Cloud the Impact on IT Services

The Cloud's

Impact on

IT Services

Providers

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Ned May

SVP Research

HfS Research

Puneet Shivam

Co-head IT Practice

Avendus Capital

Jeff Baker

VP, IT Practice

Avendus Capital

[email protected]

[email protected]

[email protected]

Dear Reader,

As the role that the Cloud is playing in transforming the technology

landscape continues to increase, it has become the topic that is on

the minds of many within the industry, and with those that invest in

both software and services. Given this, there isn't a lack of

research reports or bold predictions about how the Cloud will

transform enterprises. However, in covering this market we found

that amongst the available research there was a lack of focus on

what the effect of Cloud would be on providers of IT services. The

companies who have largely been built by providing supporting

services to non-cloud products, or to build custom applications and

linkages between disparate systems, otherwise known as system

integrators. What we tried to accomplish in this report was an

understanding of what the current transformation could mean to

these system integrators, and what we found formed the basis for

this report.

Largely, what we discovered is that the effect of the cloud on the

large SI's is still relatively small, but is increasing rapidly with time.

As Cloud becomes the standard for infrastructure and software,

and enterprises become more global and mobile, IT service

providers are being tested. This new marketplace requires a

different business model than what they've employed in the past.

While the prior decade was one where labor arbitrage was a

winning strategy, the future decade will hinge on technology

arbitrage. The operating mantra of providers during this era needs

to be characterized by adding value, because if they don't their

competition will.

As always, we welcome feedback from each of you and apologize if

anything we've written (or left out) offends anyone's sensitivities.

Please do write to us with your feedback on the report and

suggestions of how we can improve our market coverage.

Best,

Ned May Puneet Shivam Jeff Baker

SVP Research Executive Director Vice President

HfS Research Avendus Capital Avendus Capital

AVENDUS

1September 2014

1 Methodology

2 Cloud's Dramatic Impact on the Procurement of IT

3 The Impact of Cloud on IT & Business Services Providers

4 The Evolving Professional Cloud Services Provider Landscape

5 Deal Activity

6 Final Recommendations for Service Provider Success

7 Appendix

3 :: 5

6 :: 8

9 :: 13

14 :: 32

33 :: 39

40 :: 41

42 :: 53

Disclaimer

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2Disclaimer

The

promise of IT

and the ensuing opportunity around

its deployment may never have been

greater than it is today.

Methodology

1

Methodology

This report is based on a series of discussions with several dozen senior leaders across

the Cloud Services landscape including CEOs of prominent startups, practice heads of

large global services providers, venture capitalists, private equity investors, and a range

of other participants and observers. We also spoke to those who might be considered

Cloud skeptics within services providers. In addition to the insight gleaned from the effort

of gathering this collective wisdom from a crowd which represented roughly 500 years of

hands on experience, HfS and Avendus brought our own understanding and analysis of

the market through our ongoing interactions with participants. We augmented this with

primary research conducted in the IT services by HfS over the last 12 months, Avendus

experience as a leading investment bank in the IT services space, and with secondary

information available in the public domain.

Sizing methodology

HfS and Avendus market sizing relies on a consistent primary methodology that is used

for each service category. Our primary method is a supply side model that builds market

dimensions by estimating revenues from the most significant service providers in each

category. This is augmented by looking at spending models and contract tracking for

each specific market.

Forecasting methodology

HfS and Avendus forecasting combines historic revenue growth projections, contract

run rate projections, demand side survey data, supply side survey data and economic

projections.

This report examines the impact of Cloud computing on the IT Service provider

landscape with a primary focus on consultants and systems integrators. As such, all

discussions regarding Cloud offerings and services are in the context of the enterprise.

We exclude what could best be described as the Consumer Cloud - offerings such as

personal backup, photo storage, etc.

Today one would be hard pressed to find anyone in the IT services industry that is willing

to debate the premise that cloud computing has emerged as an important and lasting

trend within enterprise IT. However, when one digs deeper into the Cloud, any general

agreement unravels from there. For some, the definition of Cloud Computing is a rigid

one that adheres to the framework published by NIST. Theirs is a world where Cloud

incorporates five critical features:

Defining the Cloud

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3Methodology

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4Methodology

1. Self-service You can effectively pull out a credit card and buy it

immediately online.

2. Networked It is offered online.

3. Multitenant One instance of the service offering serves multiple

customers.

4. Elastic It can be rapidly scaled up and down to align with an

individual customers demand.

5. Metered Both provider and customer have clear visibility as to how the

underlying resources are being utilized.

Others approach Cloud with a much broader brush. For example, the collective wisdom

fueling the industry today has settled on a description that includes a comparison to

utility computing and for some it is essentially a metaphor for the internet.

For the bulk of this report, we intend to keep the definition of Cloud purposely vague.

This is not meant to establish some precedent regarding our definition at large. At times,

there is a very good reason for a tight definition, such as when establishing a market

size. However, the primary purpose of this report is to gauge the broad impact of Cloud

on the consumption of IT services, and like many emerging technologies, the specifics

as to what Cloud represents is subjective to an individual buyer. This means that to

explore its impact on the related services market, we need to take the broadest view

since the creation of a rigid box around what Cloud does and does not entail would

detract from the primary message of this report.

As such, we define Cloud as:

A relatively new IT delivery model that leverages broad network connectivity to enable

simplified procurement and allows the underlying technology assets to be centrally

managed and uniformly updated. In doing so, it creates a modular approach to the

delivery and consumption of IT.

Suffice to say, this encapsulates a very broad range of activities being labeled as-a-

Service today. This list of acronyms in the business vernacular is long and seemingly

grows with the issuance of each new industry analyst report. At the time of writing, some

of the more prominent as-a-Service models include: Software-as-a-Service, Platform-as-

a-Service, Infrastructure-as-a-Service, DataBase-as-a-Service, Unified Communications-

as-a-Service, BigData-as-a-Service, Hadoop-as-a-Service, Data Management-as-a-

Service, Cloud Management-as-a-Service, Application Development-as-a-Service,

Desktop-as-a-Service, Back-up-as-a-Service, IT-as-a-Service, and Mobile Backend-as-

a-Service. To better make sense of this, we will focus our discussion around four core

areas.

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5Methodology

The Four Layers of Cloud

It is generally accepted that there are three primary types of Cloud offerings

Infrastructure-as-a-Service (IaaS), Platform-as-a-Service (PaaS), and Software-as-a-

Service (SaaS). For the purpose of this report, HfS and Avendus will explore the impact

of Cloud across these three offerings as well as the relatively new opportunity unfolding

around Business Process-as-a-Service (BPaaS). While there is also an ongoing debate

regarding the formal definition of each of these sub segments, we are less concerned

with what goes into them than what comes out. That is, we are focused on the outcome

of these services and in particular how they are consumed by an enterprise rather than

specifics around underlying inputs. In taking this approach, we are able to identify the

unique drivers of adoption and their corresponding impact on IT services providers

without getting weighed down by semantics. Taking this outcome based approach yields

the following descriptions:

IaaS The provision over a network of one or more elements of core IT

infrastructure enabled for easy integration and consumption

PaaS The provision over a network of a software development platform

enabled for easy testing and deployment

SaaS The provision over a network of an end user application enabled for

easy and rapidly scalable consumption

BPaaS The provision over a network of a specified outcome for a particular

business process that encompasses IT and often an element of

workforce augmentation as well

Cloud's Dramatic

Impact on the Procurement of it

2

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6Clouds Dramatic Impact on the Procurement of IT

Clouds Dramatic Impact on the

Procurement of IT

The adoption of Cloud is having a profound impact on the way enterprise IT is procured.

