(Editor’s Note: The new Ovum (News - Alert) IT service draws on three expert research teams, which collaborate to provide unparalleled insight and strategic support for our clients. The articles in this series, from Ovum, Butler Group and Datamonitor Technology team members, reflect Ovum’s philosophy of analysis and advice based not on IT for its own sake but on how IT adds value to a business. In this installment, IT services specialist John Madden describes the dilemma facing global providers around cloud computing – a model too important to ignore, but one with the potential to upset longstanding revenue streams.)
Despite all the hype around it, cloud computing sits somewhere between the ‘next big thing’ and a craze that will fizzle out before it has much impact. The noise is deafening, but it’s running far ahead of actual implementations. However, that hasn’t stopped global IT services providers from ramping up their cloud-based offerings and including grand cloud visions in their future strategies. In truth, these providers have no choice but to take such steps to keep up with customer interest and, more importantly, to blunt the technology’s potential negative impact on some of their largest revenue streams. Global systems integration firms in particular are worried that cloud services could irrevocably alter the SI business as we know it.
Services players invest in cloud layers
Definitions of cloud computing services vary from vendor to vendor and customer to customer. This is part of the reason why cloud computing in general remains a confusing proposition for some enterprise customers (although you could argue that the confusion is starting to abate just a bit).
For their part, services providers are trying to be more explicit about how cloud services can deliver value, and have started to specify different models and levels of the cloud, based on the functions they serve or the services they deliver, or both. They’ve also expanded their cloud visions to encompass private clouds (services delivered either via in-house resources or via a dedicated cloud provided by a third party for a customer or group of customers); public clouds services delivered via one or multiple multi-tenant external clouds, which promise almost limitless scalability); and hybrid clouds (leveraging both private and public clouds).
At Ovum, we view cloud computing services simply as IT services that customers access over the Internet on a pay-as-you-go basis. With this as a backdrop, we view the current cloud computing market in a model that has four primary layers:
- Infrastructure as a service (IaaS), in which ‘basic’ infrastructure components such as storage or compute capacity, and associated network and security services are delivered as a service (such as those available from IBM, EMC and some telecoms/network operators such as AT&T (News - Alert) and Verizon Business).
- Platform as a service (PaaS), which provides, on top of the infrastructure components, an on-demand programming layer for building cloud-ready (web-based) applications. Salesforce’s Force.com and Microsoft’s (News - Alert) Azure are some of the better-known examples.
- Software as a service (SaaS), where cloud-enabled business applications exist; Salesforce.com is the most frequently cited example, but vendors including SAP (News - Alert), Oracle, Microsoft, NetSuite and Workday also offer SaaS applications.
- Business as a service (BaaS), which provides a combination of data and services for a complete business process on demand for a specific end-to-end business activity, including software, content and workflow (such as WebEx).
Among the major services providers, much of the emphasis and activity in the cloud to date has been on IaaS and SaaS, which are the layers more akin to their traditional offerings such as managed services and enterprise applications outsourcing. (There are varying levels of interest in the PaaS and BaaS layers among services providers, but we’d expect BPO providers to be looking hard at the potential for BaaS.)
As Ovum has detailed in recent reports, even with this increased vendor activity, the mad customer dash to adopt cloud solutions has yet to materialize. There are certainly exceptions, including some government organizations with SaaS services, and SME customers taking advantage of IaaS services.
The global recession and the need to cut and control IT costs is spurring customers to at least investigate various options for cloud services. But by and large, enterprise customers are taking a cautious, phased approach that allows them to ‘test drive’ cloud-based services – usually restricted to a specific application, workload or business process – before they commit themselves more substantially.
Preparing for a Cloudy Future
Among services providers, systems integrators say they are bullish about the cloud’s potential, but in practice they are as wary as enterprise customers have been. This is understandable; after all, SIs depend on IT complexity, building their businesses around tying together heterogeneous and often geographically dispersed IT systems (infrastructure, applications, etc.) so that they work together – hopefully – like a well-oiled machine. The larger and more complex a customer’s IT infrastructure, the greater the SI’s revenue potential.
