ISG Provider Lens™ Public Cloud - Solutions & Services - Managed Public Cloud Services for Midmarket - U.S. 2022

Cloud transformations are becoming more business value driven

In today’s world, to enable key business initiatives, cloud adoption plays a central and leading role in ensuring enterprise continuity. Enterprises are dependent on IT’s ability to deliver technology and solutions that provide differentiation in the market. The public cloud service market continues to grow as observed in previous years. This is mainly due to the acceleration of digital business transformation programs undertaken by enterprises to grow their businesses and improve customer experience (CX). Cloud migration and application modernization represent the leading enterprise initiatives. Data and analytics come third on the priority list, with cloud governance interest increasing in enterprises.

Based on ISG’s estimates, we have observed that the overall cloud services market has grown by approximately 50 percent in the U.S. since last year. However, when we looked at the global geography, the growth was more than 100 percent during the period. This shows that although the U.S. is one of the major markets in the world, its growth rate is half when compared to the global cloud services growth rate. In the ISG Index™ call for the Americas market, we reported that XaaS gained significant traction in the first half of 2022 and grew by 42 percent when compared to last year, with the annual contract value (ACV) reaching $16.1 billion. ISG also observed that within XaaS in Q2 2022, the IaaS market grew by 44 percent to $5.6 billion and the SaaS market grew by 21 percent to reach an ACV of $2.5 billion.

Recently, ISG rolled out the Star of Excellence™ program, which is loosely based on the voice of the customer concept. Here, providers are rated on six parameters, namely Service Delivery; Governance and Compliance; Collaboration and Transparency; Innovation and Thought Leadership; People and Culture Fit; and Business Continuity. The scores and data come from the Star of Excellence study that measures CX with providers, based on direct client feedback. ISG found that the average provider CX score for the public cloud domain in North America was 71.3 in 2021. Accenture, Hexaware, Microland, Mindtree, Persistent Systems and Tech Mahindra are the top six providers with above-average CX scores. Accenture won the overall global public cloud Star of ExcellenceTM award for 2021.

Some of the trends observed over the last year are presented below.

Growing multicloud strategy: ISG observed that enterprises have realized and have been dissatisfied with the vendor lock-in practices public cloud providers follow, as the practices have resulted in high costs and very little room for negotiation. Additionally, the lack of interoperability between two or more public cloud providers is a hindrance. As enterprises start to engage with more than one hyperscaler, they are now negotiating the usage prices, because of which the market has become more competitive. According to ISG’s estimates, almost three out of four public cloud consumers/ enterprises have been using a multicloud environment, and this trend is expected to grow.

AI and machine learning become a popular choice for analytics: Until last year, analytics was leveraged mostly by mature enterprises. However, now, organizations of all sizes have realized they have massive amounts of data around cloud usage and other resources and that they should leverage AI and machine learning technologies at scale. Their motivation is to bring in more insights and metrics for improving efficiencies and finding new business models and revenue streams. There are several reasons why AI and machine learning services have become popular. One such reason is with these services, enterprises do not have to invest time and money in advanced capabilities such as AI and data science. Instead, they can experiment with these technologies by doing some small proofs of concept (PoCs) and then pick their battles.

High demand but shortage of cloud skills continue: As we see a rapid rise in digital transformations across enterprises of all sizes, we are seeing an increase in the demand for cloud migrations and transformations. Consequently, there is very high demand for the cloud-related talent pool. There is fierce competition among service providers to hire the best talent in the industry. The candidates are being paid attractively to join their organizations. This increase in costs has hampered the margins of service providers, but now these costs are trickling down to enterprise clients. Service providers have also initiated several training programs in the past several years, as they have been informed of these demands by the analyst community, but still, there is a huge gap between the supply of and demand for cloud skills.

Security is a key pillar: One of the high priority items within any cloud engagement is security and securing data in cloud environments. As enterprises adopt digitalization and expand their remote workforces and hybrid IT solutions, there is a consequent high demand for agile security systems to protect sensitive data, workloads and applications. Service providers are offering unique combinations of physical and cybersecurity practices to combat ransomware and distributed denial of service (DDoS) attacks. This trend is expected to gain more traction among organizations for which security is a critical component. Most or all providers are offering security as a part of the bundled deal to secure the end-to-end infrastructure and data of enterprise clients.

FinOps is the norm: Cloud consumptions are rising, so is cloud spending. One of the top priorities for enterprises has been to control, manage and optimize cloud expenses. Many enterprises are finding it difficult to manage cloud spending due to the complex and vast cloud ecosystem. Therefore, FinOps has been growing rapidly since last year and is one of the hottest topics. ISG has observed that nine out of 10 conversations with clients are around cloud cost optimization. Service providers are playing an important role here and are helping enterprises manage costs efficiently because they have years of experience in managing cloud infrastructure and assets for multiple customers.