In turn, these changes are creating challenges for IT services providers as there are

times when their traditional marketing and sales models no longer suffice.

As seen in Exhibit 8, the impact of an enterprise IT department moving to Cloud is broad

as it changes the way decisions are made, how IT is procured and accounted for, and

ultimately what role the IT department plays across the firm. What follows are the three

biggest challenges and one misconception that this shift brings to how IT is procured.

Suddenly an individual outside the IT organization can easily provision access to a new

service without involving IT, a phenomena we see as the democratizing of access and

spending on IT. In fact, many of these potential new buyers have already done so and

that likely drove the first wave of enterprise Cloud adoption more than any other factor. It

was not an IT decision but one made within other functions like Sales and HR. For their

part, IT departments also saw a similar democratization of spending as, for example,

internal developers working on a new Mobile Android App could now secure their

Exhibit 1 The Broad Impact of Cloud on Enterprise IT

1. Cloud Turns Influencers into Buyers

Flexible and Agile

Design, Build, Run

Purchase

Complex implementation

Hard coded

Weighted toward maintenance

Long-term planning

Gate keeping

Deep IT skills required

Concentration of large mega apps

Rigid and Vast

On Premise IT Environment Cloud Driven IT Environment

Consume

Rent

Complex integration

Configurable

Focused on new applications

Upfront analysis

Collaborative

Deep vertical expertise required

Proliferation of small discrete apps

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development platform and run all necessary testing without having to get approval for the

underlying purchase required to perform the build.

Today, as Cloud adoption matures around a second wave of adoption, one categorized

by the emergence of the large ISVs offering a broad set of offerings, we are witnessing a

more collaborative approach to buying emerge in the enterprise. This is driven by a

realization that greater benefits will be obtained when individual offerings are integrated

with legacy systems and data as well as with each other. But having driven the buying

decision once, many of these functional areas want to maintain a fair amount of control

so decisions are getting drawn out and more individuals are now sitting around the table

as they are made.

Bottom line: New faces like the head of sales are now sitting at the deal table,

requiring vendors to match this level of professional with experienced business

consultants, which in some instances results in an elongated sales cycle.

One of the most significant changes that occurs for an enterprise as it migrates to the

Cloud is the shift in how spending is allocated. By moving IT from largely a long-term

capital expenditure model to one that is a flexible operating expense, much of the risk

and uncertainty associated with IT development goes away. While upfront

implementation costs do not disappear, the bulk of spending gets tied directly to

consumption and demand thus eliminating the need for forecasting scenarios of usage

that may or may not come into play. In the past, if a business was too aggressive in their

investments in a certain technology they could be straddled with years of excess cost.

However, being too cautious could result in having an IT infrastructure that was unable to

meet business needs. Today, these variances around the accuracy of investments

largely go away in a Cloud based delivery model, freeing up resources once allocated to

forecasting and planning.

Bottom line: Cash is being freed up from large capital intensive projects and will

likely be redeployed to enable enterprises to reinvest for innovation.

One of the other most important aspects to understand about Clouds impact on the

enterprise is that it does not necessarily reduce total IT spend. This is because by

aligning usage with cost, cloud eliminates the uncertainty around its outcome. The

conversation around adoption shifts from one centered on the total cost of ownership to

one centered around the return on investment. That shift will likely drive more spending,

2. Cloud Shifts Enterprise Spend from CAPEX to

OPEX

3. Cloud Shifts Conversations from TCO to ROI

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not less. Further, by being able to tap new pockets of spending in other functional areas,

the aggregate allocation of funds spent by an enterprise on IT may also rise. This is

especially true as Cloud enables quicker and easier deployments that are able to tap into

unmet demand in functional areas that previously had to sit and wait while an IT

department crunched the number to let them know if the initiative was worth the cost,

and if so what place they would occupy in line.

Bottom line: Expect the conversation to change to one of how much can be gained

rather than a primary focus on what it will cost.

Alongside these changes it is important to point out one misconception as well that

Cloud somehow eliminates the need for an enterprise to carefully cost out its ensuing

spend. By some estimates, an enterprise that shifts its consumption of an application to

the cloud can reduce its total spend by well over half as savings from better utilization of

hardware come together with lower licensing and implementation costs. Yet other

estimates show the opposite to be true. That despite the larger upfront cost of an on

premise software implementation total costs are less than what is required for the

equivalent SaaS version. Why the discrepancy? Because like most everything to do with

IT spend, the answer actually depends on the specific. Every enterprise needs to

conduct their own analysis to attempt to determine the ultimate impact on spending of

moving to the Cloud.

Bottom line: Measurable outcomes will need to be demonstrated up front and

backed up quickly for ongoing investments to be made.

4. But Cloud Still Requires One to Crunch

The

Impact of Cloud on IT &Business Service Providers

3

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9The Impact of Cloud on IT & Business Services Providers

The Impact of Cloud on IT & Business

Services Providers

The first step in understanding the opportunity that Cloud creates for IT service providers

is to undertake an effort to remove ambiguity around the related offerings. All too often,

we hear IT services providers dive into the breadth of their Cloud offerings without first

establishing clarity around what primary activity they are targeting. To that end, we

identify five activities that service providers can build specific Cloud offerings around in

addition to the broad category of IT Strategy.

The five opportunities are:

1. Build Infrastructure. This encapsulates the suite of services aimed at enabling

either a third party provider or an enterprise to build out their own cloud

infrastructure for delivering a solution either externally or internally.

2. Transform Applications. This is the series of services built around either

migrating or modernizing an enterprises application to enable integration with

Cloud services as well as services to assist a tier two ISV to ready their own

applications for delivery as Cloud.

3. Integrate. This area is a set of services offered to help an enterprise consume

Exhibit 2 The Five Opportunities around Cloud

Strategy Consulting

Transform

Applications

Integrate

Manage

ProvideBuild

Infrastructure

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a third party Cloud service. It includes integration work between legacy and

cloud as well as cloud to cloud

4. Manage. This can be at either the infrastructure layer, for example managing

an enterprise private cloud environment, or at the application layer, for example

managing the ongoing consumption of a cloud service such as Salesforce.com.

5. Provide. This opportunity encapsulates the efforts of service providers to enter

the Cloud market directly by creating, selling and delivering their own Cloud

service to the market. These offerings can range from global IaaS provisioning;

such is offered by IBM and HP all the way up the stack to targeted SaaS and

BPaaS offerings.

The activities undertaken within each of these five broad types of offering are not

necessarily unique and there is often an opportunity to bridge multiple offerings. For

instance, an advisory engagement for a particular enterprise may include developing a

strategy for rationalizing their ongoing efforts to build private cloud while also developing

a strategy for transforming a legacy application to SaaS and then integrating and

managing it. However, confusion arises because there are now two distinct buyers for

these services as public cloud providers such as Microsoft AzureCloud themselves have

now become a significant market in addition to the enterprise.

Large global IT service providers have mastered the ability to move through an

Enterprise client and maximize the revenue associated with each phase ideally

developing enough trust along the way to enter into a sole sourced deal. But the

dynamics of the Public Cloud market opportunity are unique. First, this is largely two

discrete opportunities one around Build and Manage for infrastructure and a second

Exhibit 3 Two Unique Market Opportunities

Source: HfS and Avendus Research

Serving the Enterprise

Build

Transform

Integrate

Manage

Provide

Supporting the Public Cloud

Build

Manage

Transform

Co

mp

lim

en

ted

by

:

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around transforming the applications of Tier 2 ISVs for cloud delivery. Specifically these

are sophisticated buyers that often require significant scale. These differences mean SIs

will need to realign the way they approach that market in significant ways. The upside in

this shift means a narrower sales and marketing effort might be needed to address a

growing but consolidating market.