As we’ve detailed in numerous reports, cloud services have captured customers’ attention because of the IT and business benefits they promise, including variable costs, reduced capital expenditure and access to on-demand, dynamic and virtualized IT resources. In the IT services market, the SI business – versus, say, consulting or outsourcing – appears most vulnerable if these potential cloud benefits materialize.
We’re not suggesting that the traditional SI model is going away anytime soon. The cloud computing market is still too young; customers are not taking a ‘cloud only’ approach; and customers will still need third-party integration services to take full advantage of their IT investments for the foreseeable future. However, some customers that leverage cloud services in theory will no longer need an SI for complex, time- consuming and costly integration of their internal IT systems, especially if they’re accessing services via a public cloud, or even a private cloud, that are maintained by a third party. When and if the cloud computing market finds a flashpoint, revenues from integration work are likely to take a hit.
Of course, while global firms including Accenture, IBM and Capgemini (News
) may see SI revenues decline, they also have massive consulting and outsourcing operations that could make up the difference. In fact, many of these global firms are already emphasizing the value of consulting and outsourcing in their cloud services engagements, versus their SI capabilities. For example, consulting teams can map out a customer’s cloud project up-front, and then provide outsourcing to operate the customer’s public, private or hybrid cloud. Most global outsourcers, in fact, are attempting to position the cloud as merely an extension of services that they’ve delivered for decades, just in a scalable, virtualized, on-demand manner. (It may be that the outsourcing business is vulnerable to the same kind of cloud-caused disruption that the SI market is poised to experience – another potential market shift worth monitoring.)
Again, this is not to say that the rise of the cloud will mean the demise of SI’s, but the nature of cloud-related integration work could definitely change. For example, third-party cloud providers that offer services through partners’ data centre networks will need SI’s to enable the delivery of those services.
Strategies for Surviving the Shift
In addition to shifting the focus of their cloud services away from systems integration toward consulting and outsourcing, we recommend that global services providers take some other steps to turn the cloud to their advantage:
- Differentiation is key. The cloud-based services market is cluttered and overhyped. We’ve witnessed a definite shift in which vendors attempt to define the cloud as an alternative delivery model for addressing specific business challenges. Services providers are trying to be smarter, more explicit and more proactive in how they explain and differentiate their cloud offerings – all of which are necessary if they are to overcome continued customer skepticism.
- Be a cloud services leader and innovator. Many services firms attempt to position themselves as market leaders in cloud computing services – whether as thought leaders, technology innovators, business value providers or some combination thereof. They want to be seen as shaping the industry’s broader cloud agenda and, at the same time, working with customers to show where cloud services can deliver ‘real-life’ business and IT benefits. Viewing their service provider as a leader will inevitably give customers greater confidence in the provider’s ability to deliver cloud services.
- Develop cloud services ecosystems. Rarely can an IT services provider deliver all the necessary pieces of a cloud solution on its own. We’ve seen a recent spike in the number of cloud-related partnerships and go-to-market initiatives among firms such as Accenture and CSC and software vendors and pure-play cloud providers (and in truth, some of these software and pure-play vendors need partnerships with the larger firms just as much, if not more). As with any IT vendor partnership, these activities are aimed at increasing visibility among customers and extending sales coverage for cloud-based services.
Ovum tracks development in the cloud computing market across its various disciplines, both in IT services and software, and will continue to explore cloud services’ impact on vendors, their partners and end users throughout the year. To that end, we’ll continue to monitor how global services firms react to the evolving cloud market, and how their actions will impact their chances for future success with the cloud.
TMCnet publishes expert commentary on various telecommunications, IT, call center, CRM and other technology-related topics. Are you an expert in one of these fields, and interested in having your perspective published on a site that gets several million unique visitors each month? Get in touch.
Edited by Michael Dinan