Tag: remote infrastructure management outsourcing

Years of Plenty Followed by Years of Starvation for RIM Service Providers | Sherpas in Blue Shirts

Right now Remote Infrastructure Management (RIM) service providers are enjoying explosive growth as they take share from asset-heavy players. The labor arbitrage market is disintermediating or successfully attacking the traditional asset-heavy infrastructure space. But in every boom are the seeds of undoing.

It reminds me of the story of Joseph in the Biblical book of Genesis. Egypt’s Pharaoh had a dream about seven fat cows and seven scrawny cows coming out of the Nile River and the scrawny cows ate the fat cows. He sent for Joseph to interpret the dreams, and Joseph revealed that Egypt would have seven years of great abundance followed by seven years of famine.

Everest Group anticipates that, with HCL and TCS and Wipro having achieved a break-through level of credibility doing large transactions, these three and other providers behind them are poised for a number of strong years of growth as their cost to operate is lower than the traditional players. We forecast three years of plenty where they will drive explosive growth.

But behind the RIM contracts is coming a world in which the integrated automated cloud platforms such as IBM’s SoftLayer and AWS will move into the enterprise and start taking share from the RIM players.

Unlike Egypt where they experienced seven years of plenty and then seven years of famine, we forecast three years of plenty for RIM players followed by increasingly lean years.

RIM players will need to adapt to integrated automated platforms such as SoftLayer and AWS as they move into the enterprise — just like the RIM model is currently disintermediating the asset-heavy players.


Photo credit: George Thomas

Implications of the Enterprise Strategic Intent Shift toward Cloud | Sherpas in Blue Shirts

Since the beginning of 2014 Everest Group has seen a real shift in large enterprise CIO organizations in their strategic intent toward cloud services. What are the implications on the traditional infrastructure outsourcing market from this strategic intent?

Timing

First, we expect that this shift will not happen overnight. As organizations work on their cloud plans, it’s clear that this is a three-to-five-year journey for migrating some or all their environment into this next-generation environment.

Runoff of work from legacy environments

Second, we expect the runoff on traditional outsourced contracts to accelerate. The runoff has been running at about 5-10 percent a year. We expect this will pick up to something close to 50 percent of the workloads to shift over to the cloud in the next three years with 30 percent of that shift happening in the next two years.

So this is a dramatic runoff of work from legacy environments into the next-generation models. This will put significant pressure on the incumbent service providers in that space.

Who will be the likely winners?

The third implication is the likely winners from this strategic shift. We think that at least for the next two years the Indian players or those with a remote infrastructure management (RIM) model will enjoy substantial benefits. Often a move to cloud or next-generation technologies can be facilitated by a move to a RIM model. So we see RIM continuing its torrid growth.

We also believe the providers with enterprise-quality cloud offerings will be players. One that particularly comes to mind is IBM’s SoftLayer, which we think is well positioned for the shift. It has its own runoff and can grab share from asset-heavy or other legacy providers as runoff occurs there.

We expect to see Microsoft and its Azure platform play an increasingly prominent role in cloud services. It will be interesting to see if AWS, Google, and Microsoft can make the shift from serving rogue IT and business users to enterprise IT. At this time we certainly believe IBM can. And it looks like Microsoft is making deliberate efforts to transition its model. It remains to be seen if AWS and Google are willing to shift their models to better accommodate enterprise IT.


Photo credit: Photo Dean

Wipro and HCL Deals Signal the Arrival of a Life Sciences Infrastructure Surge | Sherpas in Blue Shirts

On 19 May, Wipro signed a US$400 million+, multi-year strategic alliance deal with Japan’s largest pharmaceutical firm, Takeda Pharmaceutical. Wipro will provide infrastructure management services across Takeda’s global operations, thereby creating a unified platform across the company. Less than a week earlier, HCL announced a landmark infrastructure deal with pharmaceutical major Novartis. Per the terms of the deal, HCL will provide remote infrastructure management services for Novartis across its entire data center landscape, covering more than 70 countries across six continents.

The Life Sciences Infrastructure Bandwagon 

These deals are indicative of a sharp inflection point for IT infrastructure services in the life sciences industry. Until now, service providers have been largely focused on delivering application outsourcing services such as ADM, testing, ERP, and package implementation. Demand for infrastructure services was largely linear and predictable. However, the winds of change sweeping the overall healthcare landscape have brought about strong momentum to infrastructure uptake.

