitors all nipping at the
traditional IT and business services market ISVs, Telcos, Cloud Purists, Web
Natives and Boutiques. As Cloud delivery collapses the ecosystem of IT provisioning,
these traditional partners are increasingly competing with SIs at the edges of their core
markets. This overlap and fuzziness between groups is not entirely new, but today it is
taking on a scale that may alter how we bucket and view the industry as a whole.
In the software segment, take for example ISVs like SAP and Oracle that once ignored
Cloud adoption but are now aggressively building out their own SaaS offerings with
varied success. These new (or more accurately reworked) versions ultimately require
much less integration while at times also allowing the ISV to be closer to their customers
than before. SaaS allows, even requires, these vendors to be regularly connected and
engaged with enterprise buyers and end users. Because of these changes, the
traditional SIs risk getting squeezed.
Similarly, Microsofts new Office 365 has greatly simplified the effort required to deploy
and maintain its productivity suite. That offering now provides perhaps one of the most
compelling examples of the advantages to be gained from moving to the cloud. One
study found that the payback for a typical medium-sized company making the shift would
be realized in a matter of only several months. All this means that for any integrator once
dependent on the Office ecosystem, the need for refocus is immediate. Microsoft
already cut incentives paid to these partners at the beginning of 2014 and as the product
continues to practically sell itself, we would not be surprised to see further reductions in
reseller fees.
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16The Evolving Professional Cloud Services Provider Landscape
Exhibit 5 Five primary pressure points on traditional IT Services
Yet the encroachment on IT services from these former partners does not stop there. For
example, today Microsoft is also building out one of the most robust IaaS and PaaS
platforms globally. This means the company is no longer just writing code, they are
buying up hardware, fiber optic cables, and are building out data centers around the
world. By their estimate, they have spent some $15 billion on the effort to date.
In addition, there are the more obvious new competitors in this space as well. There is
the group of firms that are best labeled Web Natives. Companies like Google and
New Entrants
ISVs (e.g. Oracle &
SAP)
Telcos (e.g. AT&T &
Verizon)
Cloud Purists (e.g.
Saleforce.com &
Workday)
Web Natives (e.g.
Google and Amazon)
Boutiques (e.g.
Bluewolf &
CloudSherpas)
Area of Impact
Systems Integration
Network Integration,
NOC and Dcs
ADM & Systems
Integration
Infrastructure
management & ITO
Systems Integration
How to Respond
Understand some infrastructure provisioning
gets embedded in the ISVs SaaS offering and so
look to serve the needs of these ISVs while
anticipating smaller efforts on the integration
side.
Realize telcos are starting to provide IaaS as
part of bundled offerings and look to support
their needs while capitalizing on this new
channel to market.
These new public cloud offerings are having a
direct impact on new application development,
maintenance and integration. Look to augment
their offerings with lightweight implementation
teams.
Given the scale of these firms, few present the
opportunity for a traditional SI to help them
build and run. In short, best to realize that a
portion of the infrastructure market is likely
forever shifting to these new firms and look for
ways to build services around integrating these
into the enterprise.
Organized more effectively to sell and deliver
around the Public Cloud, these boutiques
present a challenge to traditional SIs. These
global firms are advised to look for ways to
deliver similar set of services while minimizing
cannibalization of their existing practices.
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17The Evolving Professional Cloud Services Provider Landscape
Amazon that with their Digital DNA and deep pockets are perfectly suited to go after the
cloud space. There is also a long list of Cloud Purists aimed directly at one aspect or
another across the space. Providers such as Salesforce.com, CloudBees and
Rackspace are by their nature created to sell and deliver new services in extremely
disruptive ways.
Finally, with Cloud largely viewed today as an exciting emerging new model, it creates a
certain mystique with which new boutique services providers can align. Take for instance
Cloud Sherpas and Fruition Partners which today have become the only two ServiceNow
partners to reach Master status beating out the likes of all the major SIs for this
highest level partner designation from this particular SaaS provider. Several other
boutiques such as Meteorix and DayNine (WorkDay), 2nd Watch (Amazon Web
Services), have built fast growing businesses primarily around a single platform;
companies like Appirio and Cloud Technology Partners have become leading cloud
integration vendors. All of this has led to the emergence of Cloud Services Brokerage
where a third party provider adds value by aggregating and simplifying the provisioning
of public cloud services. This new model presents a significant new opportunity for
traditional integrators to define and claim and many are investing to build out proprietary
platforms for enabling the space. Doing so keeps them at the center of activity a role
they have traditionally played and monetized well as it requires a certain flexibility that
only a people first business model can reflect. Today, these Cloud Brokerage efforts
augment the traditional structure and services within most SIs. However, it is foreseeable
that as the broader trend continues to grow that they might one day become the new
operating model for an SI.
