Microsoft Office 365: How the Hosted Exchange Server Is Redefining SMB Cloud IT Adoption

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1 INDUSTRY DEVELOPMENTS AND MODELS Microsoft Office 365: How the Hosted Exchange Server Is Redefining SMB Cloud IT Adoption Christopher Chute IDC OPINION Office 365 is Microsoft's next-generation and Office productivity platform. While Office 365 can be deployed across any IT environment, for small and medium-sized business (SMB) customers, the primary environment has been via Microsoft Azure's public cloud. In just the past three years, IDC has seen a quiet revolution in how SMB CIOs generally view cloud IT, and we view Microsoft Office 365 as being a main driver for this shift in perception. Further: While total SMB Office 365 adoption has grown, adoption by medium-sized businesses has outpaced that of small businesses (SBs). Midmarket firms have been first movers toward cloud IT as small businesses held back, still viewing IT as a long-term cost. U.S. midmarket Office 365 adoption will surpass 40% by the end of IDC expects that Microsoft's productivity messaging, coupled with strong channel partner support and go-to-market buzz around the Windows 10 launch, will continue to drive Office 365 adoption rates among SMB customers. Third-party IT vendors should view the Office 365 app launcher as a platform for reaching users and seek to partner with Microsoft. May 2015, IDC #256192

2 IN THIS STUDY This study provides a high-level overview of how Microsoft's Office 365 , collaboration, and office productivity software has redefined these capabilities among U.S. SMB customers and is poised to drive SMB majority-stage cloud adoption. It provides respondent usage rates from IDC's annual U.S. small and medium-sized business end-user survey for 2013 and 2014 and estimates for The data presented in this study is segmented by major SMB segments: small business (10-99 employees) and medium-sized business/midmarket ( employees). SITUATION OVERVIEW The Evolving Role of in SMB IT The server has always been the most critical piece of a typical SMB IT infrastructure. From a single server sitting underneath an office manager's desk to one in a closet of like-sized servers partly or fully virtualized to a fully built out datacenter, supporting has been the top mission-critical responsibility for IT management. Mobility has further impacted , making it an even more critical IT responsibility. Mobile device usage has spread throughout organizations of every size, resulting in mobility moving from outbound sales and CXO roles only to all employees accessing at least . Secure mobile access, along with the ability to at least view and lightly edit office documents from devices, is now viewed as a requirement by firms of every size, which in turn has increased IT staff maintenance commitments. As such, and mobility, which service basic business communication, collaboration, and compliance needs, are now served by a typical IT infrastructure that for many smaller businesses has not been modernized enough to provide a consistent quality of service. Even in the post-server/pc 3rd Platform era, Microsoft Office, along with its Exchange solution, is viewed by the majority of SMB IT professionals as irreplaceable technology. These IT professionals have deep experience running Microsoft infrastructure solutions and have spent their entire careers developing capabilities to more efficiently manage and deploy Windows, Office, and Exchange updates, patches, and general maintenance. In the past, many SMB CIOs have been hesitant to support non-microsoft software or hardware, particularly in a mobile context. To address "shadow IT" problems brought about by unsanctioned BYOD access, these managers have turned to third-party enterprise mobility management (EMM) software solutions. Basic mobile device management (MDM) delivered on an opex basis from a third-party service provider has been a highly valued cloud service for many SMB CIOs. Many devicerelated management issues are effectively addressed through this one piece of software. Office 365 as SMB Cloud Game Changer Office 365 is Microsoft's next-generation and Office productivity platform. While Office 365 can be deployed across any IT environment, for SMB customers, the primary environment has been via Microsoft Azure's public cloud. In just the past three years, IDC has seen a quiet revolution in how SMB CIOs generally view cloud IT, and we view Microsoft Office 365 as being a main driver for this shift in perception IDC #

3 In the past, the majority of U.S. SMB CIOs and IT managers have viewed cloud IT with trepidation. However, since 2012, Office 365 has served as a game changer, reducing these perception barriers, allowing SMBs to utilize a wider set of third party hosted software solutions. Channel partners that used to sell servers and other infrastructure hardware now have a new opportunity to build a predictable revenue stream by pitching the benefits of moving to a cloud-based Microsoft platform: When moving to Office 365, SMB IT professionals no longer have to individually manage, troubleshoot, and patch an on-premise Exchange server. The value of this in the eyes of these managers cannot be overstated, as they have spent many weekends and late nights troubleshooting on-premise infrastructure. Their quality of life, both at work and personal, dramatically increases. Channel partners are realizing that Office 365 represents a game-changing value. By solving the Exchange server "problem" with Office 365, they can tout the benefits of instant updates that do not require individual patching, secure mobile device access, more easily position an eventual (or immediate) cloud migration of Microsoft Office apps and, most importantly, be able to more easily pitch a whole new set of cloud IT services that SMB IT decision makers would have been nowhere near receptive to without that initial migration. Office 365 provides many smaller businesses with their first cloud experience and can create a positive impression that will spur further cloud IT demand. Microsoft, which has had its share of setbacks in the post-client/server 3rd Platform era, is now viewed in a much more modern context by both SMB customers and partners. CEO Satya Nadella's focused "Productivity" message has resulted in a rapid build out of cloud-based services and a honed Office strategy that places strong value on user experience and seamless integration between Office applications and Outlook. Because Office 365 frees up considerable staffing resources, CIOs are now able to redefine the organization's IT function. IT decision makers can now develop and implement more of a business partner role within their organization. Without Office 365, this would be considerably more difficult to effectively implement. FUTURE OUTLOOK IDC expects that Microsoft's productivity messaging, coupled with strong channel partner support and go-to-market buzz around Windows 10 launch, will continue to drive Office 365 adoption rates among SMB customers. Figures 1 3 show IDC's end-user survey results for U.S. SMB Office 365 adoption for 2013 and 2014 and offer an estimate for Figure 1 cites that across the entire U.S. SMB space, 17% had an Office 365 deployment in place in 2013, and that grew 29% to 22% in IDC expects that will accelerate in 2015 to 30% of all SMBs IDC #