These winds include regulatory reform, consumerization, market consolidation, and the emergence of next-generation digital avenues. The volume, variety, and velocity of incoming data are fundamentally impacting how life sciences organizations view their infrastructure needs. Exponential growth in data, coupled with evolving engagement and drug development models, has resulted in a significant need for analytics. Dimensions such as real-time reporting, proliferation of mobile devices, and automation are providing additional impetus.

Healthcare infrastructure services tailwinds

The Opportunity At Hand

Among the various sub-segments of life sciences IT outsourcing, we see infrastructure poised to assume the lion’s share of growth in the coming years. While applications and SI/consulting are likely to grow at a healthy rate, the infrastructure opportunity in life sciences could triple in value over 2014-2020. This is likely to be fueled by increasing traction in cloud delivery and storage models, data warehousing efforts, consolidation of information systems, and the move to obtain a unified view of customer data to enable actionable business outcomes.

Global life sciences ITO market

Life sciences has traditionally been a mature IT market. Across medical device manufacturers, pharmaceutical firms, biotech companies, life science firms spend more on IT than typical buyers. Life science companies have innovative R&D efforts at the core of their operating model. Given the rise in personalized medicines, there will be a surge in data storage/processing requirements and, consequently, infrastructure needs. These themes impact life sciences IT infrastructure requirements to give rise to various technology imperatives across the ecosystem.

Life sciences infrastructure imperatives

Buyers in the life sciences space need to evaluate their infrastructure services roadmap on a business impact versus investment paradigm. They need to establish meaningful relationships with strategic partners in order to enable the true synergistic benefits of a comprehensive and relevant infrastructure services roadmap.

At the same time, services providers need to expand their infrastructure footprint to partner with enterprises in this transformative journey. They need to adopt a holistic mix of traditional tenets (co-location models, data warehousing, BI, hosting, and network services) along with next-generation services such as multi-tenancy solutions, cloud delivery and storage, and BYOD.

What are you experiencing in infrastructure services? Our readers are eager to hear!

Capgemini Rides the Wave of Demand for Industrialized, Standardized and Pre-packaged Services | Sherpas in Blue Shirts

At Capgemini global analyst event in London last week, the company provided a holistic view of its business growth strategy and internal initiatives to enhance skills and sales capabilities.

Capgemini management was relatively upbeat about growth opportunities while acknowledging the continuing headwinds in its main market in Europe. Economic uncertainty continues in continental Europe, but the need for cost cutting and efficiency is driving demand for services. Capgemini also expects growth from wider adoption of outsourcing and offshoring in continental Europe with a number of large deals on the horizon. Disruptions from cloud and offshoring continue to negatively impact revenue growth but improve margins. At the same time, cloud and other disruptive technologies such as big data, are increasing demand for services and boosting business.

Against this backdrop, Capgemini provided guidance of 5% – 7% organic revenue growth for the mid-term. Paul Hermelin, Group CEO, also indicated that the company is well on its way to achieving an operating margin of 10%. Assuming a 2-3 year period for mid-term, this is in keeping with outlook at the end of Q1 2014: organic revenue growth of 2% to 4% and an operating margin rate between 8.8% and 9.0% for 2014.

In terms of services, industrialization, standardization, innovation and pre-packaging dominated the company’s strategy. In infrastructure services the strategy has seen service delivery standardized and globalized with increasing focus on RIM, automation, cloud migration, orchestration and brokerage services. Capgemini saw +19% growth in cloud bookings year on year in 2013.

Application management has turned into a success story for Capgemini too. This is something of a turn around with dwindling bookings reversed into an increase of 60% in 2013 and 40% in Q1 2014. This has been achieved through industrialization and taking a factory approach to AM. Capgemini highlighted circa 30% cost savings for clients through this approach. It is also offering a new approach to AM services with a business process focus – where KPI’s include related business process metrics. This is a novel approach to AM that Everest Group will cover in a separate piece.

Another key lever for growth is innovation with Capgemini investing in IP in its strategic offerings (which are based on major technological transformation themes such as customer experience, cloud, mobility, big data, and social media). In keeping with this strategy, Capgemini will continue to target demand in the market for digitization of services and for transforming big data into new business opportunities. Similar opportunities from the Internet of things is also on its radar.

The widening of the strategic offerings portfolio with more IP is to boost profitability with higher margin services. Capgemini has shown that it can do well in these. Its strategic offerings grew by 19% in 2013 and are on the way to grow by 20% in 2014.