The opportunities around cloud for traditional IT services providers boil down to three
options: help build, help consume, or directly provide. While in the past one IT services
provider could easily serve all three, that is a more difficult proposition today. That is
because success within each will depend on the alignment of business models in these
unique ways:
To Provide Public Cloud - Big is Beautiful
Succeeding directly within any Cloud market be it IaaS, PaaS, or SaaS requires one
to drive standardization at a dominant level of scale. Perhaps the best example of this is
found in the group of Web Natives. While not traditionally thought of as cloud providers,
these companies were actually operating as such before the term was even developed
and applied. For example, Google, which is able to spend billions of dollars each quarter,
is running at a pace which few other providers can keep up. One of the few, however, is
Characteristics of Professional Cloud Services
Providers Likely to Succeed
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AVENDUS
18The Evolving Professional Cloud Services Provider Landscape
another Web Native Amazon. As the leader in the IaaS market, it continues to spend
massive amounts of cash to maintain its lead. So while these two vendors are not
traditionally thought of as IT services providers, for any provider looking to operate in the
space, they along with Microsoft, represent the bulk of competition in the public cloud
infrastructure space.
Fortunately for the sake of competition and innovation, size is relative. Take for instance
the IaaS market. While entering that market today is now realistically beyond the reach
of all but the largest of global technology providers, visionaries such as Rackspace were
able to enter and establish their stronghold when the market was nascent. In a similar
fashion, while perhaps CRM may no longer be up for grabs, there are a plethora of
smaller software markets still waiting for the emergence of SaaS-based leaders to
emerge. Any service provider looking to participate directly in these markets by creating
their own offering needs to ask themselves, am I committed to investing enough
resources to be one of the largest providers in town?
To Manage Consumption: Nimble is Necessary
For those looking to continue down the more traditional path of acting as a third party
integrator, there needs to be an understanding that the rules of the game will broadly
change. While due to the customized nature and their own large scale as well as broad
installed base of legacy systems at Fortune 100 enterprises, projects will stay for some
time, increasingly large implementations will be replaced with smaller, relatively shorter
deals. For these deals, delivery is no longer measured in years, but in weeks and
months and the number of multi-million dollar implementations is reducing, and in their
place we will see $250,000 deals. This means an entirely different approach will be
required to profitably sell and deliver these deals. At the most extreme level, we are
seeing the sales structure moving from one revolving around a well-seasoned executive
who spends years developing a relationship to revolving around the task of ensuring the
best placement of a tile on a partners web site. (One caveat, we still think that for the
largest Fortune 100 enterprises this will not be the case.)
To Build: Find your Niche
IT services providers with core strengths in technology integration are well suited to
become the builders of Cloud. Pursuing this opportunity will not be without challenges.
First, it means ones core customer base shifts from the Enterprise Buyer to a much
more sophisticated Cloud ISV Buyer whose core value is dependent on the work being
done. As such, they will likely hold onto the role of services integration and management
and hire external help for very specific needs. At the same time, the enterprise market
will remain much as it is today and so a go to market and delivery strategy that works for
one may not work for the other.
Within all three of these areas other secondary factors will be important as the client
expectations of services providers shift.
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AVENDUS
19The Evolving Professional Cloud Services Provider Landscape
Front End Consulting Capabilities & Ongoing Innovation Will Differentiate Winners
from Losers
The ability to engage a client via high-end consulting for a transformative project is
critical in capturing the back-end long term services delivery contracts. Services will
focus more on organizational assessments, optimization, and application transformation
utilizing the cloud vs. historical spending which was centered on ERP implementation.
Bundled Services
Services providers can mitigate the price deflation impact of the cloud by bundling
traditional offerings such as application outsourcing with a SaaS offering, creating a
more valuable solution than the traditional offering alone. As PaaS offerings gain
penetration, IT service providers will need to partner or build their own PaaS delivery
platform to adapt to the cloud landscape, as the benefits of PaaS (reduced cost, agile
development, multi-tenant, and pay per use) outweigh traditional application outsourcing.
IP Driven Offerings
As cloud computing technologies continue to automate processes that have traditionally
been headcount intensive, it will be important for IT services firms to participate in this
shift. Additionally, as the market has become more mature in terms of offshore players,
IP will be a tool to create significant differentiators in terms of client acquisition and
retention, as well as maintaining pricing power. Vertical solutions will be a way to bundle
services, IP and specific industry templates to attract clients and become a dominant
provider in a specialized vertical such as banking, insurance, consumer products and
various sub segments of these markets.
To date, much of the activity around Public Cloud adoption has focused on small and
medium enterprises (SMEs). Yet this concentration of activity should not be confused
with fit. The primary reason most of the initial efforts were directed at smaller companies
first is that they were often unburdened with legacy systems. These green field
opportunities were the easiest to initially crack but that does not mean they are the most
desirable to do so nor does it mean they are the ones most able to benefit from the shift
in delivery. Large enterprises can and are benefiting from the migration of services to
the Cloud. As they do, they are most likely going to command the focus of Cloud
providers.
That is bad news for the large Global IT Services providers who focus on this space.
