MARKET OVERVIEW: CLOUD INFRASTRUCTURE SERVICES 2012

MARKET OVERVIEW: CLOUD INFRASTRUCTURE SERVICES 2012 Maturing Vendor Offerings in a Busy Market Author Thomas Mendel, Vice President, EMEA Executive Summary As promised by hype-building marketers, the cloud is now everywhere. As cloud has lost its buzzword reputation and is instead a requirement in many IT departments, IT buyers are now spending serious money on the various flavors of cloud technology. However, given the many choices, clients are confused. Where should I buy what and from whom? What s secure and what s not? What are the hidden costs and risks? Who are the leading vendors? How about service level guarantees? they ask. This report attempts to clarify some of the confusion in the cloud infrastructure services market. We will define the market, explain the different sub-markets, and provide information on market size and growth as well as on trends. Finally, we will also provide guidance regarding the who s who on the vendor side. Two follow-up reports will focus specifically on SAP hosting trends in the cloud era and cloud management technologies. 2012, HfS Research, Ltd www.hfsresearch.com 1

Table of Contents Executive Summary 1 Renewed Pressure on Buyers, Internal and External Service Providers 3 The Corporate IT Buyer 3 Internal IT Operations 3 The IT Service Provider 4 The Market 4 Cloud Market Definition 4 Cloud Infrastructure Services Market Growth and Trends 5 Five Capabilities Buyers Really Need 7 Key Players and Differentiation 8 IaaS 8 Hybrid Cloud Infrastructure Services 9 Private Cloud Data Center Migration 10 Private and Hybrid Cloud Migration and Management Tools 11 Recommendations 12 HfS Research Recommendations for IT Buyers 12 HfS Research Recommendations for IT Operations 12 HfS Research Recommendations for IT Service Providers 12 About the Author 13 Thomas Mendel, Vice President, EMEA 13 About HfS Research 14 2012, HfS Research, Ltd www.hfsresearch.com 2

Renewed Pressure on Buyers, Internal and External Service Providers Earlier this year, we published the cloud results of the HfS Research first IT Trends Survey. 1 We concluded that (a) cloud computing has crossed the chasm and is now on top of IT managers agendas, (b) private clouds are the number one investment area in 2012, and (c) long-term, buyers are looking for solutions that integrate the private, public, and hybrid cloud environments. 2 The underlying reason for these trends is buyers strong belief that cloud computing will dramatically slash IT costs. 3 But there is more. Increasingly, developers of cloud-based software are making heavy use of advanced features available on the market. For software service providers, it has become far easier to deploy solutions in a cloud environment than use traditional software licensing models (in addition to the nifty improvements in revenue models and reductions in costs to support outdated software). That in turn puts heavy pressure on three traditional constituencies in the IT value chain: (1) the corporate IT buyer, (2) internal IT operations, and (3) the IT service provider. The Corporate IT Buyer Buying IT products and services is no longer the sole responsibility of the IT department. Business units are increasingly taking the lead in acquiring new IT solutions, and shadow IT spending is growing. 4 But with choice comes inevitable confusion. Today, for a given business problem, often dozens of solutions are available. Some are really cloud based, some allow for hybrid cloud deployments, and some remain unchanged (though their marketing teams cloudy hype suggests otherwise). Inside and outside the IT department, IT buyers are trying to figure out the right way to mix and match the various possibilities. I need assistance in figuring out what to buy from whom, says a purchasing manager of a media company. Internal IT Operations IT operational spending, also known as maintenance, is still responsible for the bulk of the corporate IT budget. 5 While traditionally internal IT delivered the majority of the services, IT outsourcing has become an important part of the services mix for most enterprises, and a threat for internal IT operations: this is the real competition. For many years, internal IT operations were able to use smoke-and-mirrors tactics to disguise the real cost of internal IT services. A true apples-toapples comparison has remained difficult. Our research shows that cloud services solutions will force these comparisons to be more transparent. In effect, cloud is further accelerating the move toward external service delivery, making it even harder for internal IT operations to justify their budgetary needs. Today, they are either looking at establishing private cloud solutions or looking toward their service providers to help them with hybrid cloud solutions to regain control. As a vice president of infrastructure for a manufacturing company said, We are now implementing virtualization tools extensively to establish a private cloud. Our calculation shows that we ll be able to match outsourcers pricing by the end of the year. 1 The HfS Research Trends Survey was a phone-interview survey fielded to 211 IT decision-makers in Germany, the UK, France, and Benelux/Nordics. Respondents job titles included CIO, VP IT, VP Infrastructure, VP Operations, IT manager, and IT Operations manager. All companies interviewed were large enterprises with a headcount upwards of 250 and a turnover of more than 50 million. The survey was conducted in September and October of 2011. 2 See http://www.hfsresearch.com/european-cloud-computing-trends-2012. 3 The full set of results from the HfS Research Trends Survey can be found at http://www.hfsresearch.com/european-it-trends-in-2012-(webinar). 4 Estimates regarding the actual size of shadow IT vary greatly by company size, industry, etc. There seems to be consensus that it used to be around an additional 20 percent of the total IT budget a few years ago, but has now grown to more than 25 percent. See http://sandhill.com/article/the-spotlightof-enterprise-app-stores-can-help-fight-growing-shadow-it. 5 Also better understood than shadow IT, the distribution of the IT budget is vastly different depending on company size, industry, etc. However, on average the split is around 70 percent operations, 30 percent innovation. See http://en.community.dell.com/dellgroups/dell_it_efficiency_metrics/w/overall_it_performance_metrics/1338.aspx. 2012, HfS Research, Ltd www.hfsresearch.com 3