The drive for innovation is likely to lead to more acquisitions and partnership co-development. The latter brings with it the risks of investing in ambitious technology that proves too difficult to bring to market in a timely fashion e.g. Skysight, the cloud service orchestration product which Capgemini is developing in partnership with Microsoft, has been delayed.

Verticalization is another growth lever for Capgemini. One example is industry managed services offerings with OnePath Suite. This consists of pre-packaged SAP solutions that have been pre-configured for specific verticals, such as CPG, Energy and Life Sciences, and which will be delivered and set up as part of hosted and managed services with the potential to add business process services on top of bundled infrastructure and software integration.

BPO services are also being extended from the core F&A offerings to a broader set of services aimed at CFOs, including spend analytics, internal audit, SC analytics and MDM, and tax efficient accounting.

Internal organizational measures include:

  • HR: Increasing the size of the offshore workforce and its leadership while flattening the labor pyramid in other regions
  • Sales: A unified ‘One Group’ approach is being rolled out with dedicated major account teams, new rules across P&Ls and priority access to Group assets.

With globalization of services have come the challenges of managing resources better and increasing utilization rates. Capgemini needs a robust global organization to support its evolving delivery model. The HR strategy is addressing this requirement.

Capgemini has had an entrepreneurial culture with many P&L centers. This has led to a sales structure that has adapted to local market conditions. The implementation of a ‘One Group’ approach to major accounts is needed to tap into large multi-national opportunities that can now be supported by Capgemini’s global delivery model.

Overall, Capgemini has made excellent progress in transforming itself to ride the wave of demand in the market for modernized services and to compete with India-based vendors who are targeting Europe, Capgemini’s biggest market. Offshoring and globalization of service delivery has been largely achieved. Other aspects of the strategy are still work in progress but with the economic outlook generally brighter across the globe, the company is set well to achieve its latest guidance.

Are We Hearing the Swan Song for RIM Services? | Sherpas in Blue Shirts

Remote infrastructure management (RIM) services were the disrupter for asset-heavy infrastructure services over the past several years and, in all likelihood, will continue to be for the next few years. However, as we look down the road it appears that RIM will hit the speed bump of automation and cloud, which will impact RIM in much the same way that RIM currently disrupts the asset-heavy infrastructure market. At Everest we believe that about 50 percent of all current RIM workloads are viable and cheaper in the cloud and likely will migrate to the cloud over the next three years. So what’s the prognosis for the RIM model?

As shown in the charts below, RIM grew at an average of 27 percent per year while the asset-heavy space lost share at 1.6 percent a year.

RIM Growth

But the cost of operating in a pay-for-usage cloud world is about 50 percent lower than the take-or-pay world of the existing data center. Although the cloud is currently a small part of the global services marketplace, the cloud providers are operating a lot more profitably and thus disrupting the RIM providers. Automation and cloud are the areas of action and investment for growth. We need look no further than the recent acquisitions of IBM and Dell to understand how this market is evolving.

IBM’s Strategic Moves. IBM’s latest acquisitions include Cloudant, for delivering NoSQL on-demand database-as-a-service (DBaas), and SoftLayer Technologies, a global cloud infrastructure provider. And Big Blue plans to spend more than $1 billion over the next two years to bolster SoftLayer’s platform. IBM also scooped up several other strategic cloud companies over the past couple of years including UrbanCode, for software delivery automation; Green Hat, delivering software quality testing for the cloud environment; and Big Fix, providing management and automation for security and compliance software updates.

Dell’s Strategic Moves. Acquisitions adding to Dell’s capabilities include Enstratius, enabling consolidated management across multiple cloud platforms; Credant Software, providing data protection; Gale Technologies, enabling infrastructure automation; Quest Software, for value-added software solutions and virtualization; and Boomi, for SaaS integration.

RIM’s Pulse

To date the power of the cloud disruption has not yet felled the infrastructure services space. But over the next three years, we expect 30-50 percent of the infrastructure services work to migrate to a cloud model. What impact will it have on the RIM market?

First of all, RIM’s impact on the existing IT infrastructure market is not finished. We think RIM service providers have at least three more years of significant share gain shifting from IT asset-heavy infrastructure to a RIM model. After that? Not so much. And towards the third year, we expect to see cloud disintermediate the RIM market.