The biggest reason for the divergence across these service areas revolves around the

changing nature of how these Cloud-based offerings are created. In a traditional

enterprise IT deployment, the buyer was responsible for the initial outlay around

hardware and software provisioning. That was the case even in a large IT Outsourcing

deal where a transfer of ownership of the underlying IT assets might eventually occur.

But in Public Cloud offerings like IaaS, the provider of the cloud infrastructure (aka the

seller) is on the hook for all the upfront costs.

As such, this is a business that rewards economies of scale. It is one where only the

largest can effectively compete, as the outlay is so great that only the largest or most

highly capitalized providers can participate effectively. This market is similar to what

weve witnessed occur in telecommunications and mobile phone industries. This is

especially true for IaaS offerings where ultimately it is likely only a handful will succeed

as the spoils eventually fall to those who can drive commoditization at a rate faster than

anyone else. Thats the primary reason you see companies like Dell decide not to

compete in the data center space but instead partner with the likes of Microsoft. More

broadly across Cloud, it is also the reason you see companies like HP adopt

Saleforce.com for its own internal CRM. Forward thinking IT Services understand how

these markets are diverging and they are selectively picking their areas to compete.

Competing effectively in the emerging Cloud Professional Services space requires

providers to change how they package and sell offerings as well. Four of the biggest

changes are outlined below:

A Bigger Table is Required

Given the additional stakeholders involved in most typical Cloud engagements today,

service providers need to grow accustomed to new stakeholders being around the table

as they discuss a deal. This is especially the case within SaaS and BPaaS and these

new participants are not just in a listen only mode. This adds delays to reaching an

agreement on even the simplest of implementation deals. Perhaps worse, the mix of

business and IT personnel risks introducing confusion as different parties may assign

The Economics of Delivery are Changing

Cloud Creates New Demands on Services Providers

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significantly different meaning to the same set of words. Take careful heed at every

meeting to make sure everyone is using language that is commonly understood. This will

also require a different skill set from providers, whereas the last decade was marked by

labor arbitrage, the next will be defined by technology innovation across areas such as

big data, mobility, and business processes.

Bottom line: This means in turn that business expertise rises on par or above

technology expertise as a critical trait.

New Skills and Shortages at Play

As SaaS offerings start to standardize at least some of the most simplistic of underlying

processes, they begin to lead consultants and integrators deeper and deeper into a

clients industry specific needs. Value-add will come from service providers innovation in

delivering business-relevant information and impact more efficiently than traditional

services allow. Vertical expertise can add-value through various means including a

unique understanding of a clients needs, increased speed-to-market, re-useable IP, and

overall client engagement. This requires IT service providers to bring more to the table

than building to plan, but rather by being able to innovate on behalf of clients. In order to

do so, IT service providers will need to build out these capabilities, and this will in turn,

create strain around the ability to find the right professionals with industry insight. In a

similar fashion, as the need to address business problems via a mix of IT and business

centric offerings increase, it puts more demands on IT service providers to develop

solution architects who need to possess more of a business centric ability to bridge

multiple worlds more effectively, versus the traditional role of someone who has gone

deep, say around network management skills.

Bottom line: Business and industry centricity begins to trump technology

centricity.

Change in Nature of Projects for SI

In the short to medium-term, we are seeing a rise in demand for systems integration

driven by cloud initiatives. However, this activity is of a different nature than the

traditional large scale on premise implementations in the past. These new deals are in

the six figures not seven, and they last for weeks or months not years or decades. As

indicated with the current skills shortage today, they also require a deeper understanding

of industry needs and business processes than prior integration work.

Bottom line: Individual engagements shorten and shrink though aggregate volume

may remain.

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The Potential Convergence of IT with BPO

While we are seeing significant traction around automations adoption by BPO providers,

the impact of Cloud delivery models has yet to drive a similar level of change. With most

Outsourcing deals still revolving around the lift and shift of technology and jobs, there are

only a limited number of deals where BPaaS offerings are effectively combining IT

delivery and embedding it with business processes to deliver a cloud based service. Yet,

there are real examples of this opportunity today such as Wipros recent new offering in

F&A and more are on the way all the time. Service providers are working on these types

of initiatives, which will standardize their delivery models while reducing cost and

allowing them greater reach. These offerings have the potential to leapfrog SaaS and

truly fuse people, process, and technology to enable the standardization of non-core

processes like never before. For example, PaaS platforms like Apprenda could serve as

a way for IT service providers to accomplish two things: 1) begin generating revenue

from non-linear sources; and 2) combine IP with a business process such as application

development and management.

Bottom line: While relatively nascent today, BPaaS has the potential to disrupt the

disruptors in Cloud.

As-a-Service Model Provides Opportunity For Incremental IT Spend

Cloud based applications and SaaS offerings provide a large opportunity for incremental

services spend as corporations look to add functionality on top of their existing systems

and require both domain led consulting services and the requisite systems integration

work required. PaaS and TaaS can substitute for traditional services and open up new

revenue opportunities that are long-term in duration. Next generation services around

analytics, big data and mobility, are large new market opportunities for IT service

providers that offer higher margins than traditional implementation and systems

integration work.

Bottom line: While many believe the pie is shrinking, our view is that the pie will

shift to other areas of IT spending focused more on innovation, rather than cost

reduction.

The

Evolving Professional Cloud Service Providers Landscape

4

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14The Evolving Professional Cloud Services Provider Landscape

The Evolving Professional Cloud

Services Provider Landscape

Cloud based delivery models are bringing a myriad of new pressures to the IT services

market. This is coming at a time when many traditional IT services providers have only

recently stabilized from disruption that ensued following the enterprise adoption of the

offshore model. Yet, if the adjustment to offshore delivery was painful for those who were

delayed in responding to that trend, providers are warned that this one may be

catastrophic if they wait. This lesson does not appear lost on those that were laggards in

the last round and we are witnessing some of the most aggressive moves by these firms.

Conversely, it is important to note that the enterprise migration to Cloud may prove even

more problematic for those providers that were early and aggressive in responding to

offshore threats by building their own capabilities in that regard. That is because while

the offshore wave was about labor arbitrage enabled by the Internet, this wave of

disruption is one fueled by technology arbitrage and that means strength and

therefore proximity of relationships will trump labor cost. Further, having succeeded

in this last wave of disruption, theres the risk that a certain level of hubris might cloud

their ability to effectively see and respond to this new wave of change.

Exhibit 4 Cloud Industry Value Chain

IT Infrastructure

HardwareColocation

IaaSCloud enablers PaaS

SaaS

BPaaSEnd User

Facility

Systems

Infrastructure

Software

Application

DevelopmentApplication

Presentation/

Action

Professional Services

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New Entrants Appear

Today, there are no less than five groups of potential new competitors all nipping at the

traditional IT and business services market ISVs, Telcos, Cloud Purists, Web

Natives and Boutiques. As Cloud delivery collapses the ecosystem of IT provisioning,

these traditional partners are increasingly competing with SIs at the edges of their core

markets. This overlap and fuzziness between groups is not entirely new, but today it is

taking on a scale that may alter how we bucket and view the industry as a whole.

In the software segment, take for example ISVs like SAP and Oracle that once ignored

Cloud adoption but are now aggressively building out their own SaaS offerings with

varied success. These new (or more accurately reworked) versions ultimately require

much less integration while at times also allowing the ISV to be closer to their customers

than before. SaaS allows, even requires, these vendors to be regularly connected and

engaged with enterprise buyers and end users. Because of these changes, the

traditional SIs risk getting squeezed.