The IT Service Provider Public cloud services are rapidly decreasing the margins of established IT service providers, which had oriented their pricing on undercutting the internal IT operational units. Cloud services are game-changers because they do not follow the same price/performance ratio. However, security considerations and legal concerns are helping established service providers. That is why today they are focusing on (1) marketing their capabilities for meeting guaranteed service level agreements (SLAs) and (2) providing consulting services to help establish private clouds. A CIO for a packaged goods company said, We are already more than experimenting with the public cloud; our business users demand added flexibility. I just wish our IT service partners would be quicker to react. And an IT manager for a manufacturing company explained that in the past, we bought telecommunication services from aggregators, offering us the cheap rates for the bandwidth we needed. I believe that this will be available in the cloud space soon as well. The Market The cloud phenomenon has many facets. To make sense of it, we need to establish a taxonomy and start with a definition. Cloud Market Definition HfS Research defines cloud computing as standardized IT services, based on Internet technologies delivered in a flexible, self-service way. The first dimension of our taxonomy is the degree of openness to the Internet as a distribution channel. The public cloud is using the native Internet to deliver services. Private clouds are established and run by internal IT departments or IT service providers with added security and reliability features. Hybrid cloud services are using at least one element of the public and one element of the private cloud. They can be delivered by either traditional IT services companies and outsourcers, or by internal IT departments. In both cases, the service provider functions in a new role, called the service broker. The second dimension of our taxonomy is the level of complexity, ranging from infrastructure through middleware to applications. These two dimensions create nine distinct cloud market segments (see Exhibit 1). There are also a number of characteristics for cloud services:» Standardization. Cloud services should be designed to be used by many customers (multi-tenancy) with very little customization. Standardization means faster deployment, better economies of scale, lower delivery cost, and transparency.» Flexible pricing schemes. Originally, this was supposed to be 100 percent consumption-based, pay-per-use. In reality, few enterprise customers want to go all in, mainly for budgetary prediction reasons. Hence, most vendors offer more flexibility than simple annual contracts to match customers need, but full pay-as-you go remains rare.» Self-service. Service catalogues are one thing; to qualify as a cloud service, the entire procurement, provisioning, and configuration management process has to have a high degree of automation. 2012, HfS Research, Ltd www.hfsresearch.com 4

