ISG Provider Lens™ Private Hybrid Cloud - Data Center Services - Managed Hosting — U.S. 2024

Cost optimization and GenAI have become core themes of every digital transformation engagement

Enterprises are gradually recognizing the limitations and challenges of relying solely on public cloud services. As a result, they are shifting toward adopting private and hybrid cloud infrastructure solutions. Various factors, including concerns about data security, compliance requirements, performance optimization and the need for greater control over IT resources drive this transition. By embracing private and hybrid cloud environments, enterprises can enjoy the benefits of cloud computing while addressing specific operational, regulatory and security concerns more effectively. Therefore, ISG has observed that they are increasingly relying on hybrid cloud infrastructure, as it offers the required flexibility, scalability and agility along with the needed control over data residency, security and costs.

In the last four quarters, amid the prevailing economic uncertainties, enterprises have been actively seeking ways to enhance the efficiency and cost-effectiveness of their IT investments. As a result, CTOs find it difficult to justify IT spends. Enterprises are exploring strategies to streamline their IT expenditures, rationalize budgets and maximize returns on technology investments. This entails evaluating existing IT infrastructures, identifying areas for cost optimization and reduction, and adopting innovative approaches such as hybrid cloud computing, automation and outsourcing to achieve greater operational efficiency and financial resilience. They are also maximizing their investments in cloud resources through various methods such as FinOps by placing responsibility on the IT teams for cloud resource consumption.

According to the recent ISG Index™, the Q1 2024 figures for the Americas market saw a slight decline. The combined market (managed services and XaaS) witnessed a 3 percent Y-o-Y decrease, with the ACV reaching $12.1 billion. We observed a slight uptick of 1 percent in ACV, with spending reaching $7.1 billion. However, managed services saw a sharp decline of 8 percent, with ACV reaching $5.1 billion, with a notable decline of 9 percent in new scope contracts and 5 percent in restructured contracts. ISG also observed a rise in contract volume of 2 percent, with 367 contracts in managed services for the quarter. Within managed services, the ACV for the ITO market marginally increased by 1 percent to $3.4 billion, while the BPO market experienced a 22 percent reduction in ACV to $1.7 billion. These market trends signify an emphasis on enterprises engaging with service providers on a short-term basis with more contracts signed with smaller ACVs, reducing the value of ACVs even further.

ISG’s Star of Excellence™ program continues to gain traction and was lauded by several providers for the process and recognition. This program is based on the voice of the customer concept. The 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 North America’s average provider CX score for the Private Hybrid Cloud domain was 68.1 in 2023. Some of the top providers with high CX scores are Accenture, TCS, HCLTech, Zensar, NTT DATA, Kyndryl and Rackspace Technology.

Below are some of the trends observed last year:

Increased AI and ML technology usage: This year, ISG has observed more solutions leveraging AI-based cognitive capabilities and/or ML tools and services to provide highquality outcomes, speed up service delivery, improve IT efficiency and deliver a superior UX. Providers have developed tools that take data from various sources to predict downtime and implement self-healing measures to prevent such situations. AI for IT operations (AIOps) has also become popular. It can monitor various elements of the entire hybrid environment and provide predictive analytics for incident management to aggregate events, reduce noise, and auto-correlate and identify the probable root cause using ML technology.

Shifting dynamics in data center usage: Enterprises are undergoing a significant shift in their approach to data center management, characterized by a reduction in the physical footprint of their own data centers. They are increasingly turning to alternatives such as public cloud infrastructure or colocation providers. This strategic shift is driven by various factors, including the desire to optimize costs, enhance scalability and improve operational efficiency. In parallel, colocation providers are ramping up their investments to expand their portfolio of data center facilities. This surge in investment reflects the growing demand for colocation services as enterprises seek reliable, secure and scalable infrastructure solutions to support their evolving IT needs. By leveraging the expertise and infrastructure offered by colocation providers, enterprises can achieve greater flexibility, agility and resilience in managing their IT infrastructure while focusing on core business objectives.

Commoditizing specialized hardware: AI and ML applications demand substantial processing power and robust servers. It requires specialized hardware solutions, which were historically scarce and costly. However, the landscape is evolving as efficient infrastructures equipped with specialized high-performance computing (HPC) equipment emerge. Chip companies such as NVIDIA, Intel and AMD are developing highly efficient hardware. These advancements enable the deployment of AI-based cognitive capabilities and ML tools at scale, empowering organizations to harness the potential of these technologies more effectively. By  leveraging these, businesses can overcome previous limitations and drive innovation in AI and ML, unlocking new opportunities for data-driven insights and transformative applications across various industries.

Cautious approach toward investing in (generative AI) GenAI capabilities: Many enterprises are eager to comprehend the transformative impact of GenAI on business operations. Assessing the costs and benefits of GenAI entails thorough analysis to differentiate between inflated expectations and tangible outcomes. While cost remains a significant consideration, substantial reductions may take time to materialize due to high demand. This surge in demand for GenAI necessitates increased data center capacity, while GenAI is readily accessible via cloud platforms, with all major hyperscalers offering extensive language  models. Over time, GenAI is expected to become more commonplace, but currently, organizations grapple with budget allocation for GenAI initiatives, often falling under IT’s purview. The focus of these investments in GenAI was on empowering enterprises with actionable insights, predictive analytics and intelligent automation capabilities. From ML models to analytics solutions and AI-powered operational tools, service providers sought to equip enterprises with the tools and capabilities needed to drive significant business outcomes and foster innovation. Moreover, these efforts aimed to pave the way for creating new revenue models, enabling enterprises to capitalize on the transformative potential of AI technologies.

The VMware Dilemma: Following Broadcom’s acquisition of VMware in 2023, the company made alterations to VMware’s licensing terms and pricing structure, emphasizing a subscription-based model. These changes have had a major impact on nearly all enterprises and service providers that leverage VMware solutions. Some providers are considering transitioning to Red Hat OpenStack technology, as the associated support costs are lower compared to VMware licensing fees, while some are planning for Hyper-V offerings to cater to Microsoft-related solutions or altogether move to hyperconverged infrastructure (HCI) and look at solutions offered from Nutanix and other HCI vendors. ISG will continue to monitor the impact of the VMware market to report the changes in 2024.

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