Similarly, Microsofts new Office 365 has greatly simplified the effort required to deploy

and maintain its productivity suite. That offering now provides perhaps one of the most

compelling examples of the advantages to be gained from moving to the cloud. One

study found that the payback for a typical medium-sized company making the shift would

be realized in a matter of only several months. All this means that for any integrator once

dependent on the Office ecosystem, the need for refocus is immediate. Microsoft

already cut incentives paid to these partners at the beginning of 2014 and as the product

continues to practically sell itself, we would not be surprised to see further reductions in

reseller fees.

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Exhibit 5 Five primary pressure points on traditional IT Services

Yet the encroachment on IT services from these former partners does not stop there. For

example, today Microsoft is also building out one of the most robust IaaS and PaaS

platforms globally. This means the company is no longer just writing code, they are

buying up hardware, fiber optic cables, and are building out data centers around the

world. By their estimate, they have spent some $15 billion on the effort to date.

In addition, there are the more obvious new competitors in this space as well. There is

the group of firms that are best labeled Web Natives. Companies like Google and

New Entrants

ISVs (e.g. Oracle &

SAP)

Telcos (e.g. AT&T &

Verizon)

Cloud Purists (e.g.

Saleforce.com &

Workday)

Web Natives (e.g.

Google and Amazon)

Boutiques (e.g.

Bluewolf &

CloudSherpas)

Area of Impact

Systems Integration

Network Integration,

NOC and Dcs

ADM & Systems

Integration

Infrastructure

management & ITO

Systems Integration

How to Respond

Understand some infrastructure provisioning

gets embedded in the ISVs SaaS offering and so

look to serve the needs of these ISVs while

anticipating smaller efforts on the integration

side.

Realize telcos are starting to provide IaaS as

part of bundled offerings and look to support

their needs while capitalizing on this new

channel to market.

These new public cloud offerings are having a

direct impact on new application development,

maintenance and integration. Look to augment

their offerings with lightweight implementation

teams.

Given the scale of these firms, few present the

opportunity for a traditional SI to help them

build and run. In short, best to realize that a

portion of the infrastructure market is likely

forever shifting to these new firms and look for

ways to build services around integrating these

into the enterprise.

Organized more effectively to sell and deliver

around the Public Cloud, these boutiques

present a challenge to traditional SIs. These

global firms are advised to look for ways to

deliver similar set of services while minimizing

cannibalization of their existing practices.

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Amazon that with their Digital DNA and deep pockets are perfectly suited to go after the

cloud space. There is also a long list of Cloud Purists aimed directly at one aspect or

another across the space. Providers such as Salesforce.com, CloudBees and

Rackspace are by their nature created to sell and deliver new services in extremely

disruptive ways.

Finally, with Cloud largely viewed today as an exciting emerging new model, it creates a

certain mystique with which new boutique services providers can align. Take for instance

Cloud Sherpas and Fruition Partners which today have become the only two ServiceNow

partners to reach Master status beating out the likes of all the major SIs for this

highest level partner designation from this particular SaaS provider. Several other

boutiques such as Meteorix and DayNine (WorkDay), 2nd Watch (Amazon Web

Services), have built fast growing businesses primarily around a single platform;

companies like Appirio and Cloud Technology Partners have become leading cloud

integration vendors. All of this has led to the emergence of Cloud Services Brokerage

where a third party provider adds value by aggregating and simplifying the provisioning

of public cloud services. This new model presents a significant new opportunity for

traditional integrators to define and claim and many are investing to build out proprietary

platforms for enabling the space. Doing so keeps them at the center of activity a role

they have traditionally played and monetized well as it requires a certain flexibility that

only a people first business model can reflect. Today, these Cloud Brokerage efforts

augment the traditional structure and services within most SIs. However, it is foreseeable

that as the broader trend continues to grow that they might one day become the new

operating model for an SI.

The opportunities around cloud for traditional IT services providers boil down to three

options: help build, help consume, or directly provide. While in the past one IT services

provider could easily serve all three, that is a more difficult proposition today. That is

because success within each will depend on the alignment of business models in these

unique ways:

To Provide Public Cloud - Big is Beautiful

Succeeding directly within any Cloud market be it IaaS, PaaS, or SaaS requires one

to drive standardization at a dominant level of scale. Perhaps the best example of this is

found in the group of Web Natives. While not traditionally thought of as cloud providers,

these companies were actually operating as such before the term was even developed

and applied. For example, Google, which is able to spend billions of dollars each quarter,

is running at a pace which few other providers can keep up. One of the few, however, is

Characteristics of Professional Cloud Services

Providers Likely to Succeed

AVENDUS


another Web Native Amazon. As the leader in the IaaS market, it continues to spend

massive amounts of cash to maintain its lead. So while these two vendors are not

traditionally thought of as IT services providers, for any provider looking to operate in the

space, they along with Microsoft, represent the bulk of competition in the public cloud

infrastructure space.

Fortunately for the sake of competition and innovation, size is relative. Take for instance

the IaaS market. While entering that market today is now realistically beyond the reach

of all but the largest of global technology providers, visionaries such as Rackspace were

able to enter and establish their stronghold when the market was nascent. In a similar

fashion, while perhaps CRM may no longer be up for grabs, there are a plethora of

smaller software markets still waiting for the emergence of SaaS-based leaders to

emerge. Any service provider looking to participate directly in these markets by creating

their own offering needs to ask themselves, am I committed to investing enough

resources to be one of the largest providers in town?

To Manage Consumption: Nimble is Necessary

For those looking to continue down the more traditional path of acting as a third party

integrator, there needs to be an understanding that the rules of the game will broadly

change. While due to the customized nature and their own large scale as well as broad

installed base of legacy systems at Fortune 100 enterprises, projects will stay for some

time, increasingly large implementations will be replaced with smaller, relatively shorter

deals. For these deals, delivery is no longer measured in years, but in weeks and

months and the number of multi-million dollar implementations is reducing, and in their

place we will see $250,000 deals. This means an entirely different approach will be

required to profitably sell and deliver these deals. At the most extreme level, we are

seeing the sales structure moving from one revolving around a well-seasoned executive

who spends years developing a relationship to revolving around the task of ensuring the

best placement of a tile on a partners web site. (One caveat, we still think that for the

largest Fortune 100 enterprises this will not be the case.)

To Build: Find your Niche

IT services providers with core strengths in technology integration are well suited to

become the builders of Cloud. Pursuing this opportunity will not be without challenges.

First, it means ones core customer base shifts from the Enterprise Buyer to a much

more sophisticated Cloud ISV Buyer whose core value is dependent on the work being

done. As such, they will likely hold onto the role of services integration and management

and hire external help for very specific needs. At the same time, the enterprise market

will remain much as it is today and so a go to market and delivery strategy that works for

one may not work for the other.

Within all three of these areas other secondary factors will be important as the client

expectations of services providers shift.

AVENDUS


Front End Consulting Capabilities & Ongoing Innovation Will Differentiate Winners

from Losers

The ability to engage a client via high-end consulting for a transformative project is

critical in capturing the back-end long term services delivery contracts. Services will

focus more on organizational assessments, optimization, and application transformation

utilizing the cloud vs. historical spending which was centered on ERP implementation.

Bundled Services

Services providers can mitigate the price deflation impact of the cloud by bundling

traditional offerings such as application outsourcing with a SaaS offering, creating a

more valuable solution than the traditional offering alone. As PaaS offerings gain

penetration, IT service providers will need to partner or build their own PaaS delivery

platform to adapt to the cloud landscape, as the benefits of PaaS (reduced cost, agile

development, multi-tenant, and pay per use) outweigh traditional application outsourcing.

