Executive Summary: ISG Provider Lens™ Private/Hybrid Cloud - Data Center Services - U.S. 2023

The individual quadrant reports are available at:

ISG Provider Lens™ Private/Hybrid Cloud - Data Center Services - Colocation Services - U.S. 2023

ISG Provider Lens™ Private/Hybrid Cloud - Data Center Services - Managed Hosting - U.S. 2023

ISG Provider Lens™ Private/Hybrid Cloud - Data Center Services - Managed Services for Large Accounts - U.S. 2023

ISG Provider Lens™ Private/Hybrid Cloud - Data Center Services - Managed Services for Midmarket - U.S. 2023

Managed services are moving toward industrialized service delivery models and cost optimization

In the last four quarters, enterprises marginally restricted their spend on cloud technologies and business models to bring innovation and value to their end users. They are benefiting from using cloud computing environments and leveraging cutting-edge technologies  like AI, analytics and RPA, which are speeding the rate and pace of technological improvements and UX. Hybrid cloud has become the norm in the last few years, with private cloud having the lion’s share. With the growing demand for hybrid cloud solutions, IT  infrastructure environments have become more complex and difficult to manage. Enterprises are now more open to outsourcing these operations to service providers that have significant expertise in managing hybrid cloud infrastructure for enterprises in multiple  industries. Some of the key variables influencing outsourcing decisions are the integration and consolidation of data centers, server performance, virtualization, containerization, governance and compliance, downtime and data loss. ISG observed that due to inflation and several economic and political downturns, enterprises were seen spending less or holding or pushing their infrastructure transformation engagements to the next year. They are more cautious and strategic in their outsourcing decisions to manage their costs effectively in  this volatile economic scenario. This is corroborated by our ISG Index numbers, present in the Introduction part of the report. 

We have also observed that providers have been increasingly trying to make customers aware of the need to standardize infrastructure, as this can enable them to offer better services at a lower cost. Several benefits can be achieved through standardization, such as:

• It enables providers to automate infrastructure operations and reduce the need for manual intervention, which can lead to significant cost savings and improved efficiency.
• Standardized infrastructure allows providers to scale their operations more easily and quickly; they can simply replicate the standardized components across different locations and customers.
• Standardization also enhances the reliability and consistency of the infrastructure, which can improve customer satisfaction and reduce the risk of downtime and service disruptions.

By standardizing infrastructure services through infrastructure as code (IaC) and software defined infrastructure, providers can achieve greater efficiency, scalability and reliability, which can ultimately benefit both providers and enterprise clients.

ISG’s Star of Excellence™ program was very well received and has gained significant traction during the last four quarters. This program is based on the voice of the customer concept. Providers are rated on six parameters: service delivery; governance and compliance; collaboration and transparency; innovation and thought leadership; people and culture fit; and business continuity. The score/data comes from a Star of Excellence study that measures CX with providers based on direct client feedback.

ISG found that the average provider CX score for the private/hybrid cloud domain in North America was 79.6 in 2022. Accenture, Cognizant, HCLTech, Microland and PwC were the top five providers with above-average CX scores.

Some of the trends observed in the last year are:

Infrastructure modernization has become inevitable: Several enterprises in the U.S. have been using their IT infrastructure for several years or even decades, and these infrastructures have reached the end of their life; they are no longer able to keep up with the  demands of modern applications and business processes and are more vulnerable to security threats and other risks. As modernizing IT infrastructure requires a significant investment of time, money and resources, as many enterprises see it as a big bet. Service providers offer a thorough assessment of the existing infrastructure, identify the gaps and inefficiencies, and develop a roadmap for how to update or replace these systems. However, the payoff is not immediate, and there may be risks involved, such as  disruptions to business operations during the migration process. Overall, infrastructure modernization has become a critical step for many enterprises to stay competitive and meet the evolving demands of the digital age. While it may be a big bet, the potential rewards are substantial, notably improved operational efficiency and enhanced business outcomes. 

Evolution of hybrid cloud to polycloud: As cloud providers, particularly AWS, Microsoft Azure and Google Cloud, continue to distinguish their offerings in 2023, we anticipate businesses to be very deliberate about where they put their workloads. With this polycloud  strategy, applications will have access to the best-ofbreed services available for their use case, be it an industry-specific cloud solution, a specialized database or an AI and ML service. Businesses will embrace their on-premises and private cloud footprints in their  roadmaps as they continue to recognize that not all workloads belong to public cloud, primarily owing to cost, performance and regulatory factors.

Cloud cost optimization is a top priority: Enterprises have changed their 2023 objectives to focus on cost reduction and efficiency because of the likelihood of an upcoming economic downturn. As a result of the rapid expansion of public cloud usage over the past  two years, cloud expenses are one of the greatest areas for cost reduction. To uncover opportunities to optimize and monetize cloud transitions, IT, finance and FinOps teams are visualizing their TCO across their full hybrid cloud footprint (on-premises and private and  public clouds). After achieving elementary cost reductions through basic FinOps in 2021 and 2022, organizations are now aiming to rearchitect their applications to make use of more affordable, cloud-native technologies, such as serverless, to further optimize their  cloud spend.

Midmarket providers winning more deals: We have seen several large global system integrators losing clients to many midsize providers. Some of the key reasons are:

• Cost: Midsize providers are able to offer more competitive pricing, as they have lower overhead costs and are more agile in adapting to changing market conditions.
• Innovation: Midsize providers are more agile and innovative and are able to respond more quickly to emerging technologies and trends. Some also offer more cutting-edge solutions.
• Personalized services: Midsize providers give more attention and focus to clients and have more flexibility to tailor their services to the unique needs of their clients, unlike the standardized service offerings provided by large providers.

Overall, the reasons for the shift in business from large to midsize IT infrastructure service providers are likely complex and multifaceted, with a combination of factors at play.

Changing hosting landscape: Within the managed hosting domain, U.S. enterprises continue to give priority to OpEx models for hybrid cloud deployments. However, there are important issues that influence sourcing selections, such as the difficulty in replacing hardware and poor profit margins. The widespread use of VMware technology by service providers in hosting settings is reducing technological distinction at a lower level in hosting environments. Enterprises in several industries are investing in improving  security protocols and automated managed backup and recovery services that use cutting-edge computing and AI technologies. As a result, for applications that require low latency, businesses are turning away from on-premises infrastructure and instead opting for  services that are closest to the workload.

Rapid growth in the colocation business: Over the last two years, the colocation business in the U.S. has undergone substantial growth. Providers have made significant investments to increase their regional data center presence, primarily in the Southwest region,  which is attracting many technology firms and other establishments from places like California. Colocation providers were seen offering tailored colocation solutions and establishing stronger partnerships with technology vendors and network service providers. This is  aimed at improving IT operations, reducing latency and enhancing network performance for businesses of all sizes. U.S.-based colocation providers are increasingly prioritizing environmental, social and governance (ESG) mandates and green initiatives. Few providers are setting targets for sustainability measures and committing to using renewable energy sources to power their colocation facilities. Furthermore, there is a growing emphasis on ensuring that data center facilities comply with standards such as LEED and  Energy Star.

Colocation facilities with near proximity are the preferred choices among enterprises, as they are looking to grow business with an asset-light strategy. This enables them to access modern data centers while achieving greater cost efficiencies. Public cloud providers are also relying on colocation providers to expand their business in existing and new geographic locations. Colocation providers are upgrading their capabilities to offer smooth integration with hyperscalers and edge data centers, enabling them to support  emerging applications in AI, IoT, big data and more.

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