Consulting in IO contracts rises with technology complexity and need for transformation; buyers are depending on service providers to help transform their infrastructure setup and manage technology complexities arising from adoption of digital solutions
Why Service Integration and Management (SIAM) is taking hold in infrastructure outsourcing
TCV of North America-based IO renewal deals is high in 2014 through early 2015 but plummets from 2015 through early 2016
In comparison to other geographies, European buyers have been more aggressive in investing in IT infrastructure services in the past several years, with ACVs in 2012 1.7 times the global average. European average contract sizes in 2012 were bolstered by an increased appetite shown by different governments.
You’ve heard it … read it in the news … and probably even participated in the discussions about it. “It” is the impact of the cloud model on the third-party service provider marketplace. What are the cloud’s potential disruptive effects? As the cloud and outsourcing meet head on, will the cloud make hiccups or ripples, or will it become a crushing force? How big a threat is cloud to the outsourcing space?
To answer those questions, I think we have to pull apart the services spaces, as the cloud’s impact will differ widely in various areas.
Let’s start with where cloud has the highest potential for disruptive impact.
Impact on IT infrastructure services
The cloud model’s impact on the traditional IT infrastructure outsourcing space has been modest to date and, surprisingly, has not had as strong an impact in disintermediating the existing marketplace as RIMO (Remote Infrastructure Management Outsourcing) had.
Although the impact to date has been modest, the cloud model has a very high potential to disintermediate business in this space and is in a position to drive increased run-off out of traditional infrastructure models.
Threat profile — High. I believe the cloud’s disruptive impact in this area is a question of when, not if.
Impact on the applications space
Here the story is quite different. Unlike the infrastructure space where cloud is poised to take away existing revenues, in the applications space it has at least as many positive impacts as negative. In fact it has the potential to be a growth engine.
As companies prepare to evolve and move into the as-a-service world or migrate their applications to the cloud infrastructure models, the substantial amount of SI and applications effort to transition into the new models will create growth in the outsourcing marketplace.
However, there is a caution sign. The kind of work best suited for the cloud model often goes to new market entrants rather than the traditional players. We’ve blogged before about the shift of decision rights into the business stakeholders’ realm rather than the CIO, and this is driving growth in the cloud market. So there are some issues associated with positioning, but it’s driving growth in the overall marketplace.
Threat profile — Initially modest to high disruptive impact for traditional players. But as the traditional providers resolve their positioning issues with the new consumerized decision-making realm in clients’ businesses, the cloud should have a net positive impact on the outsourcing providers’ growth, rather than a disruptive impact.
Impact on the BPO space
On the BPO side, the cloud model is even more immature and it’s less clear what eventual impact it will have. We certainly see cloud engines being incorporated into the BPO or BPaaS model. But here it’s more of a change in one of the component parts, rather than affecting the overall business model.
Threat profile — Modest to flat impact.
Our overall assessment is that the cloud’s clout to disrupt the existing marketplace in the outsourcing world is modest to high — but the changes will carry both negative and positive consequences.
For those of us who are industry observers, it is not a secret that the traditional Infrastructure Outsourcing (IO) market has stopped growing and is currently contracting at a rate of 2 percent a year.
The secular trends driving this contraction are numerous and include client frustration with the contracting model, lack of flexibility, poor customer/provider alignment, and alternative sourcing options such as in-house, co-location and remote infrastructure management outsourcing (RIMO). All of these alternative options present increased flexibility and often more attractive economics.
However, the reason that this market deceleration and consequent contraction has been so slow is that once a client has entered into a significant IO contract it is very hard to move away from the model. It is possible to switch service providers but very difficult to rebuild in-house managed capacity. As a result, we note that the traditional IO market place is dominated by re-competes with few new logos entering the market.
Nevertheless, this stable market may be about to change in a big way. To understand why, we only need to look at the nature of the workloads that are running in these IO environments. Over the course of the last year, we have taken a close look at these workloads and have determined that between 40-50 percent of the workloads currently hosted via these contracts do not have the security requirements or the mission criticality that prevents them from being migrated to less expensive cloud environments. We estimate that savings can approach 20-40 percent, depending on the workload distribution and the volumes involved, particularly when these workloads are migrated to a pay-as-you-go environment such as those available from public cloud platforms such as Amazon or Rackspace.
To better understand the viability of this happening, let’s look at the use case of Application Test and Development. Test and Development environments are not subject to the same performance, security or compliance requirements of production workloads. They are, in fact, excellent candidates to be operated in less expensive but more flexible environments. There is little reason for customers to look at these workloads in the same light as production workloads or for the same cost and delivery constructs to be applied.