IP Driven Offerings

As cloud computing technologies continue to automate processes that have traditionally

been headcount intensive, it will be important for IT services firms to participate in this

shift. Additionally, as the market has become more mature in terms of offshore players,

IP will be a tool to create significant differentiators in terms of client acquisition and

retention, as well as maintaining pricing power. Vertical solutions will be a way to bundle

services, IP and specific industry templates to attract clients and become a dominant

provider in a specialized vertical such as banking, insurance, consumer products and

various sub segments of these markets.

To date, much of the activity around Public Cloud adoption has focused on small and

medium enterprises (SMEs). Yet this concentration of activity should not be confused

with fit. The primary reason most of the initial efforts were directed at smaller companies

first is that they were often unburdened with legacy systems. These green field

opportunities were the easiest to initially crack but that does not mean they are the most

desirable to do so nor does it mean they are the ones most able to benefit from the shift

in delivery. Large enterprises can and are benefiting from the migration of services to

the Cloud. As they do, they are most likely going to command the focus of Cloud

providers.

That is bad news for the large Global IT Services providers who focus on this space.

This is especially true because having first unfolded as an SMB opportunity and with all

the hallmarks of a classic disruptive innovation, Cloud delivery is driving significantly

Icebergs Ahead No IT Services Provider is Immune

AVENDUS


lower pricing across many aspects of enterprise IT. This deflationary pressure is going to

hit integration projects at the same time the engagement time retracts.

At the same time, the fragmentation happening across the IT Services Continuum will

also hit the large global services providers hard. No longer will massive long term

management contracts naturally flow from development and integration work. In this

light, the last disruptive shift to outsourcing and offshoring was relatively minor as it

primarily centered around doing the same things but with different personnel. This time

around, the underlying activities and how they are sold will all see a shift.

Positioning of the 10 IT Services providers today

Knowing this, many global IT Services providers are working aggressively to embrace

the cloud. They are doing this not only externally, but internally as well in an effort to

capture all the advantages Cloud-based delivery brings. HPs migration to

Salesforce.com is one example of how this is playing out, but perhaps the best example

is highlighted in a recent post by IBMs Robert LeBlanc. In it he lays out a new vision for

the entire companys operating model. See: Rethinking IBM: The Company as a

Service.

LeBlanc highlights:

This shift to cloud where hardware, software, and services meld into one, represents

the most significant change in IBMs go-to-market strategy since it built a large blue-

suited sales force to cater to businesses in the 1950s and 60s. Its a fundamental

reinvention of the companyhow IBM operates and how it delivers value to clients and

society.

The following table highlights the Cloud positioning of the top 10 IT Services providers

today.

AVENDUS


Exhibit 6 Top 10 Global IT Services Providers Activity in the Cloud

Source: HfS and Avendus Research

Service

Provider

IBM

Accenture

HP

Fujitsu

CSC

NTT

Capgemini

TCS

Oracle

SAP

Top 10

Est. 2013

Cloud Rev

($Ms)

4,400

3,755

3,555

2,950

2,900

2,577

2,230

1,760

1,200

1,050

26,377

Est. 2013

Public Cloud

Services Growth

69%

98%

60%

97%

32%

35%

35%

35%

50%

20%

56%

Est. 2013

IaaS

($Ms)

388

380

355

275

350

152

125

15

NA

NA

2,040

Est. 2013

Paas

($Ms)

200

25

50

50

75

75

15

45

NA

NA

535

Est. 2013

SaaS

($Ms)

612

250

150

225

125

100

50

200

1,200

1,050

3,962

Est. 2013

Hybrid

($Ms)*

1,900

1,750

1,900

1,650

1,200

1,500

1,150

750

NA

NA

11,800

Est. 2013

Private

($Ms)*

1,300

1,350

1,100

750

1,150

750

890

750

NA

NA

8,040

Overview

Though late to the Cloud game, IBM caught up with a series of major investments and

now leads the pack.

A leader in both Innovation and Customer satisfaction, Accenture is a strong player

across all areas of Cloud services today.

One of a few providers that truly cover all Cloud services on a global level. Innovative in

its approach to Tier II ISVs

Very strong and consistent in APAC and Europe and a demonstrated team player.

One of the earliest to pursue opportunities in the Cloud and after a few challenges it has

made recent gains.

Given its strong communications backbone and recent acquisitions, very strong on cloud

infrastructure side.

This traditional SI understands the future importance of the Cloud and is working to

position itself for new realities there

Having just made it into the top 10 IT Services firms Tata lags a bit in building out its

capabilities in Cloud.

After spending years downplaying the model, the company got aggressive with its own

SaaS offering and is coming on strong.

Similar to Oracle, SAP got serious about Cloud but failed to get the same traction in

2013.

AVENDUS


We are also witnessing a range of reactions to the pending impact from Cloud by the

remaining WITCH companies outside the top 10. For example, Cognizant has taken an

aggressive and bold move to set up a standalone business unit charged with developing

new forms of IP to transition itself to a provider of these new services. Others, such as

Infosys have taken a more measured approach though also looking to develop their own

IP in this case under their Edge initiative. Of course, all that may now change with the

recent appointment of a software executive as its new CEO. For its part, Wipro is also

doing some innovative things. With a primary focus on building out its services to help

enable enterprise adoption of Cloud, it brought together those skills sets with others in

Analytics and Mobility in a new group called Advanced Technology Solutions so it could

better source skills from across the firm. On the BPO side, Wipro has partnered with

NetSuite to create a BPaaS offering targeting Finance and Accounting. Finally, HCL,

recognizing its limitations in building out IaaS decided to partner with CSC and potential

others as a way to jointly leverage go-to-market efforts in the face of smaller deals.

Enter the Boutiques

As the opportunity around Cloud computing began to emerge, savvy IT services

professionals branched off to create new enterprise cloud services providers to capitalize

on the trend. Without the burden of legacy business models, these upstarts could

package, sell and deliver services targeting a new reality of smaller sized deals. In doing

so, many experienced rapid growth and success. However, the underlying approach and

target markets of these emerging providers varied greatly.

Exhibit 7 highlights providers who each chose a unique path to success. Appirio, the

largest of these boutiques, originally focused on Saleforce.com implementations, but

now takes a broad approach to the cloud. Through its purchase of TopCoder last year, it

now augments its own capabilities with a very unique crowd sourcing platform consisting

of hundreds of thousands of development professionals. This allows it to effectively

serve a very wide market while keeping its own core capabilities much more focused.

This approach is likely to serve it extremely well.

AVENDUS


Exhibit 7 Select Cloud Boutiques

About

Though one of the smaller of the Cloud boutiques, 2nd Watch focus on Cloud infrastructure in particular, the

enablement of Amazon Web Services

AppCrown delivers cloud based application and financial systems to banking and wealth management. The company

innovates middle office and back office for customers to get to a one bank initiative. Also a premiere Salesforce

integration partner

The largest of the Cloud Boutiques, Appiro covers nearly all the major Cloud platforms and technologies and brings

with it a unique crowd sourcing platform called TopCoder

Bluewolf offers a broad range of services built around the cloud and claims to be one of the first firms created with this

focus. As a salesforce.com Platinum partner, its offerings tend to revolve around that platform, but it is globally located

and helps a broad range of industries and functions make the most of Cloud

Helps companies in IT Infrastructure management specializes in Cloud Services, Mobility, Voice & Broadband,

Messaging & Collaboration, Web Hosting, Backup & Security

Promotes cloud based technology by developing software products and offering services of Integration,

Implementation, Migration, Re-engineering, Adoption and Training, Consultation and more

Cloud Sherpas provides advisory, implementation and management services around three leading Cloud platforms