This is especially true because having first unfolded as an SMB opportunity and with all
the hallmarks of a classic disruptive innovation, Cloud delivery is driving significantly
Icebergs Ahead No IT Services Provider is Immune
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AVENDUS
20The Evolving Professional Cloud Services Provider Landscape
lower pricing across many aspects of enterprise IT. This deflationary pressure is going to
hit integration projects at the same time the engagement time retracts.
At the same time, the fragmentation happening across the IT Services Continuum will
also hit the large global services providers hard. No longer will massive long term
management contracts naturally flow from development and integration work. In this
light, the last disruptive shift to outsourcing and offshoring was relatively minor as it
primarily centered around doing the same things but with different personnel. This time
around, the underlying activities and how they are sold will all see a shift.
Positioning of the 10 IT Services providers today
Knowing this, many global IT Services providers are working aggressively to embrace
the cloud. They are doing this not only externally, but internally as well in an effort to
capture all the advantages Cloud-based delivery brings. HPs migration to
Salesforce.com is one example of how this is playing out, but perhaps the best example
is highlighted in a recent post by IBMs Robert LeBlanc. In it he lays out a new vision for
the entire companys operating model. See: Rethinking IBM: The Company as a
Service.
LeBlanc highlights:
This shift to cloud where hardware, software, and services meld into one, represents
the most significant change in IBMs go-to-market strategy since it built a large blue-
suited sales force to cater to businesses in the 1950s and 60s. Its a fundamental
reinvention of the companyhow IBM operates and how it delivers value to clients and
society.
The following table highlights the Cloud positioning of the top 10 IT Services providers
today.
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AVENDUS
21The Evolving Professional Cloud Services Provider Landscape
Exhibit 6 Top 10 Global IT Services Providers Activity in the Cloud
Source: HfS and Avendus Research
Service
Provider
IBM
Accenture
HP
Fujitsu
CSC
NTT
Capgemini
TCS
Oracle
SAP
Top 10
Est. 2013
Cloud Rev
($Ms)
4,400
3,755
3,555
2,950
2,900
2,577
2,230
1,760
1,200
1,050
26,377
Est. 2013
Public Cloud
Services Growth
69%
98%
60%
97%
32%
35%
35%
35%
50%
20%
56%
Est. 2013
IaaS
($Ms)
388
380
355
275
350
152
125
15
NA
NA
2,040
Est. 2013
Paas
($Ms)
200
25
50
50
75
75
15
45
NA
NA
535
Est. 2013
SaaS
($Ms)
612
250
150
225
125
100
50
200
1,200
1,050
3,962
Est. 2013
Hybrid
($Ms)*
1,900
1,750
1,900
1,650
1,200
1,500
1,150
750
NA
NA
11,800
Est. 2013
Private
($Ms)*
1,300
1,350
1,100
750
1,150
750
890
750
NA
NA
8,040
Overview
Though late to the Cloud game, IBM caught up with a series of major investments and
now leads the pack.
A leader in both Innovation and Customer satisfaction, Accenture is a strong player
across all areas of Cloud services today.
One of a few providers that truly cover all Cloud services on a global level. Innovative in
its approach to Tier II ISVs
Very strong and consistent in APAC and Europe and a demonstrated team player.
One of the earliest to pursue opportunities in the Cloud and after a few challenges it has
made recent gains.
Given its strong communications backbone and recent acquisitions, very strong on cloud
infrastructure side.
This traditional SI understands the future importance of the Cloud and is working to
position itself for new realities there
Having just made it into the top 10 IT Services firms Tata lags a bit in building out its
capabilities in Cloud.
After spending years downplaying the model, the company got aggressive with its own
SaaS offering and is coming on strong.
Similar to Oracle, SAP got serious about Cloud but failed to get the same traction in
2013.
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AVENDUS
22The Evolving Professional Cloud Services Provider Landscape
We are also witnessing a range of reactions to the pending impact from Cloud by the
remaining WITCH companies outside the top 10. For example, Cognizant has taken an
aggressive and bold move to set up a standalone business unit charged with developing
new forms of IP to transition itself to a provider of these new services. Others, such as
Infosys have taken a more measured approach though also looking to develop their own
IP in this case under their Edge initiative. Of course, all that may now change with the
recent appointment of a software executive as its new CEO. For its part, Wipro is also
doing some innovative things. With a primary focus on building out its services to help
enable enterprise adoption of Cloud, it brought together those skills sets with others in
Analytics and Mobility in a new group called Advanced Technology Solutions so it could
better source skills from across the firm. On the BPO side, Wipro has partnered with
NetSuite to create a BPaaS offering targeting Finance and Accounting. Finally, HCL,
recognizing its limitations in building out IaaS decided to partner with CSC and potential
others as a way to jointly leverage go-to-market efforts in the face of smaller deals.
Enter the Boutiques
As the opportunity around Cloud computing began to emerge, savvy IT services
professionals branched off to create new enterprise cloud services providers to capitalize
on the trend. Without the burden of legacy business models, these upstarts could
package, sell and deliver services targeting a new reality of smaller sized deals. In doing
so, many experienced rapid growth and success. However, the underlying approach and
target markets of these emerging providers varied greatly.