When you dig further into existing IO contracts you find that many of these customers are operating well above their contracted minimum volumes thus allowing them to shift these workloads without fear of having to renegotiate contracts or pay early termination fees. When you consider that test and development alone often take up 25-35 percent of the capacity in the traditional IO environment it becomes clear that it is only a matter of time before customers move to shift these workloads and move from these low-hanging fruit to other workloads that exhibit similar favorable characteristics.
We have researched what conditions are necessary to allow a traditional IO client to move down this path. It appears that three key conditions need to be met.
Given the strong ROI resulting from these initiatives it is likely that many if not all ITO customers will explore this option. Already, more than half of enterprise customers are actively migrating or considering migration of development and testing environments to the cloud, next only to email/collaboration and disaster recovery/archiving.
With significant portions of IO workloads vulnerable to this emerging threat it’s only logical to conclude that we will see this market contract sharply in the next few years.
Earlier this year, Everest Group conducted its annual study of high-value Infrastructure Outsourcing (IO) deals to gain insight into how a range of parameters correlate with deal activity in the IO market. The study, which is part of our Infrastructure Outsourcing Market Update 2012 report, analyzed 164 IO deals across a combination of 17 MNCs, Tier-1 offshore and Tier-2 offshore providers.
Infrastructure Outsourcing 2012 – Key Findings:
Infrastructure outsourcing: On the cusp of transformation?
Overall, the IO market appears to be on the cusp of transformational change. IO seems to be showing the way not only in cloud adoption but also in how IT delivery and pricing models are transforming. The growth of IaaS says a lot about the IO’s impetus for buyers and providers alike.
To find out more about these trends, our analyses of and insights on the infrastructure outsourcing market, check out the Infrastructure Outsourcing Market Update 2012 report (a preview deck is available).
For the past few decades, Infrastructure Outsourcing (IO) was a proverbial elephant in the outsourcing room – huge deals, led primarily by multinational corporations (MNCs) and so capital and hardware intensive that some would beat the revenues of some medium-size businesses. At the turn of the 21st century, most non-MNC service providers, especially those based in India, did not even have Infrastructure Management Services (IMS) as a separate business line. Investments required for traditional IO were massive, and none of these providers had the capacity to manage the scale. Only application development & maintenance (ADM) had the scope, size and convenience to suit the global delivery model that the offshore providers championed.
However, as it turned out, IO was too big a piece of cake to cater to the appetite of just the MNCs, and soon offshore providers, cloud players and other boutique IO firms (like IPsoft) arrived on the scene with a commitment to stay in the marketplace. Soon thereafter, with the advent of next-generational concepts such as Remote Infrastructure Management Outsourcing (RIMO), cloud and consumerization, IO achieved some of that nimble-footedness we have come to associate only with ADM.
More buyers, especially the large ones, started to explore the scope-breakdown model that RIMO offered. The huge size and scope of traditional IO required little buyer focus on the nuances of their outsourcing strategy. RIMO provided the buyers with an option to focus decision making not only on opportunity costs but also on strategic choices, i.e., whether and what aspects of infrastructure to outsource. Though traditional IO continued to retain major share of the IO market, RIMO steadily supplanted itself as a viable option (see below).
While RIMO continues to be small as compared to traditional IO, it is a model that traditional IO providers can ignore only at their peril. Astra Zeneca’s recent replacement of IBM with HCL Technologies as its provider of data center hosting and migration is a case in point. Offshore providers may indeed be leveraging RIMO to enter the space dominated by MNCs for so long.
However, this is not a David vs. Goliath story. The IO market is witnessing numerous such evolutions, not only because of what providers are doing (e.g., RIMO and cloud) but also because of what buyers are demanding. The following illustration only partially exhibits the incredibly interesting forces currently influencing the IO market. How the balance tilts will be determined by the innovations that providers bring to the table to align with the growing strategic focus that buyers now have on IO.
Want to know how this story pans out? We’ve covered it in our latest research report on RIMO: Expanding the Wings of RIMO.
We would also love to hear your comments on what you think of RIMO and the related trends.
The news media a couple of days ago reported – not entirely unexpectedly – that Wipro is in talks to sell the U.S.-based data center assets it acquired when it purchased Infocrossing for US$600 million in 2007. Interestingly, the business was referred to as “non-core.”
The message the acquisition at that time sent to the market was that buyers are more comfortable in outsourcing end-to-end infrastructure to providers with their own data centers.
