ISG Provider Lens™ Public Cloud - Services & Solutions - Hyperscale Infrastructure and Platform Services - U.S. 2021
In the past couple of years, ISG has seen strong growth in demand for multicloud services from enterprises of all sizes. Enterprises have recognized that moving to cloud is beneficial to their business. They are now willing to approach managed services providers to move to the cloud the right way and choose the right cloud for a particular workload as well as leverage multiple clouds to avoid vendor lock in. In the past, there were multiple cloud systems, but each one of them functioned independently. However, now there is a shift toward multiple cloud systems, which are interconnected, integrated and managed, and thus, creating a complex environment of multi hybrid cloud systems.
The COVID-19 pandemic has changed the way most enterprises operate today, and the cloud ecosystem has played a major role. As the world moves to a near normalcy where employees have started returning to office, we strongly believe that the hybrid model of working will still continue where some form of restrictions will remain, and employees will have an option to work remotely. Most managed services are now virtually and remotely delivered, including transformation and migration of workloads, sales activities and due diligence. These activities are most preferred now to achieve faster, better and cost-effective delivery.
In the last financial year, almost all service providers have observed significant growth in their cloud practice and have several deals in pipelines. This completely aligns with ISG’s predictions that the number of companies planning to outsource their managed cloud services activities will grow significantly in 2020, and this trend is expected to continue in the coming years. In the recent ISG Index™ call, for the Americas market, we saw that IaaS has gained more traction in the first half of 2021 and grew by 24 percent when compared to the last year, with the annual contract value (ACV) reaching to US$7.4 billion. ISG also observed that the SaaS market grew by 15 percent and reached to an ACV of US$3.7 billion, when compared to the growth in 1H20, which was 11 percent.
ISG also observed an increasing number of providers investing in talent upskilling in the U.S., mainly due to the shortage of skills in the market. Service providers are working closely with hyperscalers and third-party training institutes to train and certify their talent pool of engineers in cloud technologies to support the rising demand and cloud market growth. A few providers are leveraging automation techniques to counterbalance the skill shortage, enabling them to support more clients. The service provider community uses several platforms and tools to automate cloud operations. Leveraging AI and machine learning technologies has also become a norm and creates a differentiation with the level of automation they can achieve, which can vary from 30 to 70 percent. Some companies are using automation to enhance customer experience and improve the bottom lines. Also, DevOps and security configurations for application migration have been widely adopted, with an accelerated acceptance in cloud native transformation initiatives.
Some of the trends that we are seeing in this space are as follows:
Business value focused engagements: Some of the provider leaders in the cloud consulting and transformation segment have shifted the conversations with enterprises to deliver business value, while helping them with application transformation strategies, rather than just migrating their workloads to the cloud. Service providers are helping them create a roadmap that suggests whether the workload needs a lift-and-shift transition or whether it should be rearchitected or replatformed to improve the performance and reduce the costs for running the workload. They have changed their commercial models wherein they are seeing several enterprises wanting to engage in value-based deals as it benefits the clients significantly. Providers offer a comprehensive partnership and bring value through CXO level agendas in every organization of the enterprise. Although this model has high investments and high risks, the outcomes or value realizations are immense to both the provider and its clients.
Investment commitments in cloud: In the last couple of years, we have seen several large global service integrators committed to investing in growing their cloud practice in some form or the other. They are investing in building a robust cloud partner ecosystem and developing intellectual properties by integrating the best of breed capabilities to improve client satisfaction. The investments can be seen primarily in developing cloud-focused offerings, creating innovation architecture, increasing the number of employees with cloud certification and creating cloud innovation labs, which are developed in collaboration with the cloud providers such as AWS, Azure, GCP and IBM. This has helped the providers to better orchestrate the cloud journey for its clients and improve the outcomes and deliver better customer experience.
The rise of cloud FinOps: Since early 2020, the adoption of FinOps principles and frameworks has grown considerably and will continue to grow their community every day. FinOps increases the business value of cloud by bringing together technology, business and finance professionals with a new set of processes, which helps the organization to efficiently monitor and track all their cloud resources, eventually reducing the cloud bills. FinOps practitioners continuously align and optimize their cloud investments to drive strategic business initiatives and bring in the needed discipline of using cloud resources effectively. The FinOps Foundation, a part of the Cloud Native Computing Foundation (CNCF), has been active in spreading the awareness of its principles. There is a large growing partner ecosystem, consisting of vendors and global service integrators, along with community members contributing to the FinOps initiative. Cost analysis and allocation tools such as VMware’s CloudHealth or Apptio’s Cloudability are prominent vendors in the market and play an important role in many organizations’ FinOps journeys, as they help keep the finance and procurement team informed, enabling forecasting and driving accountability toward the actual users. These tools offer visibility and direction toward long-term purchases such as savings plans and reserved instances to reduce cloud bills.