Exhibit 7 highlights providers who each chose a unique path to success. Appirio, the
largest of these boutiques, originally focused on Saleforce.com implementations, but
now takes a broad approach to the cloud. Through its purchase of TopCoder last year, it
now augments its own capabilities with a very unique crowd sourcing platform consisting
of hundreds of thousands of development professionals. This allows it to effectively
serve a very wide market while keeping its own core capabilities much more focused.
This approach is likely to serve it extremely well.
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AVENDUS
23The Evolving Professional Cloud Services Provider Landscape
Exhibit 7 Select Cloud Boutiques
About
Though one of the smaller of the Cloud boutiques, 2nd Watch focus on Cloud infrastructure in particular, the
enablement of Amazon Web Services
AppCrown delivers cloud based application and financial systems to banking and wealth management. The company
innovates middle office and back office for customers to get to a one bank initiative. Also a premiere Salesforce
integration partner
The largest of the Cloud Boutiques, Appiro covers nearly all the major Cloud platforms and technologies and brings
with it a unique crowd sourcing platform called TopCoder
Bluewolf offers a broad range of services built around the cloud and claims to be one of the first firms created with this
focus. As a salesforce.com Platinum partner, its offerings tend to revolve around that platform, but it is globally located
and helps a broad range of industries and functions make the most of Cloud
Helps companies in IT Infrastructure management specializes in Cloud Services, Mobility, Voice & Broadband,
Messaging & Collaboration, Web Hosting, Backup & Security
Promotes cloud based technology by developing software products and offering services of Integration,
Implementation, Migration, Re-engineering, Adoption and Training, Consultation and more
Cloud Sherpas provides advisory, implementation and management services around three leading Cloud platforms
Salesforce.com, Google Apps, and ServiceNow. It has rapidly grown to become a global provider with offices across the
US and Asia as well as in the UK and United Arab Emirates
Cohesion consults on IT and business strategy for the banking and financial services, insurance and retail industries
with expertise in Salesforce.com and infrastructure managed services
Enables IT solutions providers to efficiently backup, monitor, troubleshoot and maintain desktops, servers and other
endpoints for small-and-medium-sized businesses. Specialities: Managed Services, Remote Monitoring and
Management, Backup and Disaster Recovery, Virtual Help Desk
Workday enterprise services firm deploying and optimizing Workday Human Capital Management, Workday Payroll
and Workday Financial Management solutions
eBuilders Business Process as a Service (BPaaS) cloud platform complements existing IT investments: it provides
control over processes outside the organization
Service
Provider
2nd Watch
Appcrown
Appirio
Bluewolf
Cbeyond
Cirrologix
Cloud Sherpas
Cohesion IT
Continuum
Day Nine
Ebuilder
Year
Founded
2010
2009
2006
2000
1999
2012
2007
1999
2011
2009
2003
Total
Outside
Funding
27M
NA
75M
NA
NA
NA
63M
NA
NA
NA
NA
Est. 2013
Growth
400%
NA
95%
45%
NA
NA
100%
NA
NA
NA
NA
Est. 2013
Revenue
($Ms)
$14
$2
165
90
$463
NA
150
NA
$195
NA
$16
Est. 2013
Employees
85
20-50
825
550
1667
< 50
750
200
700 -1000
230
200+
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AVENDUS
24The Evolving Professional Cloud Services Provider Landscape
About
Provides Virtual IT TechOps - full Enterprise Production IT Technical Operations and cloud hosting services delivered
remotely
Fino provides enterprise application design, development, and consulting services. As a Microsoft Gold Partner,
Microsoft Azure Circle Partner, Xamarin Premier Consulting Partner, Hortonworks System Integration Partner and
Apple Enterprise Development Partner, it offers a variety of custom solutions
Fruition Partners is an integrator focused exclusively on ServiceNow. The company has completed over 400
implementations, and has over 50 experts certified in the platform and was one of the first companies to earn Master
status from ServiceNow
Offers operational assessments, consulting and Managed Services to complement clients technical resources and
capabilities. Services include consulting, deployment, migration, integration, automation, Cloud based SaaS Managed
Services for Monitoring and advanced Service Desk solutions
IT solutions and services company with a clear focus on combining business and technology in key areas such as Cloud,
data center infrastructure, user support, and IT outsourcing
Meteorix provides workday implementation, optimization and integration services for mid-market companies
Helps companies with their adoption of Cloud Computing, Big Data and advanced architectures which often includes
moving systems to public cloud providers when possible and implementing private cloud solutions when appropriate
Motif Works is a cloud and mobile solutions company that helps migrate applications and infrastructure to the cloud to
accelerate time to market, fuel efficiencies and drive business growth
The company delivers services to Plan, Design, Manage, Support and Migrate IT Infrastructure running mission critical
applications for over 1200 enterprises across the globe
