As economic challenges in Europe are likely to persist in the near future, growth in the infrastructure services market is expected to remain muted. As a result, service providers’ success will largely depend on their ability to chip away market share from their competitors.
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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.
Keying off 2013 market activities and indications, following are five SaaS developments I anticipate we’ll witness in 2014:
1) Blurring of SaaS and on-premise: With the quintessential poster boy of cloud computing and SaaS, Salesforce.com, announcing a partnership with HP whereby customers can now choose to have their “dedicated infrastructure” within a Salesforce.com data center, the true SaaS premise is dead. However, rather than quibbling and mindless debate on further defining true SaaS, SaaS vendors will realize the potential of this market in which a “dedicated” SaaS solution is required. Though Salesforce.com has always shied away from creating a true on-premise version of its SaaS offering, other vendors do offer on-premise and SaaS version. This blurring of boundaries will further continue in 2014.
2) Battle of architectures: Oracle, a company that always denounced cloud computing, has suddenly found a love for it, and has acquired (and will continue to acquire) numerous SaaS vendors. (Note that this nothing different from its on-premise strategy, e.g., remember JD Edwards and PeopleSoft?). However, Oracle for long has criticized Salesforce.com’s approach of creating application-based multi-tenancy. With the introduction of Oracle 12c (c denoting cloud), Oracle’s marketing machinery is going to town explaining how its database-driven multi-tenancy is better than typical application-based architecture. In 2014, we should see more the lines in the sand being drawn.
3) Indirect sales: Most SaaS vendors are running in losses, and understand that their sales and marketing expenses (~30-40 percent of revenue) are exorbitant. They will realize the importance of indirect sales channels such as system integrators and partners to further drive adoption of their offerings. Given the strategic partnerships of Salesforce.com, Workday, and NetSuite with large system integrators such as Accenture, Wipro, Deloitte, and niche providers such as Bluewolf, 2014 should see increase in the depth of these partnerships.
4) Churn management: Despite soft lock-in, SaaS providers are witnessing high churn rates. To be fair, some of the churn is attributable to clients’ unwillingness to adopt SaaS models once the pilot run is over. In 2014, we’ll see SaaS providers investing more time and energy in maintaining their existing customer relationships.
5) Enhanced functionality: This is a multi-year, multi-decade evolution for the SaaS ecosystem. In the past decade, SaaS providers have included many types of functionality that were earlier considered to be unsuitable for this model. In 2014, vendors will continue to evolve their offerings, including introducing industry-specific vertical flavors whenever possible. However, given the opportunities in the horizontal SaaS space (CRM, salesforce automation, marketing, HCM, etc.), most SaaS vendors will gain the lion’s share of their growth in enhanced horizontal functionality.
Buyers prefer service providers with an existing “off-the-shelf” cloud offering, as they can customize the solution and make it operational in a short time. In the early generation of cloud adoption, most buyers prefer service providers to host the client cloud in the provider’s datacenter, and the service providers building or hosting a cloud platform for clients is the “de facto” choice for managing the platform, as well. While this trend may reverse in the coming years, until that change happens, service providers that “own” a cloud platform will corner a significant portion of this market.
Everest Group Performance | Experience | Ability | Knowledge (PEAK) Matrix™ provides a detailed assessment on the service provider landscape in a given market. In this video, Practice Director Chirajeet Sengupta outlines the positioning of cloud application and infrastructure service providers on the PEAK Matrix.
Have you the noticed the growing ripples of marketing messages from Genpact? The firm is already a leader in the global services market, but Bain Capital is aggressively pushing Genpact to grow faster and become more dominant in the market.
Bain — which is known for taking well-run, aggressive firms and super-charging them — provides capital to Genpact, has a seat on the provider’s board, and is becoming far more active in its management meetings. Acquisitions, organic growth, and looking outside the Indian heritage for Western talent are all on the strategic agenda along with refreshing marketing activities.
They moved from purely F&A services and solutions and now have compelling offerings in enterprise application services and IT infrastructure services. In today’s environment, there is plenty of room to grow their share of the pie. Genpact already had one of the higher win rates in the global services industry and now, with increased focus on marketing, should capture more wins.
If you’re a global services buyer, these observations portend to Genpact coming to visit you soon.
If you’re a service provider, you likely have reasons to be frightened by the moves Genpact is making to step up to a higher level in the market.
Dave Roberts, SVP of Strategy and Evangelism at Service Mesh, talks about balancing an open and closed cloud infrastructure and provides tips on ensuring your cloud project succeed.
Follow Dave on Twitter @sandhillstrat.
Dave was a speaker in the Hard Choices in Enterprise Cloud Adoption session – part of the Organizational Readiness track at Cloud Connect Chicago, which Everest Group’s Scott Bils chaired. For more Organizational Readiness resources, visit www.everestgrp.com/ccevent.
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).