4 FIGURE 1 U.S. SMB Office 365 Adoption, Q. Does your organization currently use Office 365? (Answer = Yes) Note: The data for 2015 is estimated. Source: IDC's U.S. SMB Survey, 2013 and 2014 Small Business Figure 2 shows that among small businesses, Office 365 adoption has grown significantly, and this represents a strong opportunity for channel partners. In 2013, only 8% of SBs had adopted Office 365, and that number almost doubled in 2014 to 15%. IDC expects adoption to double to 30% in 2015, representing two consecutive years of 90%+ growth. FIGURE 2 U.S. Small Business Office 365 Adoption, Q. Does your organization currently use Office 365? (Answer = Yes) Note: The data for 2015 is estimated. Source: IDC's U.S. SMB Survey, 2013 and IDC #

5 Medium-Sized Business Medium-sized business adoption of Office 365 had outpaced that of small businesses. Midmarket firms have been first movers toward cloud IT as small businesses held back, still viewing IT as a longterm cost. In 2013, only 8% of small businesses adopted Office 365, while 22% of midmarket firms adopted Office 365. That grew to 33% of midmarket in 2014 (47% growth), and IDC expects this to grow another 32% in 2015 to 43% (see Figure 3). FIGURE 3 U.S. Medium-Sized Business Office 365 Adoption, Q. Does your organization currently use Office 365? (Answer = Yes) Note: The data for 2015 is estimated. Source: IDC's U.S. SMB Survey, 2013 and 2014 ESSENTIAL GUIDANCE IDC SMB survey data indicates that Microsoft has been successful growing its Office 365 installed base among smaller United States based customers largely due to a business benefit, namely less time commitment managing on-premise infrastructure maintenance. IDC expects that the company will use this growing installed base to drive adjacent capabilities, such as cloud storage, IT security, and mobility-related solutions. Rather than view Microsoft as a competitor, third-party IT vendors should view the Office 365 app launcher as a platform for reaching users and seek to partner with Microsoft. Harnessing Microsoft's success is more than riding coat tails; suppliers must also begin to think about not just how to differentiate from each other but specifically from Microsoft. IDC suspects that as Microsoft builds out its Azure service offerings, partnerships will be a key component to growing the installed base. For vendors, differentiating based on customer industry or on a set of capabilities that solve a specific set of business problems would be attractive to a Microsoft cloud platform IDC #

6 LEARN MORE Related Research U.S. and Worldwide SMB Enterprise Mobility Management Software Forecast (IDC #254958, March 2015) How Microsoft Could Disrupt the Current Enterprise Mobility Management Landscape (IDC #254022, February 2015) Worldwide SMB Business File Synchronization and Sharing Forecast: An Opportunity for Partners to Become Trusted Advisors (IDC #253072, December 2014) Worldwide and U.S. SMB Public IT Cloud Services Forecast (IDC #251967, October 2014) Synopsis This IDC study provides a high-level overview of how Microsoft's Office 365 , collaboration, and office productivity software has redefined these capabilities among U.S. SMB customers and is poised to drive SMB majority-stage cloud adoption. It provides respondent usage rates from IDC's annual small and medium-sized business end-user survey for 2013 and 2014 and an estimate for The data presented in this study is segmented by major SMB segments: small business (10-99 employees) and medium-sized business/midmarket ( employees). "Office 365 provides many smaller businesses with their first cloud experience and can create a positive impression that spurs further cloud solution demand. Microsoft CEO Satya Nadella's 'Productivity' messaging has resulted in a honed Office strategy that places strong value on user experience and seamless integration between Office applications and cloud-based Outlook. Office 365 owes its strong growth among U.S. SMBs to allowing IT decision makers to free up considerable staffing resources. SMB CIOs can now spend this time developing and implementing IT as more of a business partner role within their organizations." Chris Chute, vice president, SMB Cloud and Mobility Practice 2015 IDC #

7 About IDC International Data Corporation (IDC) is the premier global provider of market intelligence, advisory services, and events for the information technology, telecommunications and consumer technology markets. IDC helps IT professionals, business executives, and the investment community make factbased decisions on technology purchases and business strategy. More than 1,100 IDC analysts provide global, regional, and local expertise on technology and industry opportunities and trends in over 110 countries worldwide. For 50 years, IDC has provided strategic insights to help our clients achieve their key business objectives. IDC is a subsidiary of IDG, the world's leading technology media, research, and events company. Global Headquarters 5 Speen Street Framingham, MA USA idc-insights-community.com Copyright Notice This IDC research document was published as part of an IDC continuous intelligence service, providing written research, analyst interactions, telebriefings, and conferences. Visit to learn more about IDC subscription and consulting services. To view a list of IDC offices worldwide, visit Please contact the IDC Hotline at , ext (or ) or sales@idc.com for information on applying the price of this document toward the purchase of an IDC service or for information on additional copies or Web rights. Copyright 2015 IDC. Reproduction is forbidden unless authorized. All rights reserved.