The Ball and Chain for Enterprise IT Services

Amazon recently posted its Q2 2016 earnings. It showed that AWS generated $2.88 billion in revenue in the second quarter of this year. That’s 58% more than in the second quarter of 2015. A good summary can be found here. That’s some very special growth indeed, so a big well done to everyone at AWS for making it happen and for all that hard work over the last 10 years and more.

Whilst Amazon is hogging the limelight you can expect that other providers are still getting a slice of this market and growing at their own healthy rates. Synergy Research Group suggested growth of over 100% YoY for both MS and Google (the report listed hybrid and private but these won’t have much impact). All of this states the obvious: healthy growth overall in the public cloud market.

So, observers would say that if you’re a hosting provider you’re probably in trouble. Looking at home turf here in the UK, I see server hosting and “service providers” being squeezed by the public cloud, shooting off in different directions to chase some seemingly elusive differentiation (usually OpenStack installs…). Early next year AWS will be opening a region in the UK and it’ll further put the screws on them, customers can keep their data in the UK AND get a better solution. Companies will ask themselves: why go with a hosting provider rather than public cloud, with a very strong technical solution at a cheaper price? The smart hosting providers have been busy building public cloud practices with the aim of managing the transition and keeping the customer!

Rackspace is an interesting example here. They’ve been busy building an AWS and Azure capability on their foundational business; fanatical support. By all accounts this is shaping up nicely for them, in my opinion it’s a good way for them to exploit weaknesses in others and ride this wave into the Enterprise space, somewhere new to them. Furthermore, as customers move away from their server hosting they can simply redirect them straight into their public cloud managed services.

But what about the big ol’ IT service companies like IBM, CapGemini, Accenture, CSC and so-on? Trends such as in-sourcing aside (and other pressures), one might think that from a services perspective they have a better future given this shift towards utility computing. After all, there is plenty of work to be done. The problem here is that they have something in common with the many hosting providers out there. These big services companies have also been drinking the hosting kool-aid for the past 10+ years, which has skewed their business. They’ve been making easy money and healthy margin on hosting and managing infrastructure for clients. This is also something easy for a sales rep to understand and sell, by the way. Many of them have re-branded this hosting as “cloud”. To the detriment of their cloud consulting, integration and managed service capabilities they have invested money in server hosting and wannabe cloud platforms. This is the proverbial ball and chain. Why should I help a customer consume public cloud rather than sell my own server hosting?

Meanwhile, smaller providers have been taking advantage of this and picking up the public cloud opportunities in the Enterprise space. Some of the other large service companies have been busy focusing on application management services, which is more relevant than infrastructure (they don’t mind where those apps live). That’s good for them, lots of new opportunities to exploit here. Certainly they are well placed to reap the benefits in the global move to public cloud. Mind share for cloud transformation, consulting, integration and managed services for public cloud is dominated by these smaller providers like 2ndWatch, CloudReach and Nordcloud. They are small but often have excellent capabilities to supplement a customers nascent cloud migration, they position themselves as the strategic forward-thinking partner. But, they don’t necessarily have the existing relationships and global reach like some of the larger providers.

The opportunity for a big player is to embrace public cloud adoption, invest strongly in broad and deep capabilities for building solutions and chase the Enterprise-scale transformations and managed services opportunities that are already there or that are starting to emerge. As Drew Firment notes, Enterprises are still in the very early phases of cloud adoption. The larger services companies need to ween themselves off the server hosting and “fake cloud” to set themselves up best for the long term; taking the crown for large scale enterprise cloud transformation and management projects.

Then comes the next challenge; the financials of this new business will be quite different to what they are used to…

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