But the infrastructure outsourcing (IO) market has changed quite a bit in the past four years. Indeed, our Decline of Traditional Infrastructure Outsourcing research highlights the challenges in traditional IO and discusses the fundamental shift wherein newer and nimbler models such as RIMO and other next generation infrastructure services are outpacing and outsmarting the conventional IO strategy. With this news, it appears Wipro’s management agrees that the dynamics of IO have changed and that it has become largely immaterial whether or not offshore providers own a data center. And coupled with industry developments in which Indian IT providers are partnering with local data center providers to win IO deals against MNCs, Wipro seems to understand the broader strategic fit of these assets.
Other Everest Group research (e.g., Remote Infrastructure Management – “RIMO Strategy – Stick to the Basics, but Fine-tune Too”) has emphasized that Indian providers should focus on their core competencies of simpler engagements, global sourcing, resource management, flexibility, and asset-light strategy as the core of their IO services. This is not to say they should not move up the value ladder, just that they should not fundamentally alter the DNA of their infrastructure business.
Will this change the basic nature of the outsourcing deals in which Wipro can participate? Not really. Wipro saw early gains leveraging Infocrossing and, subsequently, carved out its place among traditional IO providers. After exploiting Infocrossing’s potential in traditional IO by providing integrated infrastructure services, Wipro is divesting out of the non-core assets, and that makes real sense. It appears Wipro has realized that the value proposition of Indian infrastructure service providers is different from that of typical MNCs and, therefore, is realigning its strategy.
While it does impact its business in terms of offering large end-to-end complex IO deals, we need to be careful in generalizing this as a hindrance toward its growth. Indian providers should walk away from deals that require them to perform tasks that are not in sync with their core DNA, rather than attempt a dangerous straddling strategy. Therefore, although Wipro may no longer be willing to offer hosted IO, we believe it is better off focusing on typical offshore infrastructure offerings augmented with its integrated infrastructure services through Infocrossing.
Will this impact Wipro’s cloud play? Not really. Most of the Indian providers are targeting cloud IT service/ orchestration/platform BPO to drive their cloud revenue than offering their own, in-house hosted cloud solutions. Moreover, if Wipro plans to develop its own data centers specifically for in-house cloud solutions, nothing stops it from doing so (e.g., Infosys earlier offered its SaaS-based iEngage platform through partner data centers and is now offering the solution in its own data centers as well).
Overall, divesting Infocrossing’s non-core assets could be a great help to Wipro, as the growth of its infrastructure business has lagged its Indian peers. We can count on Wipro’s management to ensure that the strategic advantage Infocrossing brings, especially in key verticals, such as healthcare, will continue. This will make more management and operational bandwidth available to focus on the core capabilities needed in infrastructure services that are fine-tuned with the general strengths of Indian infrastructure service providers.
HP’s 2008 acquisition of EDS reduced an already small number of large infrastructure outsourcing (IO) service providers with a significant footprint in Canada. While for a time that meant buyers in Canada who were uncomfortable entering into agreements with IO providers with lesser presence in Canada had a smaller pool to choose from, the landscape is quickly changing.
First, the HP-EDS acquisition was quickly followed in 2009 by that of ACS by Xerox and Perot by Dell. Both Xerox and Dell have capabilities and resources on the ground in Canada they can utilize to increase ACS’ and Perot’s presence in the country’s IO space. Additionally, Canada appears to have caught the attention of offshore providers over the last few years, with many of the Tier 1 Indian providers making headway and developing Canadian practices with strong delivery capabilities. Also increasing competition in the IO space are providers that are leveraging emerging technologies to replace traditional IO deals.
What does this mean to the service provider community? The big Tier 1 multinational firms with strong footholds in Canada need to beware. Competition is coming from expected places, such as from major players that in the past have not focused their attention on Canada, as well as less expected up-and-comers that are gaining ground in using cloud offerings, for example in development and testing environments. The Indian players, continuing their push into the Canadian marketplace, must become better focused in order to effectively compete with the large multinationals that already have a strong track record, strong relationships, and a greater presence.
What does this mean to the buyers of IO services? Many more options. Take, for example, midrange services. They can use a large Tier 1 ITO provider and go the soup to nuts solution route. They can split the physical aspects of the data centre and servers from the services and leverage an offshore provider for remote infrastructure management outsourcing. They can use a cloud solution offered by anyone from a large Tier 1 provider to a niche vendor. As the market has matured and IO services buyers have gained experience, the risk around leveraging a new set of providers and emerging technologies has decreased, which equates to additional option advantages for Canadian buyers.
This increasingly competitive environment challenges service providers to clearly articulate the value that their solution, their proposal, and their company bring to their clients. But buyers aren’t off the hook. They must ensure that their sourcing process allows for the consideration of providers with very different capabilities and value propositions than those to which they have become accustomed.
©2023 Everest Global, Inc. Privacy Notice Terms of Use Do Not Sell My Information
"*" indicates required fields