Studies show managed services layer is a major cloud service opportunity

Analyst: Liam Eagle

 
Enterprise adoption of cloud infrastructure offerings and SaaS is accelerating, while the dominance of hyperscale providers is increasing in the public infrastructure-as-a-service (IaaS) cloud market. However, other service providers – including those with a history of providing managed hosting and operating infrastructure of their own – have a notable role to play in the cloud adoption process for the majority of enterprises and smaller businesses. That role is likely to include designing, managing and securing public cloud resources, as well as potentially supplementing them with private cloud resources of their own.

The nature of this role, and the degree of its significance, is supported and detailed in part by a study conducted in the first half of 2016 by 451 Research, and commissioned by Microsoft. In particular, the study results detail the nature of the cloud transformation taking place in the enterprise, and they offer insight into how service providers might take advantage of new opportunities emerging as a result. Understanding and acting on this fundamental shift will be extremely important for traditional hosting providers, as growth continues to dwindle in the core legacy facets of that business, such as shared and dedicated hosting.


The 451 Take


Security and other managed services are likely to play an increasingly important role in the adoption of cloud-based infrastructure and applications as that adoption reaches the majority of enterprise customers. These businesses are far less likely than the early adopters to possess the skill set within their IT departments to effectively manage the security, performance and cost of hosted and cloud infrastructure and applications. Being an enabler (in the sense of providing managed services, regardless of the infrastructure or application platform) may represent a more exciting prospect for businesses with expertise in managed services than being an operator. This is likely true even for many companies that have existing investments in the business of operating infrastructure. Our research supports this trend, as do the growing efforts of hyperscale public cloud vendors at building partner network systems, and the increasing number of managed hosting businesses transitioning to models that incorporate support for third-party public cloud IaaS and SaaS.
Cloud as a transformative force in the hosting space

We have seen a stratification within the hosting space across a set of products that includes pure utility IaaS (of the type offered by Amazon Web Services, Microsoft Azure and Google Compute Engine) at one end, and pure SaaS at the other end (a broad spectrum of products that includes Web presence services, and business tools, such as Office 365).

From a service provider revenue perspective, cloud is quickly becoming more prominent. 451 Research's Market Monitor service estimates the cloud portion of hosting and cloud revenue (including IaaS, PaaS and IT software as a service) will grow to almost 30% of a $134bn market in 2019, up from 7% of a $26bn market in 2010.

One major takeaway from the growth rates in hosting and cloud is that utility infrastructure is becoming a major force in the market – a huge source of future revenue, and the best execution venue for a variety of workloads that include many currently running in more traditional hosting environments. Another takeaway is that despite this growth in cloud, managed hosting remains the largest single opportunity in the overall hosting and cloud market, representing more than 50% of the market through 2019.

As a handful of hyperscale vendors assume dominant positions in the public cloud market, it is becoming clearer that managed services around applications, security and other management functions are core to the value offered by managed hosting firms. Their margins are likely more closely attached to those managed services than to the operation of those underlying infrastructure resources.

Cloud infrastructure is widely treated by service providers and customers as a commodity. The infrastructure market is a difficult one in which to compete on price and margin. Although it is certainly possible to deliver utility infrastructure at a price competitive with the large public cloud vendors, it is difficult to approximate their cost structure, and even more difficult to engineer and introduce new features at a comparable pace.


Cloud transformation in the enterprise


According to 451 Research's Q2 2015 Voice of the Enterprise (VotE) Cloud study, enterprises expect to dramatically shift business application workloads to cloud during the next two years, with the percentage running in cloud environments expected to jump from 38% to 56% by 2017. Those numbers include on-premises and hosted private cloud environments. However, cloud service providers currently account for 60% of cloud workloads, and are expected to account for 68% in two years.

Results from the previously cited Microsoft study indicate that the key drivers of this transformation are shifting, as business priorities move toward improving product or service quality, and increasing revenue. These priorities are rising in significance as objectives – at the expense of, for instance, lowering costs.

