As infrastructure becomes invisible, we are all service providers

The following is an excerpt of 4Sight, 451 Research's newly-released research framework. In the coming months, we'll be releasing a series of Spotlights on 4Sight and its major themes--Invisible Infrastructure, Pervasive Intelligence, Universal Risk and Contextual Experience.

William Fellows, Founder & Research Vice President, Cloud
John Abbott, Founder & Distinguished Analyst
Al Sadowski, Research Vice President, Voice of the Service Provider

In the course of two decades, the hardware layer of infrastructure has mostly commodified, with the value shifting to software and services; consequently, to the consumers, the actual infrastructure itself – the place where logic is processed and data is stored – is less relevant. As long as it is secure, compliant, reliable, available on demand and cost-effective, they are happy. To the end consumer, the underlying infrastructure is almost entirely invisible. Service providers of all types have to automate service delivery and process – infrastructure is an afterthought at this point – and continually improve their speed and efficiency of reliable, repeatable, profitable services. The cloud era's consumption-based, service-driven, retail model discipline is the engine of transformation.

According to 451 Research's Voice of the Enterprise: Cloud, Hosting and Managed Services, Budgets and Outlook 2017, enterprises cite moving workloads off-premises as the top reason for increasing IT budgets – the clear beneficiary of this transition to hosted applications being hosters and public cloud providers. Every company is becoming a service provider, and software is the new hardware in the digital enterprise. Consequently, service providers will need to raise their software IQs in order to remain relevant.

We Are All Service Providers

Transforming to become a service provider is now the stated goal of many enterprise CIOs and many categories of IT vendors. Powered by the cloud, digital transformation enables even pure product companies to add ongoing services revenue. Public cloud services – and the hyperscale providers in particular – continue to define, dominate and drive the industry's direction.

But how far can this go? Spending on traditional IT infrastructure never fully recovered after the 2008 recession, and there are real concerns about the existential threat this presents to a multibillion-dollar industry that has grown up to support 'on-prem' IT over the last half-century. The lion's share of infrastructure remains very much on-premises, with spending increasingly concentrated among a smaller group of very large technology suppliers. This is still the on-premises providers' game to lose.

Nonetheless, the hyperscale cloud suppliers – Amazon, Microsoft, Salesforce, Google – are gaining greater clarity as they pull away from the pack. The chasing suppliers are swirling in acquisitions and divestments, going private, breaking up. Every major firm is seeking to respond and reorganize for the new conditions.

But even with new niches or pivots, time is not on their side. Most, if not all, have embraced the inevitable, and will be providing access to a range of third-party cloud services in addition to their own, to maintain and expand customer relationships in a multi-service, hybrid cloud world. Almost without exception, every service provider – hyperscalers aside, of course – will therefore become, in some shape or form, a broker of cloud services.

Where is the AWS of network service delivery?
The telecom industry is undergoing a long-term transformation as the value of wireline infrastructure declines. The cloud has been seen as a potential bulwark against this drop, capitalizing on natural synergies between connectivity and clouds. However, colocation and clouds are not cheap. Hosting and cloud services require skills, customer relationships, and the ability to adjust or add services quickly.

Colocation is capital-intensive. Telcos are finding that success requires more money and time than they expected or wanted to spend. Some operators will transition to a new level of automation and access that combines clouds and networks. Others will throw in the towel. The opportunity remains, however: Where is the AWS of network service delivery?

So, the old business models of IT services – landing and expanding, with an expectation that contract value will increase over time – are being replaced by an expectation that technology costs will reduce over time, and that higher value will be delivered during the lifetime of the contract via outcome-based agreements. In a more standardized service world, the buyer expects the supplier to price quickly and accurately, and to carry far more of the risk for the work, which is agile and incremental. IT services firms are adapting their business models to deal with the move to the cloud.

Looking ahead: the next 10 years
Service providers are now looking to gain at least 20-30% of their business from new 'digital ' revenue streams, assisting customers with cloud adoption and associated technologies such as big data, advanced analytics and automation. But instead of trying to compete head-to-head with the hyperscalers (an increasingly perilous aspiration), service providers are finding ways to work collaboratively with them, setting up multi-cloud stories while changing their own focus from infrastructure services to platform services.

Of course, cloud practitioners want to remain in control of their destiny by deploying their own cloud management stacks. But they are now more open to the idea of supporting customers that want to deploy commercial cloud management tools, as well as those that want to run existing internal systems alongside their cloud resources. According to Voice of the Enterprise data, some 58% of enterprises are moving toward a hybrid IT environment that leverages both on-premises systems and off-premises cloud resources in an integrated fashion. Only 4% are building an on-premises cloud for all workloads.

Increasingly, cloud service integrators will move beyond infrastructure, developing their own value-added software assets and investing in open platforms that enable them to operate in wider ecosystems. Managed service providers (MSPs), in order to find competitive differentiation and to meet customer demands, will have to become more specialized, either by developing special skills and focusing on specific technologies, or by focusing in on specific vertical markets.

Services that will become increasingly necessary include lifecycle support and management, ranging from design and deployment to operational management and monitoring. For MSPs, the ability to provide virtual IT management – effectively acting as a virtual CIO by providing high quality, user-focused services – will be their chief differentiator.

Further out, consultants and systems integrators will likely be in a better position to offer digitized business services using their own assets, but closely integrated with the customer's established ecosystem of providers – transforming themselves into service partners that can deliver project-oriented tasks or processes that fit within end-to-end business processes.

And as consultancies take on this system/service integration role, helped by advances in IT automation technology, the classic systems integrators with their large offshore teams will begin to consolidate in order to survive. There will also be a growing risk profile to face up to. As major auditing scandals come to light, the management consultancies will be forced to reduce their exposure when providing digitized business services. This could give the struggling systems integrators a new lease of life as the consultancies offload service lines to them.
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