Exhibit 1: Cloud Services Taxonomy Source: HfS Research, 2012 Cloud Infrastructure Services Market Growth and Trends In this report, we will focus on complexity level 1, cloud infrastructure services. How big are these markets today, and how much growth can we expect (see Exhibit 2)?» Infrastructure as a Service (IaaS). IaaS includes all the system services that make up the foundation layer of the cloud: The servers, network and peripheral infrastructure, the operating systems, storage, data back-up and security plus the databases. 6 We estimate this market today at around $2.5 billion in service revenues.» Hybrid infrastructure services. These services are today typically delivered by established IT service providers adding an IaaS flavor to their outsourcing offering. We estimate this market today at around $1.8 billion in service revenues. Private cloud data center. It consists of two separate markets, one for software tools that help to run private clouds 7 and one for consulting services to help establish a private cloud. We estimate the software market is at around $3.4 billion in licenses revenues and the consulting market is at around $ 7.8 billion in service revenues today. 6 IaaS supports the Platform as a Service (PaaS) layer, which includes the middleware and development tools used to build, provision, and manage cloud optimized applications. Both are necessary to create the Software as a Service (SaaS) layer and cloud applications such as CRM, ERP, help desk, or email. 7 These software tools include virtualization, metering and billing, service catalogue, change and configuration, availability and performance, service desk, and dashboards. 2012, HfS Research, Ltd www.hfsresearch.com 5

(To avoid confusing our BPO clients, we define the combination of these solutions with a business process as a cloud business platform. Additional information on this sector is available in our report, What Are Business Platforms, and Why Do They Represent the Future of Outsourcing?). To put the cloud infrastructure service market into perspective as it relates to the overall market, total global IT spending is estimated to be approximately $2,000 billion. The overall IT infrastructure outsourcing market is around $100 billion (excluding mainframe and desktop). IT infrastructure consulting services represents another $50 billion. 8 Thus, the cloud infrastructure services market represents about 8 percent of the total market today (excluding the software component). Although the number is relatively small, we estimate the market barely existed nearly three years ago. Hence, the growth rate until today is impressive. Now, what are the trends, and what do the trends mean for the three market segments? Exhibit 2: Cloud Infrastructure Services Sizing and Forecast Source: HfS Research, 2012 8 These estimates are based on publicly available information, conversations with end-user companies as well as vendors and primary as well as secondary research. 2012, HfS Research, Ltd www.hfsresearch.com 6

» IaaS. IaaS was the original innovation that created the cloud infrastructure services market. Technology is now mature enough to use the Internet for business needs. That s why developers were the first to exploit speed and costs savings. And they will continue to do so. In fact, by 2015 very little testing will be done in-house. More substantial growth in areas other than testing will be inhibited by security, legal, auditing, and data privacy concerns. Nevertheless, we expect the IaaS market to experience healthy growth to $7.2 billion by 2015.» Hybrid infrastructure services. This area of the market will enjoy the highest growth rates, and with good reason. Corporate IT buyers as well as IT departments are looking toward IT service providers to help manage the various service delivery options. IT service providers will gradually replace existing outsourcing contracts with more flexible ones, adding cloud flavors as they go along. We expect that by 2015, around a quarter of the IT infrastructure outsourcing contracts will be able to qualify as hybrid cloud infrastructure services, resulting in a $22.7 billion market. An additional driver, albeit on a lower level, will be cloud management and cloud broker services.» Private cloud data center. This market is driven by internal IT operations departments need to compete with external service delivery. And they will have a hard time. As service transparency through standardization increases, finally enabling true apples-to-apples cost comparisons, it will become clear that only the largest enterprises (sometimes with data center environments bigger than many service providers) can match the economies of scale necessary to stay competitive. However, as mentioned before, in 2012 establishing a private cloud is number one on the investment agenda. For the software part of the market, the growth potential is limited. Many companies already own the necessary type of tools; growth comes mainly from virtualization and configuration management. In contrast, the consulting part of the market will enjoy further growth to $12.3 billion by 2015, as more and more IT departments become desperate for a private cloud as a competitive differentiator. Here s the bottom line: Cloud infrastructure services will establish themselves as a key part of the overall IT infrastructure outsourcing and consulting market. No IT service provider can afford to avoid this market. Depending on overall market growth, the cloud part will grow from 8 percent today to between 20 percent and 25 percent in 2015. Five Capabilities Buyers Really Need Stripping away the hype, cloud-washing, and marketing, here is a short list of what our interviews with IT buyers suggest they really need from cloud vendors. 1. Flexible pricing. Long-term fixed-priced contracts no longer fit the needs of IT buyers. They are looking for ways to replace capital expenditure with more flexible operational expenditure, helping their company to adjust to changes in the business climate. 2. Faster time-to-launch. Business decision makers are no longer prepared (or rather cannot afford) to wait for months until a new service is launched. Therefore, IT buyers need the capability to launch new applications and services quickly without neglecting thorough testing. 3. Right-clouding. With so many options, buyers need guidance. They need help in finding the right mix of the three cloud deployment options (public, hybrid, private). 4. The holistic view. Some of the cloud services make it sound so easy, but there is the danger of losing oversight. Clients need assistance in establishing integrated solutions of holistic business processes with end-to-end SLAs. 5. Trust. One of the key obstacles to even wider use of cloud services is trust. Vendors need to do a better job at launching cloud services that are secure and auditable. 2012, HfS Research, Ltd www.hfsresearch.com 7