Nuevora is a Big Data analytics solutions provider that helps leading organizations achieve positive, high-impact
business outcomes through the delivery of continuous and context-sensitive predictive insights
New Signature helps customers implementing private, hybrid and public cloud solutions. Helps customers leverage:
Office 365, Azure, Lync, Exchange, SharePoint, System Center, Windows Intune, Dynamics CRM, Yammer, Windows
Server, Hyper-V, Active Directory, Forefront Identity Manager, SQL Server, Windows Desktop, and Office
Service
Provider
Enki
Fino Consulting
Fruition Partners
Itegrations
Long View Systems
Meteorix
Momentum SI
Motif Works
NetMagic
Neuvora
New Signature
Year
Founded
2006
2006
2003
2011
1999
2011
1997
2010
1998
NA
2003
Total
Outside
Funding
NA
NA
12M
NA
NA
NA
NA
NA
NA
2.3
NA
Est. 2013
Growth
NA
NA
95%
NA
NA
NA
NA
NA
NA
NA
NA
Est. 2013
Revenue
($Ms)
$2
$6
35
$10
$50+
NA
NA
NA
$40
NA
NA
Est. 2013
Employees
10
20
200
20 - 50
1000+
200
51 - 200
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AVENDUS
25The Evolving Professional Cloud Services Provider Landscape
About
Provides infrastructure services for application development and maintenance, for consulting services and for the
management of IT processes and services
Implements and customizes cloud-based human resources and finance platforms with a primary expertise in Workday
Optaros is a global digital commerce service partner that helps companies conceive, build and operate commerce
solutions that accelerate revenue and decelerate costs with expertise in Hybris, Demandware and Magento
Pragiti is a consulting and technology services company delivering hybris based eCommerce solutions to the global markets
SADA Systems is a cloud computing information technology consulting, outsourcing, and development firm with a large
focus on helping organizations implement and integrate new cloud computing technologies
Helps companies realize the potential of cloud computing by successfully deploying it for them. Focus: SaaS IT Strategy,
SasS Deployment, Custom Application Development, Google Apps Deployment, Google Apps Migration, Software
Development, PaaS, Cloud Applications, Cloud Storage, Amazon EC2, Amazon Web Services, Web Apps, Office 365,
Google Apps for Business
Smart and flexible marketing software for planning, optimizing and analyzing social advertising campaigns
Silverline is a Salesforce Gold Cloud Alliance Partner. They focus exclusively on the end-to-end deployment of
Salesforce.com products and powerful third party apps
Digital experience agency with deep roots in experience design, web content management (WCM), eCommerce,
digital asset management (DAM), and systems integration
Soastas web and mobile app test automation solution enables developers, QA professionals, and IT operations teams
to test with unprecedented speed, scale and precision
Specializes in Cloud Computing, Google Enterprise Solutions, Google Apps Implementations, and Cloud Application
Development
Verecloud is a value-added distributor of cloud-based applications. Their nationwide network of partner resellers
specializes in delivering innovative, reliable and cost effective IT and Communications Solutions to their mid-market
customers
Service
Provider
Nexio
OneSource Virtual
Optaros
Pragiti
SADA Systems
Sheepdog
Shift
Silverline
Siteworx
Soasta
Tempus Nova
Verecloud
Year
Founded
1994
2007
2004
2011
2000
2007
1995
2010
2002
2006
2001
2006
Total
Outside
Funding
NA
15
$39
NA
NA
NA
NA
NA
NA
63.6
NA
NA
Est. 2013
Growth
NA
40%
NA
NA
NA
NA
NA
NA
NA
NA
NA
NA
Est. 2013
Revenue
($Ms)
$11
$33
NA
$3
$2
NA
$7
NA
$42
NA
$7
$6
Est. 2013
Employees
50
275
51 - 200
51 - 200
51 - 200
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AVENDUS
26The Evolving Professional Cloud Services Provider Landscape
Close behind Appirio in terms of revenue is Cloud Sherpas which has taken a narrower
approach to the market as it focuses around three Cloud providers Salesforce.com,
Google Apps, and ServiceNow. Doing so appears not to have held the firm back but
instead allows it to create focus among its internal staff.
Bluewolf follows the early path of Appirio with its offerings centered on Salesforce.com
but with a willingness to follow a potential client into tangential opportunities. Opposite
this approach is a firm like Fruition Partners which is 100% dedicated to providing
services around ServiceNow. That focus saw it be one of the first to garner Master status
from the firm and serves it extremely well as long as the underlying opportunity remains
strong.
In a similar fashion, there are providers like 2nd Watch that are also focused on
providing services centered around a single Cloud platform but are focused at the
infrastructure layer. In this particular case, 2nd Watch is dedicated to Amazon Web
Services. That singularity of focus allows it to develop significant capabilities on par with
much larger providers despite its much smaller size.
While many service providers responded well to the early demands around Cloud related
services, their continued success is by no means guaranteed. The reason for this is
twofold. First, the first wave of enterprise adopters despite being ahead of the pack
often approached the provisioning of these services in much the same way they did
more traditional forms of IT. This is especially true for the activity within private and
hybrid cloud the two areas that to date have seen the bulk of related services activity.