In the Consulting and Transformation Services (CATS) for Large Accounts quadrant, ISG observed that the conversations were mainly around providing better business value by leveraging public cloud environments. The transformation of an enterprise’s legacy environments to public cloud requires a significant level of investment and maturity from the client’s side. Therefore, to convince clients to spend large amounts of money on modernizing their infrastructure assets, providers need to show the value they will get over the years. Cloud-native transformation was made a priority by both providers and enterprises. Enterprises have now realized that moving to cloud in an accelerated fashion will not yield better results. Therefore, they now understand that by using the lift-and-shift method, they cannot get the most of out of cloud environments and instead should move the workload through rearchitecting or refactoring. Leveraging microservices architecture and other cloud-native technologies also will benefit in the long run.

In the Consulting and Transformation Services (CATS) for Midmarket quadrant, some of the midsize providers are purely focusing on catering to the small and midsize enterprise market segment. They are seeing significant growth potential, and many of the large global service providers prefer working with large enterprises and often disregard small and midsized enterprises. Midmarket providers have been highly accommodating and are going above and beyond to satisfy customers and fulfil their requirements on a tight deadline. Many providers in this space leverage the lift-and-shift methodology to speed the migration process. We also observed that these providers took a platform-driven approach, where they leveraged their proprietary tools and solutions developed in-house to discover, assess and migrate workloads to cloud and automate most of the processes. Enterprises were happy with these providers because they were able to help them with their cloud journey in a cost-effective manner, along with improving the overall CX.

In the Managed Public Cloud Services for Large Accounts quadrant, we foresee that very few MSPs will thrive and grow, as the market has become very competitive. Therefore, providers in this segment are taking a platform-driven approach, where they are creating differentiators with their proprietary platforms and vertical-specific offerings that provide additional features, apart from the traditional cloud managed services. This includes FinOps services, AI- and machine-learning-led analytics and actionable insights, and new revenue-generating business models. Providers are also engaging with hyperscalers in strategic partnerships, by co-developing solutions and having a joint go-to-market strategy.

The Managed Public Cloud Services for Midmarket quadrant ecosystem has been growing rapidly. Small and midsize providers are gaining traction with their unique offerings of public cloud managed services for multicloud environments. There has been some consolidation in the U.S. market through acquisitions. Hyperscalers are conducting yearly audits and making the MSP certification eligibility criteria even more stringent, thereby making certified MSPs an exclusive club. Most of the service providers in this segment used automation tools in some form or the other to manage clients’ cloud infrastructure, but many were not seen leveraging AI and machine learning technologies to further enhance their automated processes.

The Hyperscale Infrastructure and Platform Services market has been very competitive in the U.S. The eight major providers that were rated have been developing new vertical- and technology-specific services and solutions to create differentiation, especially the top three—AWS, Microsoft Azure and Google Cloud. The overall market has seen exponential growth, which is expected to continue in the coming years. The growth in public cloud adoption can also be attributed to cloud-native application development and the increased use of containeriza¬tion and microservices technologies for application development and deployment. This has led enterprises to achieve their cloud journeys much easier and faster.

The SAP HANA Infrastructure Services market continues grow steadily, as enterprises are gaining confidence in the public cloud infrastructure. Owing to the enhanced data security and cost effectiveness of public cloud infrastructure, enterprises have started to migrate their critical workloads to public cloud platforms. For existing clients, SAP offers attractive deals when they consider migrating their SAP products to cloud, thus further pushing cloud adoption. However, for new clients willing to install SAP S/4HANA, and many other SAP products, SAP no longer offers perpetual licenses for on-premises deployment, and the cloud is their only option. The SAP RISE program helps accelerate clients’ migration to cloud. It bundles pay-per-user SAP S/4HANA licenses and cloud infrastructure, which looks like a SaaS model. With SAP RISE, many clients think all clouds are equal. However, the reality is slightly different. SAP does not provide cloud migrations, and clients need to choose their preferred partner, with both SAP and cloud expertise. Enterprises need to tie up with service providers that are experts in this market. The providers should have vast experience in migrating large complex workloads and offer automation features to assess, plan and migrate SAP to cloud, including legacy ECC systems, data warehouses, documents and files. This will enable enterprises to migrate smoothly without any disruptions.

Access to the full report requires a subscription to ISG Research. Please contact us for subscription inquiries.