Key Players and Differentiation No market overview would be complete without a look at the vendor landscape. In the cloud infrastructure space, this is particularly important as hundreds of vendors are already active in the three market segments with new challengers entering the game daily. That s why we made our selection based on a few important criteria:» Market traction» Innovative and differentiated offerings» Future potential Because of the rapid changes in the market, HfS Research will update this list regularly. IaaS The vendor landscape in this market (see Exhibit 3) consists of IaaS pure plays and IT services companies with additional IaaS offerings (which may also appear in the hybrid cloud section). The key differentiators are as follows:» Security and auditability. Most public IaaS clouds won't let you audit them. The Cloud Security Alliance (CSA) is currently working on a common set of security-related standards for cloud services that won t be out for a while. Many countries laws are also unclear.» Networking services. Unlike Content Delivery Networks (CDNs), 9 IaaS are often based on centralized data storage, which makes it difficult to use for many data transaction-intensive applications. The capability of a vendor to cover many geographies can be a decisive factor.» Automation. Ease-of-use and self-service capabilities are important IaaS components. The more automation a vendor can offer, the better.» Integration. APIs to other vendors IaaS solution or hybrid and private cloud offerings are becoming increasingly sought after. So are configuration options.» Management services. Apart from the pure location and geographical coverage, clients also require network and systems management services as well as SLA and performance management.» Price and payment structure. As argued before, it does not have to be a full flexible billing, but there needs to be significant payment flexibility.» Breadth and depth of the solution. A full IaaS solution needs to cover servers, network and peripheral infrastructure, the operating systems, storage, data back-up, and security plus the databases. 9 CDNs are offered by the likes of Akamai, Mirror Image, and many telcos. 2012, HfS Research, Ltd www.hfsresearch.com 8

Exhibit 3: Leading IaaS Providers Tier One IaaS Providers» Amazon Web Services» CSC» T-Systems» HP» Savvis» Rackspace» Terremark (Verizon)» IBM» OpSource (Dimension Data)» NaviSite» Google» Microsoft» Fujitsu» Dell» GoGrid» Joyent» Hosting.com» Bluelock Important IaaS Challengers Source: HfS Research, 2012 Hybrid Cloud Infrastructure Services A lot of cloud-washing of existing services is going on here. It s tricky to distinguish who has a strategy and who is executing as opposed to doing simple rebranding or reselling of other IaaS solutions (see Exhibit 4). The key differentiators are somewhat similar to the IaaS ones. Hence, we ll be a bit briefer here:» Security and auditability.» Networking services.» Automation.» Price and payment structure.» Hybrid cloud management.» Solution architecture and features (does the vendor have its own IaaS or not). 2012, HfS Research, Ltd www.hfsresearch.com 9