Which leads us to the second reason these services providers will become challenged in
the near to medium term. The opportunity around building private and hybrid clouds,
though currently large, is one that likely has a limited lifespan. These efforts represent a
transitory interim phase along an enterprises migration IT to the cloud. Its the equivalent
of the energy industry which saw power generated onsite until the challenges of
distribution were solved and led it down a path of commoditization. Onsite compute will
go the way of dams and waterwheels. So who is at greatest risk for the pending shift?
We identify three types of providers at greatest risk.
The Pleasers
Service providers that demonstrate a willingness to do whatever it takes to obtain high
customer satisfaction may find this operating approach now gets diminishing returns.
Providers that have done well by organizing themselves to be highly responsive to
customer demands will be challenged in this next phase as they lack a clearly defined
What Enterprise Services Providers are at Greatest
Risk?
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AVENDUS
27The Evolving Professional Cloud Services Provider Landscape
differentiated expertise. Conversely, those that are highly process driven and maintain a
product mindset will do better. This will mean some of yesterdays winners will fall
behind, while some that did not fare as well in the last round have another chance to
regain the lead.
The Body Shops
Even those services providers with rigid processes in place will be challenged if they
have not translated these into platforms that embed elements of repeatable IP. Simply
doing things more efficiently is not going to create winners if at the core the things they
are now doing better remain the same. Said another way, automation (or robotization) is
an interim stopgap measure that will allow short-term gains but it will not curtail long term
changes coming to the underlying processes themselves. Those without repeatable IP,
companies that have become skilled at efficiently providing cheaper labor whether or not
that is augmented by technology, need to understand that the advantages they bring
today become disadvantages in the era of cloud.
The Muddling Mid-Tier
Cloud computing dictates and rewards scale or specialization. Across each unfolding
opportunity, either the very largest, most efficient will succeed as non-core processes get
driven to a level of commoditization that original outsourcing industry promised but rarely
achieved, or those who possess unique expertise will succeed. As it does, the
distinguishing trait of the winners will be their ability to provide these new services either
at the lowest cost or highest level of differentiation. That means an age of renewed
specialization is upon us and those mid-tier service providers attempting to emulate their
large brethren may be too late to the game. Cloud creates an opportunity for new
providers as depth trumps breadth.
The disruptive forces impacting the IT and business services market by the arrival of
cloud computing has not gone unnoticed by most providers. Yet the range of reactions to
the pending shifts have been wide. Some, like IBM, have declared an all-out and
aggressive effort to remake the very way they do business. Others, like Cognizant, have
created an autonomous unit to tackle it while maintaining business as usual elsewhere.
Still others seem to view it only as an incremental new market, treating it like any other
emerging technology and are taking only a few steps at best to meet the pending
challenge. We believe those in the first two categories are not only in the strongest
position to win share as this opportunity evolves, but that those in the latter may see their
very business in jeopardy. To that end, we will be watching this space carefully over the
next twenty four months as it continues to unfold.
How Services Providers can Address the Threat
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AVENDUS
28The Evolving Professional Cloud Services Provider Landscape
That said, there is still time to address this threat, and to do so we see three core tactics
in use by several industry leaders:
Build or Acquire Platforms:
Developing and capturing repeatable IP is a core component of creating these new
Cloud services offerings. In short, services are becoming codified as software and while
the accepted description of SaaS is Software as a Service, it could as easily be reversed
to Service as Software. The same rationale applies farther down the stack where IaaS
could as easily be described as Infrastructure as Software. As this shift to codifying
processes occurs, the uniqueness of an enterprises operating model increasingly gets
expressed not in how it deploys its workforce but in what software it selects and
integrates.
This has created a significant opportunity around services brokerage and we are seeing
almost every major SI from IBM to Dell enter the market. It is a natural transition for
these SIs to help an enterprise procure and integrate a myriad of small cloud services
components. These components temporarily allow legacy systems to emulate (the full
functionality) of cloud systems. These applications have been bolting on capabilities for
many years as they attempt to offer a single answer for some function across multiple
enterprises. As such, these legacy applications often required years of additional
development layered on top to customize, bend and mold them to the needs of a
particular enterprise. In the Cloud services world, the needs around customization are
significantly reduced, yet the points of integration multiply.
This means that for any hope for efficiencies to be realized, the demands around
integration must be greatly reduced and wherever possible, even automated. To that
end, service providers are building proprietary tools and cloud management platforms to
act as the glue to bind together these services while also adding a common layer of
visibility and control. So it is no surprise that we are seeing companies like Unisys, which
for a variety of reasons had stumbled to migrate its resources to lower cost regions fast
enough to keep pace with the broader market, now double down on these new platform
efforts as a way to leapfrog competitors in this new phase. While certainly not the only
effort like this underway, Unisys Edge Service Management platform offers a standard
but configurable framework underpinned by analytics and represents a winning strategy
for a new reality of how IT is increasingly provisioned, deployed, and run. Whether or not
it will succeed will be determined over the test of time, but it absolutely represents the
right path to pursue. Another example is Appcrown, who have developed a platform that
integrates Salesforce's CRM with back end systems such as clearing and commissions
for financial services firms.