Salesforce.com, Google Apps, and ServiceNow. It has rapidly grown to become a global provider with offices across the

US and Asia as well as in the UK and United Arab Emirates

Cohesion consults on IT and business strategy for the banking and financial services, insurance and retail industries

with expertise in Salesforce.com and infrastructure managed services

Enables IT solutions providers to efficiently backup, monitor, troubleshoot and maintain desktops, servers and other

endpoints for small-and-medium-sized businesses. Specialities: Managed Services, Remote Monitoring and

Management, Backup and Disaster Recovery, Virtual Help Desk

Workday enterprise services firm deploying and optimizing Workday Human Capital Management, Workday Payroll

and Workday Financial Management solutions

eBuilders Business Process as a Service (BPaaS) cloud platform complements existing IT investments: it provides

control over processes outside the organization

Service

Provider

2nd Watch

Appcrown

Appirio

Bluewolf

Cbeyond

Cirrologix

Cloud Sherpas

Cohesion IT

Continuum

Day Nine

Ebuilder

Year

Founded

2010

2009

2006

2000

1999

2012

2007

1999

2011

2009

2003

Total

Outside

Funding

27M

NA

75M

NA

NA

NA

63M

NA

NA

NA

NA

Est. 2013

Growth

400%

NA

95%

45%

NA

NA

100%

NA

NA

NA

NA

Est. 2013

Revenue

($Ms)

$14

$2

165

90

$463

NA

150

NA

$195

NA

$16

Est. 2013

Employees

85

20-50

825

550

1667

< 50

750

200

700 -1000

230

200+

AVENDUS


About

Provides Virtual IT TechOps - full Enterprise Production IT Technical Operations and cloud hosting services delivered

remotely

Fino provides enterprise application design, development, and consulting services. As a Microsoft Gold Partner,

Microsoft Azure Circle Partner, Xamarin Premier Consulting Partner, Hortonworks System Integration Partner and

Apple Enterprise Development Partner, it offers a variety of custom solutions

Fruition Partners is an integrator focused exclusively on ServiceNow. The company has completed over 400

implementations, and has over 50 experts certified in the platform and was one of the first companies to earn Master

status from ServiceNow

Offers operational assessments, consulting and Managed Services to complement clients technical resources and

capabilities. Services include consulting, deployment, migration, integration, automation, Cloud based SaaS Managed

Services for Monitoring and advanced Service Desk solutions

IT solutions and services company with a clear focus on combining business and technology in key areas such as Cloud,

data center infrastructure, user support, and IT outsourcing

Meteorix provides workday implementation, optimization and integration services for mid-market companies

Helps companies with their adoption of Cloud Computing, Big Data and advanced architectures which often includes

moving systems to public cloud providers when possible and implementing private cloud solutions when appropriate

Motif Works is a cloud and mobile solutions company that helps migrate applications and infrastructure to the cloud to

accelerate time to market, fuel efficiencies and drive business growth

The company delivers services to Plan, Design, Manage, Support and Migrate IT Infrastructure running mission critical

applications for over 1200 enterprises across the globe

Nuevora is a Big Data analytics solutions provider that helps leading organizations achieve positive, high-impact

business outcomes through the delivery of continuous and context-sensitive predictive insights

New Signature helps customers implementing private, hybrid and public cloud solutions. Helps customers leverage:

Office 365, Azure, Lync, Exchange, SharePoint, System Center, Windows Intune, Dynamics CRM, Yammer, Windows

Server, Hyper-V, Active Directory, Forefront Identity Manager, SQL Server, Windows Desktop, and Office

Service

Provider

Enki

Fino Consulting

Fruition Partners

Itegrations

Long View Systems

Meteorix

Momentum SI

Motif Works

NetMagic

Neuvora

New Signature

Year

Founded

2006

2006

2003

2011

1999

2011

1997

2010

1998

NA

2003

Total

Outside

Funding

NA

NA

12M

NA

NA

NA

NA

NA

NA

2.3

NA

Est. 2013

Growth

NA

NA

95%

NA

NA

NA

NA

NA

NA

NA

NA

Est. 2013

Revenue

($Ms)

$2

$6

35

$10

$50+

NA

NA

NA

$40

NA

NA

Est. 2013

Employees

10

20

200

20 - 50

1000+

200

51 - 200

AVENDUS


About

Provides infrastructure services for application development and maintenance, for consulting services and for the

management of IT processes and services

Implements and customizes cloud-based human resources and finance platforms with a primary expertise in Workday

Optaros is a global digital commerce service partner that helps companies conceive, build and operate commerce

solutions that accelerate revenue and decelerate costs with expertise in Hybris, Demandware and Magento

Pragiti is a consulting and technology services company delivering hybris based eCommerce solutions to the global markets

SADA Systems is a cloud computing information technology consulting, outsourcing, and development firm with a large

focus on helping organizations implement and integrate new cloud computing technologies

Helps companies realize the potential of cloud computing by successfully deploying it for them. Focus: SaaS IT Strategy,

SasS Deployment, Custom Application Development, Google Apps Deployment, Google Apps Migration, Software

Development, PaaS, Cloud Applications, Cloud Storage, Amazon EC2, Amazon Web Services, Web Apps, Office 365,

Google Apps for Business

Smart and flexible marketing software for planning, optimizing and analyzing social advertising campaigns

Silverline is a Salesforce Gold Cloud Alliance Partner. They focus exclusively on the end-to-end deployment of

Salesforce.com products and powerful third party apps

Digital experience agency with deep roots in experience design, web content management (WCM), eCommerce,

digital asset management (DAM), and systems integration

Soastas web and mobile app test automation solution enables developers, QA professionals, and IT operations teams

to test with unprecedented speed, scale and precision

Specializes in Cloud Computing, Google Enterprise Solutions, Google Apps Implementations, and Cloud Application

Development

Verecloud is a value-added distributor of cloud-based applications. Their nationwide network of partner resellers

specializes in delivering innovative, reliable and cost effective IT and Communications Solutions to their mid-market

customers

Service

Provider

Nexio

OneSource Virtual

Optaros

Pragiti

SADA Systems

Sheepdog

Shift

Silverline

Siteworx

Soasta

Tempus Nova

Verecloud

Year

Founded

1994

2007

2004

2011

2000

2007

1995

2010

2002

2006

2001

2006

Total

Outside

Funding

NA

15

$39

NA

NA

NA

NA

NA

NA

63.6

NA

NA

Est. 2013

Growth

NA

40%

NA

NA

NA

NA

NA

NA

NA

NA

NA

NA

Est. 2013

Revenue

($Ms)

$11

$33

NA

$3

$2

NA

$7

NA

$42

NA

$7

$6

Est. 2013

Employees

50

275

51 - 200

51 - 200

51 - 200

AVENDUS


Close behind Appirio in terms of revenue is Cloud Sherpas which has taken a narrower

approach to the market as it focuses around three Cloud providers Salesforce.com,

Google Apps, and ServiceNow. Doing so appears not to have held the firm back but

instead allows it to create focus among its internal staff.

Bluewolf follows the early path of Appirio with its offerings centered on Salesforce.com

but with a willingness to follow a potential client into tangential opportunities. Opposite

this approach is a firm like Fruition Partners which is 100% dedicated to providing

services around ServiceNow. That focus saw it be one of the first to garner Master status

from the firm and serves it extremely well as long as the underlying opportunity remains

strong.

In a similar fashion, there are providers like 2nd Watch that are also focused on

providing services centered around a single Cloud platform but are focused at the

infrastructure layer. In this particular case, 2nd Watch is dedicated to Amazon Web

Services. That singularity of focus allows it to develop significant capabilities on par with

much larger providers despite its much smaller size.