It will be interesting to see whether RIM providers can make the accommodations for the new cloud world. Yes, there will be a role for RIM in cloud, but we believe it will be less than in its current IT infrastructure space. And managing the the automated cloud world will require fewer people, which means lower revenue for RIM vendors.

For vendors and service providers, the non-cloud IT infrastructure space is becoming a very bad place to be.

What If CSC and HCL Get Brave? | Gaining Altitude in the Cloud

CSC and HCL announced an alliance a few weeks ago, which is more of a go-to-market than structural change. But what if the twosome were to agree to a follow-on alliance to do something really big — something with huge industry and market consequences? It would be extremely brave and very risky. But it would address the inevitable whopping market threat for CSC and position both companies for future growth. Let me paint a picture of what that speculative alliance would look like.

The alliance would address the elephant in the room: CSC losing half its client work 

Such an alliance would first enable CSC to grasp the mantle and really address its big problem — its current huge commitment to an asset-heavy outsourcing model. CSC has invested at least $12+ billion in this model.

Our research and insights reveal that over 50 percent of the workloads currently in an asset-heavy model are able to migrate to the cloud over the next three to five years— and are incented to do so. With half of its work exiting the asset-heavy model, this mass exit would leave CSC with a huge revenue hole.

And that’s only part of the problem. The situation is doubly threatening in that the exit from the asset-heavy model will leave CSC with huge stranded costs on facilities, equipment and people along with the revenue hole.

A really brave alliance with HCL would deal with this situation.

Alliance step one. Step one is to deal with the people. CSC could move its people servicing clients in the asset-heavy model over to HCL, taking costs down and removing the stranded costs. CSC already has a vehicle in its offer set to catch the cloud work but would be replacing this revenue at 50 cents on the dollar. It’s much cheaper to do the work in the cloud than in the asset-heavy model.

Step two. Step two would move CSC’s data centers into an industry REIT to deal with the data center overhang. It would leave CSC with a much smaller set of stranded assets in overhead and equipment to deal with. In this way CSC would be able to navigate the inevitable shrinkage of its asset-heavy business and deal with those stranded assets.

The emerging CSC 

A brave alliance between CSC and HCL would also make CSC “all in” on the cannibalization of its own footprint. Although CSC is attempting to drive this strategy now, it has conflicting incentives as it fights to maintain revenue in its existing asset-heavy model while standing up new revenue. The speculative alliance I’m describing would send a message internally to the CSC organization and to its external market that CSC is “all in” on the cloud transformation issue.

What would emerge from this alliance strategy would be a cloud-based CSC — a smaller, more profitable, more nimble CSC without the huge write-downs that it likely will incur as the cloud transformation happens naturally over the next few years.

The picture for HCL also makes a lot of sense

Such an alliance would create big growth in HCL’s infrastructure because of gaining significant advantages in economies of scale, market credibility and greater profits to invest.

HCL would pick up CSC as a huge client and capture probably 15 percent of the entire RIMO (Remote Infrastructure Management Outsourcing) market in one fell swoop. It would cement HCL into the undisputed RIMO leadership position with a wide margin between HCL and TCS, its nearest competitor.

What do you think? Will the twosome be brave and take the risk of a market-changing follow-on alliance?

HP’s Most Difficult Challenge Has Yet to Hit | Gaining Altitude in the Cloud

To date the cloud has not been a major disruption in the traditional outsourcing market. Rather, cloud has attacked the rogue IT or departmental processing market. But we believe that this tide will now turn inward onto the enterprise space, where HP and other infrastructure players live.

How will HP take on cloud disruption? We at Everest Group believe that it is highly likely that over the next three years 30 percent of the existing workloads will move out of the traditional outsourcing space and shift to cloud models. If this proves true, the substantial turnaround work that HP has done to date will not prove adequate to stem this new source of competition and disruption.

The results to date 

As shown in the figure below, CSC, Dell, HP and IBM have significant portfolios of asset-heavy IT infrastructure outsourcing deals. The statistics below clearly evidence the fact that the asset-heavy providers are losing share to asset-light players.

Asset heavy ITO players losing share

So far, the primary attack on the traditional space has been the RIMO (Remote Infrastructure Management Outsourcing) talent-only model.