Innovating through strategic collaboration: ISG has observed that many service providers have entered into strategic relationships with public cloud infrastructure providers such as AWS, Microsoft Azure and Google Cloud Platform. They work closely to co-develop cloud offerings and have a joint go-to-market strategy, which is a win-win situation for all involved parties. This collaboration brings in the best-in-class technologies, along with the best practices to develop cloud solutions for faster migrations, improved efficiencies in cloud resource management, increased adoption of next generation technologies and more. Providers and hyperscalers are also doubling their efforts on improving and strengthening security measures to help enterprise customers improve their customer experience in a highly secure cloud environment.
Consulting and transformation services (CATS) for large accounts: In the large enterprise market, ISG observed a change in the way of migrating workloads to public cloud. Cloud-native transformation was given a precedence by both providers as well as enterprises. The enterprises recognized that with a lift-and-shift method they cannot get the most of out of cloud environments, and instead should move the workload through rearchitecting. Also, leveraging microservices architecture and other cloud-native technologies will benefit in the long run. They are also leveraging AI and machine learning technologies to decide which workloads to prioritize based on the severity and criticality to the business. Large global service integrators were also seen to acquire firms in the U.S. to bolster their cloud transformation capabilities and bring in the niche capabilities required to fill their gaps.
Consulting and transformation services (CATS) for midmarket: The providers catering to the small and medium-sized enterprise market segment saw significant growth in their cloud business. As the enterprise affected by the pandemic want to promptly move many of their workloads to cloud, the midmarket providers have been more than accommodating and going above and beyond to satisfy the customers and fulfil their requirements in a tight deadline. Many providers in this space were seen leveraging automation as key differentiation and pushing for cloud native transformation engagements. Also, we observed that providers took a platform-driven approach, where they leverage several proprietary platforms developed by them in-house to discover, assess and migrate workloads to the cloud as well as automate most of this process. Providers in this space were able to make a deep impact in the market by helping clients with their cloud journey in a cost-effective manner.
Managed services for large accounts: As the demand for cloud adoption grows significantly and moves from virtual machine-centric adoption to microservices architecture with containers and serverless architectures, the roles and activities under managed services have changed considerably. Large global service providers have been investing in empowering the developers with more self-services capabilities and enabling robust engineering of the cloud platform to become more self-managing and automated healing. Also, as enterprises migrate and modernize their applications for cloud, the main challenge observed was for them to transform their operations to meet the requirements of the modern applications and adopt modern cloud management services with principles of site reliability engineering, DevOps and infrastructure as code. It will also require large enterprises to transform their existing teams and process to focus more on optimization, automation and adoption, rather than focusing on standard ITIL framework of incident, problems and changes. Service providers catering to this market segment were seen to increase their cloud practice by certifying their cloud engineers in hyperscaler technologies, along with strategically engaging with the public cloud providers to develop joint go-to-market strategies and help large enterprises in the U.S. to manage their public cloud infrastructure efficiently.
Managed services for midmarket: The midmarket segment saw considerable growth in managed public cloud services space when compared to the large market segment. Service providers were successful in bringing in new clients and create an impact by helping them move their workloads to cloud environments more efficiently and at lower costs. To achieve this, service providers in this segment were seen heavily leveraging automation capabilities to improve operational efficiencies. They helped enterprises automate the complete management of the application and infrastructure stack. This, in turn, reduced the downtime, improved productivity and minimized the number of errors, which was beneficial, especially during the COVID times. Providers in this space developed in-house and third-party tools and platforms for better managing the multicloud infrastructure.
Infrastructure- and platform-as-a-service trends: With large number of workloads moving to the public cloud, system integrators and service providers are strengthening their credentials and partnerships with hyperscalers, as they are being viewed as key strategic partners by both service providers as well as large enterprises. Hence, public cloud infrastructure providers are doubling their efforts to improve and strengthen security measures for their offerings to entice customers that are hesitant to move to the public cloud due to security concerns. This has led to major investments by the hyperscalers in cyber competencies and expertise to prevent cyberattacks and help clients leverage their infrastructure with more confidence and entrust their mission-critical workloads on the public cloud. Hyperscalers are also developing vertical-specific offerings, especially in highly regulated industries where they must adhere to the regulations and compliance requirements.
SAP HANA infrastructure services trends: SAP has been working closely with the hyperscalers and has developed a robust partner ecosystem in the U.S. The announcement of RISE with SAP has accelerated the migration of SAP workloads to the cloud in 2021. In the U.S., hyperscalers are competitive and are assessing every SAP deal and are aggressively helping clients migrate their large complex SAP workloads to their cloud by incentivizing them and offering discounts. Although enterprises do not have any preferred cloud provider, they tend to migrate their workloads with the hyperscaler they are already familiar with or have a close relationship built over the years.
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