While many service providers responded well to the early demands around Cloud related

services, their continued success is by no means guaranteed. The reason for this is

twofold. First, the first wave of enterprise adopters despite being ahead of the pack

often approached the provisioning of these services in much the same way they did

more traditional forms of IT. This is especially true for the activity within private and

hybrid cloud the two areas that to date have seen the bulk of related services activity.

Which leads us to the second reason these services providers will become challenged in

the near to medium term. The opportunity around building private and hybrid clouds,

though currently large, is one that likely has a limited lifespan. These efforts represent a

transitory interim phase along an enterprises migration IT to the cloud. Its the equivalent

of the energy industry which saw power generated onsite until the challenges of

distribution were solved and led it down a path of commoditization. Onsite compute will

go the way of dams and waterwheels. So who is at greatest risk for the pending shift?

We identify three types of providers at greatest risk.

The Pleasers

Service providers that demonstrate a willingness to do whatever it takes to obtain high

customer satisfaction may find this operating approach now gets diminishing returns.

Providers that have done well by organizing themselves to be highly responsive to

customer demands will be challenged in this next phase as they lack a clearly defined

What Enterprise Services Providers are at Greatest

Risk?

AVENDUS


differentiated expertise. Conversely, those that are highly process driven and maintain a

product mindset will do better. This will mean some of yesterdays winners will fall

behind, while some that did not fare as well in the last round have another chance to

regain the lead.

The Body Shops

Even those services providers with rigid processes in place will be challenged if they

have not translated these into platforms that embed elements of repeatable IP. Simply

doing things more efficiently is not going to create winners if at the core the things they

are now doing better remain the same. Said another way, automation (or robotization) is

an interim stopgap measure that will allow short-term gains but it will not curtail long term

changes coming to the underlying processes themselves. Those without repeatable IP,

companies that have become skilled at efficiently providing cheaper labor whether or not

that is augmented by technology, need to understand that the advantages they bring

today become disadvantages in the era of cloud.

The Muddling Mid-Tier

Cloud computing dictates and rewards scale or specialization. Across each unfolding

opportunity, either the very largest, most efficient will succeed as non-core processes get

driven to a level of commoditization that original outsourcing industry promised but rarely

achieved, or those who possess unique expertise will succeed. As it does, the

distinguishing trait of the winners will be their ability to provide these new services either

at the lowest cost or highest level of differentiation. That means an age of renewed

specialization is upon us and those mid-tier service providers attempting to emulate their

large brethren may be too late to the game. Cloud creates an opportunity for new

providers as depth trumps breadth.

The disruptive forces impacting the IT and business services market by the arrival of

cloud computing has not gone unnoticed by most providers. Yet the range of reactions to

the pending shifts have been wide. Some, like IBM, have declared an all-out and

aggressive effort to remake the very way they do business. Others, like Cognizant, have

created an autonomous unit to tackle it while maintaining business as usual elsewhere.

Still others seem to view it only as an incremental new market, treating it like any other

emerging technology and are taking only a few steps at best to meet the pending

challenge. We believe those in the first two categories are not only in the strongest

position to win share as this opportunity evolves, but that those in the latter may see their

very business in jeopardy. To that end, we will be watching this space carefully over the

next twenty four months as it continues to unfold.

How Services Providers can Address the Threat

AVENDUS


That said, there is still time to address this threat, and to do so we see three core tactics

in use by several industry leaders:

Build or Acquire Platforms:

Developing and capturing repeatable IP is a core component of creating these new

Cloud services offerings. In short, services are becoming codified as software and while

the accepted description of SaaS is Software as a Service, it could as easily be reversed

to Service as Software. The same rationale applies farther down the stack where IaaS

could as easily be described as Infrastructure as Software. As this shift to codifying

processes occurs, the uniqueness of an enterprises operating model increasingly gets

expressed not in how it deploys its workforce but in what software it selects and

integrates.

This has created a significant opportunity around services brokerage and we are seeing

almost every major SI from IBM to Dell enter the market. It is a natural transition for

these SIs to help an enterprise procure and integrate a myriad of small cloud services

components. These components temporarily allow legacy systems to emulate (the full

functionality) of cloud systems. These applications have been bolting on capabilities for

many years as they attempt to offer a single answer for some function across multiple

enterprises. As such, these legacy applications often required years of additional

development layered on top to customize, bend and mold them to the needs of a

particular enterprise. In the Cloud services world, the needs around customization are

significantly reduced, yet the points of integration multiply.

This means that for any hope for efficiencies to be realized, the demands around

integration must be greatly reduced and wherever possible, even automated. To that

end, service providers are building proprietary tools and cloud management platforms to

act as the glue to bind together these services while also adding a common layer of

visibility and control. So it is no surprise that we are seeing companies like Unisys, which

for a variety of reasons had stumbled to migrate its resources to lower cost regions fast

enough to keep pace with the broader market, now double down on these new platform

efforts as a way to leapfrog competitors in this new phase. While certainly not the only

effort like this underway, Unisys Edge Service Management platform offers a standard

but configurable framework underpinned by analytics and represents a winning strategy

for a new reality of how IT is increasingly provisioned, deployed, and run. Whether or not

it will succeed will be determined over the test of time, but it absolutely represents the

right path to pursue. Another example is Appcrown, who have developed a platform that

integrates Salesforce's CRM with back end systems such as clearing and commissions

for financial services firms.

As they do this, the operating models of these traditional services providers start to look

more like that of a software firm. At least some of the development talent is deployed not

on behalf of a customer, but on behalf of itself. Funding is required up front rather than at

AVENDUS


the time of delivery and the potential trajectory for growth breaks away from a linear

model to one of increasing returns.

In the same fashion, we see the likes of Dell making a similar move. Early on its

enterprise services division found good work building out cloud infrastructure for other

providers such as Microsoft. Along the way, they built out their own IaaS capabilities and

started offering it directly to enterprises as well. But, in doing so, they began competing

directly with their own customers. Recognizing the immense effort and capital

requirements required to compete rather than ramp up, Dell walked away from the direct

IaaS business and focused on building it for others. At the same time, they also pursued

the brokerage model by acquiring and investing in Boomi which has become a leading

integration platform serving the needs of Dell and its clients extremely well.

Create New Divisions:

One of the biggest challenges cloud presents for traditional service providers is the

disruptive shift required to transition their business from one built around people to one

built around technology and IP. That is because the shift requires a change in how

services are created and delivered which cannibalizes existing business and ultimately

may lead to reductions in staff. Most middle managers are simply not prepared for such

a change, and if they are it is unlikely the proper metrics and incentives are in place to

allow them to lead the way.

The senior leadership of several forward thinking companies have grasped this and

responded to the challenge by setting up unique operating structures to tackle the

opportunities around the cloud. The best example of this is Cognizants adoption of the

three horizons model where it incubates potentially disruptive new offerings outside the

day-to-day pressures of its core business. Overseen directly by its CEO, Cognizants

third horizon labeled Emerging Business Accelerator taps the global wisdom and talent

from across its entire 170,000+ workforce but in a safe environment where failure is

acceptable and disruption is lauded, not kept in check.

Other services providers are beginning to follow suit and while their structures are not

quite so formalized they are creating new operating entities that fall outside of existing

business lines. Doing so allows flexibility to incorporate a mix of capabilities, say

infrastructure, software, and services, into a single offering that would traditionally have

fallen across unique P&Ls.