Performance progress

When Meg Whitman took the reins as CEO, HP started the long process of turning around its business. Recommitting to the services space, she appointed Mike Nefkens as EVP and Enterprise Services general manager a seasoned veteran of EDS who quickly made progress in improving morale and in addressing customer satisfaction issues in existing service accounts. Market share losses slowed and HP reemerged with more competitive offerings and a can-do attitude.  But have they fought the enemy to a standstill only to find they have a new front with a more deadly enemy.

Like a stone dropped on glass, RIMO competitors smashed the asset-heavy business. What will the new disruption of cloud do to it if — as we predict — it drives a 30% + run-off of workloads?


Photo credit: Don Debold

Why the Traditional Infrastructure Outsourcing Market Is about to Shrink Dramatically | Gaining Altitude in the Cloud

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.

Market Size for Traditional Infrastructure Outsourcing Players

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.

  1. A vision or understanding by the customer that savings are possible, large and attainable.
  2. Orchestration tools that allow the client to organize, manage and coordinate. These tools have recently come on the market with several strong case studies to demonstrate their success.  What makes the business case compelling is that it is entirely possible for customers to “test” the cloud model by moving incremental workloads without investing in such tools though a larger scale of transformation would require such investments.
  3.  The willingness to invest the time and money to implement the program.

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.

Cloud Adoption for Application Dev Test Environments

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.

Remote Infrastructure Management – “Gearing Up for the Big Leagues” | Sherpas in Blue Shirts

Everest Group’s just released research on Remote Infrastructure Management (RIM) services shows that the overall infrastructure services market, which was already undergoing significant changes due to various factors, is being further disrupted as RIM adoption takes center stage.

Let’s take a step back before we talk about RIM’s current state. Over the years, our RIM-focused research analyzed the growing challenges offshore providers, who pioneered RIM industry, faced in offering services that went beyond typical low-cost infrastructure monitoring. As their aspirations grew, and more buyers became willing to engage, those providers began offering newer RIM services, such as delivering from offshore locations those infrastructure services typically provided at onshore by competitors. Yet, the core value remained remote low-cost helpdesk and status quo monitoring of infrastructure assets, which experienced a significant growth across buyer landscape.

However, now we are witnessing substantial growth in the adoption of offshore infrastructure services that are moving beyond the typical RIM offerings. Our discussions with various buyers have revealed a clear evolution in the delivery and market messages of offshore infrastructure providers. Most of them are marketing and selling their portfolio of infrastructure offerings as “new service X,” “new service Y,” and “RIM,” unlike earlier years when they solely focused on RIM as a generic brand for all infrastructure offerings. This messaging effort is backed by changes in delivery model, engagement terms, transitioning process, investment in tools/automation, and various other related initiatives.

One example of this strategy is the willingness displayed by large offshore providers to open nearshore and onshore delivery centers to serve bigger customers. The typical 100 percent offshore ratio in RIM is dropping to around 80-85 percent as the providers offer higher value-added services that are normally delivered from client locations.

Remote Infrastructure Management Services

We are now seeing RIM providers gearing up to enter this new, big league. While cost savings is still the core tenet, their strategy is to move up the value chain, grab larger market share, and create more “downstream” opportunities for pure RIM services.

Traditional infrastructure and managed service providers that were already facing challenges due to stagnation in their core market and reduction in mega size, multi-towers, multi-years deals, are getting further squeezed by RIM providers. RIM providers are squarely part of this disruption, and are tweaking their delivery model, market messages, buyer engagement strategy, and investment focus to exploit this opportunity.

The Infrastructure Outsourcing Market in 2012: On the Cusp of Transformation? | Gaining Altitude in the Cloud

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:

  • Buyers: Buyers across geographies found increased value in offshore providers’ remote infrastructure management outsourcing (RIMO) model due to its flexibility. Faced with the high costs associated with IO, buyers appeared very tactical in their approach. Analysis of the basket of IO spend showed clear signs of carefully planned allocation across traditional IO, RIMO and cloud-based services
  • Service providers: Though MNCs remain by far the leaders in the IO market, offshore providers appeared to be steadily gaining ground in sales strategy as well as deal wins. We also observed similarities between MNCs and offshore providers on a number of parameters such as buyer segments, deal size and geographies
  • Cloud-based services: As transformation of infrastructure is the major driver of cloud adoption across enterprises, we devoted an entire section in the study to cloud adoption in IO. Not surprisingly, cloud is helping buyers create a flexible and scalable infrastructure environment, with Infrastructure-as-a-Service (IaaS) solutions leading cloud adoption

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).

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