The study also indicates that infrastructure is only a part of the overall hosting and cloud picture for enterprise consumers, representing an estimated 29% of their spending – with security services, managed services and applications hosting representing 23%, 22% and 26%, respectively. These services represent the larger part of hosting and cloud spending, and the numbers may help to crystallize the opportunity for service providers in addressing the specific application and security needs of customers.


The cloud services layer


Managed services have historically been a component of managed hosting, whereas cloud infrastructure tends to refer to a utility-like service. However, we have begun to see adoption of cloud infrastructure by a range of customers that rely far more heavily on enablement services, including managed services in the categories described above, along with an up-front range of professional services such as cloud transformation (the development of an overall strategy), cloud readiness assessment and cloud migration. These professional services all rated among the top cloud and hosting services in the 451/Microsoft study.

We are also seeing a growing number of managed hosting firms recognizing those managed services as their core competency, and extending their reach beyond their own infrastructure to include third-party public cloud. Many hosting providers are beginning to regard partnerships as the answer to the question of how to compete with AWS and Azure.

The concentration of this expertise in a services layer between the cloud infrastructure and the user is of benefit to all parties. For the hyperscale vendors to build an at-scale managed services practice would be extremely difficult and costly. Recognizing this, these businesses are doing extensive work to support the efforts of partners. For enterprises, the concentration of expertise in this layer makes it easier (and potentially much more affordable) for businesses to access costly and uncommon cloud operational expertise.

The 451/Microsoft study addressed the managed services layer in more granular detail, finding that hosted private cloud ranked highest among infrastructure services; security, email and productivity and networking services rated most highly among application services; and web application firewall, endpoint security and data encryption rated most highly among security services. Notably, the demand for security permeates this list, particularly if the single-tenancy of private cloud is considered to have security value.

For service providers, although the delivery of these services requires human intervention, many parts of that delivery can also be automated, making the managed services portion of the hosting and cloud business far more scalable than traditional IT outsourcing, and more achievable from a smaller starting point.

Managed services are the among the best ways for a service provider to get closer to a hosting customer's workloads, to their specific pain points for technology adoption, and to their business outcomes, which can make a service a lot more valuable to that customer.


Hybrid cloud


The VotE cloud survey from Q2 2015 indicates that, among users of cloud, 69% report using multiple cloud environments at the least, with varying degrees of interoperability, up to the point of seamlessly delivering a single business function. The ability to deploy onto multiple cloud environments, to source those various environments, manage their performance and security, and to support interoperability, is a significant part of the value a cloud service provider can bring to the table around a customer's consumption of cloud.


Provider loyalty, churn and customer value


One key area explored by the 451/Microsoft study was the prospect of lifetime value of hosting and cloud customers. The use of multiple providers for hosting and cloud servers is widespread, with very large (5,000 or more employee) businesses averaging 18 providers, and medium (25-499 employee), small (50-249 employee) and very small (10-49 employee) business averaging five providers each. However, almost half (48%) of total cloud spending is with respondents' primary providers. Renewal rates with those primary providers across categories of customer size was consistent, and averaged at 95%, while the average number of years with a primary provider was 3.2. This means lifetime value of a very large customer for a very large business (with an average monthly spend of $30,326) is $5.2m, and for a very small customer (with an average monthly spend of $2,036) is $0.6m. The opportunity is vast, but it is critical that service providers act as the primary vendor.


Recommendations


Cloud technology has clearly transformed the way we operate and orchestrate infrastructure. However, the availability of on-tap utility infrastructure is not a universal solution for all enterprise customers. Managed services will continue to drive much of hosting and cloud service consumption, with public cloud likely to present traditional managed hosting providers with a larger opportunity to apply management expertise.

Complexity will continue to grow, however, with the breadth of services presenting customers with more reason to work with multiple providers. Service providers must recognize this, and adapt by supporting hybrid configurations, focusing on lifetime customer value and working to position themselves as the primary providers to their customers, large or small.


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