Acquire Capabilities:

Given the depth of change occurring, we are also seeing a wave of acquisitions as

services providers look to catch up in building out skills around new technologies as well

as control the critical IP building out leading cloud platforms. One of the best examples of

this is what IBM accomplished around both the emerging opportunity in mobility and

AVENDUS


cloud. Though late to each of these, IBM spent aggressively over the last several years

to acquire leading platforms across each and now stands as a leader across many

aspects of both. The challenge for them today is not to build the capabilities but to bridge

internal structures around its software, services, and remaining hardware lines and

perhaps to entirely restructure some of these in an effort to compete most effectively in

Cloud.

While the big get bigger, we are also witnessing pressure among the mid-tier to

consolidate as well. Recently, SOPRA and Steria, two major European providers both

based in France, announced plans to join forces in an effort to remain competitive

among heightened demands on scale. This strategy could make sense for other mid tier

players, particularly those built as offshore/labor models.

Even small boutique players are feeling the pressure as new service models are

increasingly based on leverageable technology in addition to people based workloads.

As such, we see acquisitions in this space as providers look to augment their own

offerings. Several players like Appirio and Cloud Sherpas have used acquisitions as a

major part of their strategy. As an example, you have the recent tie up between

Highstreet IT and Computer Network Solutions (CNS) to extend the formers capabilities

deeper into the Cloud.

Deeper Verticals

Certain vertical industries are likely to experience the greatest impact from cloud

computing in the short term and are already feeling the impact today. As a common

thread, all of these have a direct to consumer element that is largely commoditized,

driving price sensitivity and dictating the need to quickly adapt to changing demand as a

means to gain advantage. Markets seeing some of the heaviest activity are Retail,

Telecom, Financial Services and Media and more recently post the implementation of

the Affordable Care Act, Healthcare. However, opportunities will remain strong across

the board and services providers are advised to focus instead on their own current

strengths. New market realities favor depth over breadth, so if a provider has decent, but

not great capabilities in a vertical, they are advised to build these up or spin them out

regardless of that industrys relative market demand.

Critical New Skills

As the market for enterprise cloud services unfolds, certain cross industry skills sets will

be increasingly in demand. Security is an area that will be of particular demand as

providers look to mitigate, if not eliminate the risks with hosting sensitive data off

premise. To that end, building out depth around privacy and data protection as well as

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identity management and authentication will be critical. At the same time, despite the

move toward creating platforms to solve the task, the need for services integration is

going to rise. Providers will need to deepen their bench of skilled generalists who can

quickly adapt to and weave together the myriad of new emerging services rather than

those with very deep knowledge of a single enterprise app.

New Business Models / IP

Providers are advised to look for ways to effectively add new go-to-market models that

successfully combine a complete mix of people, processes and technologies rather

than just one or two of these at a time. That is the promise of cloud and enterprises of all

sizes who will increasingly be looking to obtain this complete mix at the outset rather

than as some foreseen milestone down the road. Yet these new models will bring

operational challenges to existing providers. That means they need to be aggressive in

transitioning to them or they might be unable to bring about the change.

On paper, most of the large global IT services providers are competing effectively under

the new demands and opportunities emerging with the migration to Cloud. Yet, if one

looks at a medium to long term horizon, some troubling challenges arise. In particular,

the bulk of activity today revolves around creating private cloud environments or enabling

hybrid cloud. Such activity, while good work to get, may lead to complacency around the

much more significant shift to services delivery that is being driven by public cloud. Some

of the global providers are addressing that opportunity as well but without an outright

effort to cannibalize themselves, such initiatives will likely fall short.

This brings us to the darlings that emerged during the last wave of technology disruption,

the offshore outsourcers collectively known as WITCH. As we highlighted earlier, some

of these are being very aggressive in their efforts to implement change. Most notably,

Cognizant is taking a lead. Yet others are not being quite as bold and they may find that

strategy causes them to eventually run out of steam. Those in the latter camp tend to be

doing well around cloud today, but like their larger global brethren they are primarily

strong in helping an enterprise build out elements of their own cloud rather than in

consuming that from someone else. Todays strength may be tomorrows weakness as

the delivery demands and business models change.

Which brings us to the outlook for the new breed of truly Cloud-focused providers

companies like Appirio, Cloud Sherpas, Cloud Technology Partners, Highstreet IT and

Fruition Partners. While each of these approach and define the opportunity in different

ways, they share some common traits that serve them well. First, they are organized to

sell smaller shorter engagements profitably to both large and smaller providers. They

aggressively own and continue to develop proprietary IP that drives this profitability while

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also allowing for recurring revenue from support and managed services while keeping

them in close contact with customers. Perhaps most important though, is that they are

not burdened with large implementation practices that they need to continue to feed. On

the other hand, these newer providers dont have resources, scale or deep relationships

with the client organizations. This creates a fertile environment for enhanced mergers

and acquisition activity as highlighted in the following section.

DealActivity

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33Deal Activity

Deal Activity

Introduction

Each decade over the last 40 years, the technology industry has undergone a

generational shift in business models that reshapes the landscape. What is currently

happening with Cloud is the latest of these generational shifts. Much like the 1980s saw

the introduction of mainframe computing, followed by the 1990s with a shift to the

client/server model and the introduction and rapid growth of the Internet, the current time

period is in the midst of the transition to cloud computing. These shifts result in a high

volume of financing activity whether in the form of VC or PE investments, mergers and

acquisitions or public market activity.

The growth potential and end size of the cloud market is rivaled only by the introduction

of the Internet in terms of sheer scale. As such, investor interest in cloud technology and

services, as well as adjacent markets such as big data and mobility is high. Many of

these investors have been prior participants and enablers of the previous generational

shifts and the growth of the Internet. As such, they are aggressively pursuing

opportunities in Cloud across the 4 primary areas covered in this report, as well as the

professional services that support these areas. This interest has remained steady over

the last several years even amid the economic recession.

Today, the market remains in an early stage of its lifecycle, with new companies

emerging rapidly with a new cloud based solution or service offering. This leads to a

highly fragmented market with a limited number of assets of scale. In the services

segment, this is especially true as there is typically a lag between the creation of new

technologies and the subsequent creation of services companies to support these

technologies. As technology platforms like Salesforce, ServiceNow, Workday,

Demandware, and NetSuite continue to scale, and traditional ISVs like SAP and Oracle

move more to the cloud, there remains a tremendous opportunity for investors to

capitalize on the ecosystems that emerge to support the growth of these platforms. By

focusing on investing in the services companies supporting these platforms, or even

more broadly cloud services in general, they are able to invest in a market where there

will be far more winners created than in the technology platforms alone. For every

successful technology platform like ServiceNow, there will be a factor of services

companies that emerge and are able to scale. One need only look at companies like

Oracle, SAP, and Salesforce and the ecosystem of services companies that exist to

support those products to get a sense of opportunity. So while SaaS and IaaS may

generate the most buzz, the number of winners will be limited.

For strategic acquirers, there are opportunities abound to acquire capabilities in the

Cloud. The question for many strategic acquirers remains what and when to acquire.

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34Deal Activity

With respect to what to acquire, there are many dimensions that need to be answered.

As traditional implementation services become shorter in duration and pricing pressure

increases, as cloud slowly eliminates the need for manual implementation, the nature of

services are becoming more IP centric and platform in nature. Given that, does it make

sense to acquire IP in the form of SaaS or PaaS applications to begin the decoupling of

revenue and headcount growth, strengthen the customer relationship, and sell a bundled

offering? The answer is perhaps, as valuation, integration and an expanded competitive

landscape loom as challenges to such a strategy. On the service side, the what and

when to acquire are linked, and while there are many high growth cloud focused services

firms, a lack of scale continues to define the segment. The result is hesitancy on large

SIs to make a bet on these firms, as they are alternately betting on which platforms will

be the winners of

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