As they do this, the operating models of these traditional services providers start to look
more like that of a software firm. At least some of the development talent is deployed not
on behalf of a customer, but on behalf of itself. Funding is required up front rather than at
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AVENDUS
29The Evolving Professional Cloud Services Provider Landscape
the time of delivery and the potential trajectory for growth breaks away from a linear
model to one of increasing returns.
In the same fashion, we see the likes of Dell making a similar move. Early on its
enterprise services division found good work building out cloud infrastructure for other
providers such as Microsoft. Along the way, they built out their own IaaS capabilities and
started offering it directly to enterprises as well. But, in doing so, they began competing
directly with their own customers. Recognizing the immense effort and capital
requirements required to compete rather than ramp up, Dell walked away from the direct
IaaS business and focused on building it for others. At the same time, they also pursued
the brokerage model by acquiring and investing in Boomi which has become a leading
integration platform serving the needs of Dell and its clients extremely well.
Create New Divisions:
One of the biggest challenges cloud presents for traditional service providers is the
disruptive shift required to transition their business from one built around people to one
built around technology and IP. That is because the shift requires a change in how
services are created and delivered which cannibalizes existing business and ultimately
may lead to reductions in staff. Most middle managers are simply not prepared for such
a change, and if they are it is unlikely the proper metrics and incentives are in place to
allow them to lead the way.
The senior leadership of several forward thinking companies have grasped this and
responded to the challenge by setting up unique operating structures to tackle the
opportunities around the cloud. The best example of this is Cognizants adoption of the
three horizons model where it incubates potentially disruptive new offerings outside the
day-to-day pressures of its core business. Overseen directly by its CEO, Cognizants
third horizon labeled Emerging Business Accelerator taps the global wisdom and talent
from across its entire 170,000+ workforce but in a safe environment where failure is
acceptable and disruption is lauded, not kept in check.
Other services providers are beginning to follow suit and while their structures are not
quite so formalized they are creating new operating entities that fall outside of existing
business lines. Doing so allows flexibility to incorporate a mix of capabilities, say
infrastructure, software, and services, into a single offering that would traditionally have
fallen across unique P&Ls.
Acquire Capabilities:
Given the depth of change occurring, we are also seeing a wave of acquisitions as
services providers look to catch up in building out skills around new technologies as well
as control the critical IP building out leading cloud platforms. One of the best examples of
this is what IBM accomplished around both the emerging opportunity in mobility and
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cloud. Though late to each of these, IBM spent aggressively over the last several years
to acquire leading platforms across each and now stands as a leader across many
aspects of both. The challenge for them today is not to build the capabilities but to bridge
internal structures around its software, services, and remaining hardware lines and
perhaps to entirely restructure some of these in an effort to compete most effectively in
Cloud.
While the big get bigger, we are also witnessing pressure among the mid-tier to
consolidate as well. Recently, SOPRA and Steria, two major European providers both
based in France, announced plans to join forces in an effort to remain competitive
among heightened demands on scale. This strategy could make sense for other mid tier
players, particularly those built as offshore/labor models.
Even small boutique players are feeling the pressure as new service models are
increasingly based on leverageable technology in addition to people based workloads.
As such, we see acquisitions in this space as providers look to augment their own
offerings. Several players like Appirio and Cloud Sherpas have used acquisitions as a
major part of their strategy. As an example, you have the recent tie up between
Highstreet IT and Computer Network Solutions (CNS) to extend the formers capabilities
deeper into the Cloud.
Deeper Verticals
Certain vertical industries are likely to experience the greatest impact from cloud
computing in the short term and are already feeling the impact today. As a common
thread, all of these have a direct to consumer element that is largely commoditized,
driving price sensitivity and dictating the need to quickly adapt to changing demand as a
means to gain advantage. Markets seeing some of the heaviest activity are Retail,
Telecom, Financial Services and Media and more recently post the implementation of
the Affordable Care Act, Healthcare. However, opportunities will remain strong across
the board and services providers are advised to focus instead on their own current
strengths. New market realities favor depth over breadth, so if a provider has decent, but
not great capabilities in a vertical, they are advised to build these up or spin them out
regardless of that industrys relative market demand.
Critical New Skills
As the market for enterprise cloud services unfolds, certain cross industry skills sets will
be increasingly in demand. Security is an area that will be of particular demand as
providers look to mitigate, if not eliminate the risks with hosting sensitive data off
premise. To that end, building out depth around privacy and data protection as well as
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identity management and authentication will be critical. At the same time, despite the
move toward creating platforms to solve the task, the need for services integration is
going to rise. Providers will need to deepen their bench of skilled generalists who can
quickly adapt to and weave together the myriad of new emerging services rather than
those with very deep knowledge of a single enterprise app.
New Business Models / IP
Providers are advised to look for ways to effectively add new go-to-market models that
successfully combine a complete mix of people, processes and technologies rather
than just one or two of these at a time. That is the promise of cloud and enterprises of all
sizes who will increasingly be looking to obtain this complete mix at the outset rather
than as some foreseen milestone down the road. Yet these new models will bring
operational challenges to existing providers. That means they need to be aggressive in
transitioning to them or they might be unable to bring about the change.
On paper, most of the large global IT services providers are competing effectively under
the new demands and opportunities emerging with the migration to Cloud. Yet, if one
looks at a medium to long term horizon, some troubling challenges arise. In particular,
the bulk of activity today revolves around creating private cloud environments or enabling
hybrid cloud. Such activity, while good work to get, may lead to complacency around the
much more significant shift to services delivery that is being driven by public cloud. Some
of the global providers are addressing that opportunity as well but without an outright
effort to cannibalize themselves, such initiatives will likely fall short.
This brings us to the darlings that emerged during the last wave of technology disruption,
the offshore outsourcers collectively known as WITCH. As we highlighted earlier, some
of these are being very aggressive in their efforts to implement change. Most notably,
Cognizant is taking a lead. Yet others are not being quite as bold and they may find that
strategy causes them to eventually run out of steam. Those in the latter camp tend to be
doing well around cloud today, but like their larger global brethren they are primarily
strong in helping an enterprise build out elements of their own cloud rather than in
consuming that from someone else. Todays strength may be tomorrows weakness as
the delivery demands and business models change.
Which brings us to the outlook for the new breed of truly Cloud-focused providers
companies like Appirio, Cloud Sherpas, Cloud Technology Partners, Highstreet IT and
Fruition Partners. While each of these approach and define the opportunity in different
ways, they share some common traits that serve them well. First, they are organized to
sell smaller shorter engagements profitably to both large and smaller providers. They
aggressively own and continue to develop proprietary IP that drives this profitability while
The Net Net
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also allowing for recurring revenue from support and managed services while keeping
them in close contact with customers. Perhaps most important though, is that they are
not burdened with large implementation practices that they need to continue to feed. On
the other hand, these newer providers dont have resources, scale or deep relationships
with the client organizations. This creates a fertile environment for enhanced mergers
and acquisition activity as highlighted in the following section.
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Deal Activity
Introduction
Each decade over the last 40 years, the technology industry has undergone a
generational shift in business models that reshapes the landscape. What is currently
happening with Cloud is the latest of these generational shifts. Much like the 1980s saw
the introduction of mainframe computing, followed by the 1990s with a shift to the
client/server model and the introduction and rapid growth of the Internet, the current time
period is in the midst of the transition to cloud computing. These shifts result in a high
volume of financing activity whether in the form of VC or PE investments, mergers and
acquisitions or public market activity.
The growth potential and end size of the cloud market is rivaled only by the introduction
of the Internet in terms of sheer scale. As such, investor interest in cloud technology and
services, as well as adjacent markets such as big data and mobility is high. Many of
these investors have been prior participants and enablers of the previous generational
shifts and the growth of the Internet. As such, they are aggressively pursuing
opportunities in Cloud across the 4 primary areas covered in this report, as well as the
professional services that support these areas. This interest has remained steady over
the last several years even amid the economic recession.
Today, the market remains in an early stage of its lifecycle, with new companies
emerging rapidly with a new cloud based solution or service offering. This leads to a
highly fragmented market with a limited number of assets of scale. In the services
segment, this is especially true as there is typically a lag between the creation of new
technologies and the subsequent creation of services companies to support these
technologies. As technology platforms like Salesforce, ServiceNow, Workday,
Demandware, and NetSuite continue to scale, and traditional ISVs like SAP and Oracle
move more to the cloud, there remains a tremendous opportunity for investors to
capitalize on the ecosystems that emerge to support the growth of these platforms. By
focusing on investing in the services companies supporting these platforms, or even
more broadly cloud services in general, they are able to invest in a market where there
will be far more winners created than in the technology platforms alone. For every
successful technology platform like ServiceNow, there will be a factor of services
companies that emerge and are able to scale. One need only look at companies like
Oracle, SAP, and Salesforce and the ecosystem of services companies that exist to
support those products to get a sense of opportunity. So while SaaS and IaaS may
generate the most buzz, the number of winners will be limited.
For strategic acquirers, there are opportunities abound to acquire capabilities in the
Cloud. The question for many strategic acquirers remains what and when to acquire.
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With respect to what to acquire, there are many dimensions that need to be answered.
As traditional implementation services become shorter in duration and pricing pressure
increases, as cloud slowly eliminates the need for manual implementation, the nature of
services are becoming more IP centric and platform in nature. Given that, does it make
sense to acquire IP in the form of SaaS or PaaS applications to begin the decoupling of
revenue and headcount growth, strengthen the customer relationship, and sell a bundled
offering? The answer is perhaps, as valuation, integration and an expanded competitive
landscape loom as challenges to such a strategy. On the service side, the what and
when to acquire are linked, and while there are many high growth cloud focused services
firms, a lack of scale continues to define the segment. The result is hesitancy on large
SIs to make a bet on these firms, as they are alternately betting on which platforms will
be the winners of