Exhibit 4: Leading Hybrid Cloud Infrastructure Services Providers Tier One Hybrid Cloud Infrastructure Services Providers» CSC» T-Systems» Cognizant (Savvis)» Capgemini» Accenture» HP» Wipro» IBM» Fujitsu» Dimension Data» igate Important Hybrid Cloud Infrastructure Services Challengers» Atos» AT&T» Verizon (Terremark)» Xerox» TCS» VPS.net» BT Global Services» Orange Business Services» Rackspace» NaviSite» GoGrid» Datapipe» Hosting.com Source: HfS Research, 2012 Private Cloud Data Center Migration A private cloud is typically a virtualized, multitenant environment dedicated to one company (increasingly also extended to suppliers, customers, and other value chain partners). Here is where the flexible payment scheme characteristic gets challenged a lot. At the end of the day, HfS believes that the customer decides what the private cloud solution needs to do (see Exhibit 5). The key differentiators in the private cloud data center migration market are:» Experience in private cloud migrations.» Solution architecture.» Commitment to outcomes.» Partner ecosystem.» Cost savings.» Manageability.» Meeting the criteria for standardized, flexible pricing, and automation. 2012, HfS Research, Ltd www.hfsresearch.com 10

Exhibit 5: Leading Private Cloud Data Center Migration Consultants Tier One Private Cloud Data Center Migration Consultants» HP» Accenture» Wipro» Dimension Data» Infosys» Cognizant» Capgemini» igate» Genpact» Symantec Important Private Cloud Data Center Migration Challengers» IBM» Microsoft» VMware» Avanade» EMC» Dell» Compucom» HCL» Atos» Lufthansa Systems Source: HfS Research, 2012 Private and Hybrid Cloud Migration and Management Tools These tools help you to either establish a private cloud or manage a private or hybrid cloud environment. As this market is currently experiencing an extremely high change rate, the main differentiation lies in the functionality, integration, and future potential of a given solution (see Exhibit 6). Exhibit 6: Leading Private and Hybrid Cloud Migration and Management Tools Leading Private and Hybrid Cloud Migration Tools» BMC» CA» HP» VMware» Microsoft» Eucalyptus» Symantec» Citrix» OnApp» Oracle» In Continuum Software» Cloupia» Red Hat Leading Private and Hybrid Cloud Management Tools» BMC» Compuware» HP» Symantec» CA» Veeam» Cisco» Eucalyptus» Zimory» Rightscale» Puppet labs» Kaavo» 6fusion» Cloupia Source: HfS Research, 2012 2012, HfS Research, Ltd www.hfsresearch.com 11

Recommendations A number of clear recommendations can be derived from the findings of the report: HfS Research Recommendations for IT Buyers» Save now or regret it later. Don t despair. The possibilities to save while at the same time improve the service experience have never been better. Many interesting options are available in the market that give you great negotiation leverage. However, taking advantage of the opportunities requires more detailed technological knowledge.» Play together with your internal IT. Try to avoid the temptation to do it all without your IT department. Isolated solutions will be great for a while, but a huge headache later. And, as discussed before, your internal IT will most likely see cloud as the big enemy. So, why not try to create a common sourcing project, and bring together IT buyers from all constituencies in the organization and the internal IT. That way, you will reap benefits for all parties involved. HfS Research Recommendations for IT Operations» Reduce your operational spending. Virtualization and cloud services offer great cost-savings opportunities. Exploit them! There are many examples out there of companies managing to get their operational spending down to less than 50 percent of the IT budget.» Get in the ring and fight. No more smoke and mirrors. Internal IT operations need to become more transparent in their pricing and allow advanced benchmarking to be performed because true apples-to-apples comparisons on standardized services are now possible. But make sure you voice your true competitive differentiators, namely, closeness to the business and an understanding of internal business processes. HfS Research Recommendations for IT Service Providers For IT service providers, opportunities present themselves in three areas:» Private cloud migration first. The number one opportunity over the foreseeable future will be helping internal IT to ease the migration to a private cloud environment.» Hybrid cloud second. As contract durations decline and flexibility increases, offering hybrid cloud infrastructure services as part of the services mix will change from being a competitive differentiator (2012-2015) to becoming a competitive necessity (2016-2020).» IaaS third. Helping clients understand and use IaaS is an immediate opportunity but will not constitute a sustainable competitive advantage in a market that is quickly commoditizing. Partnerships with leading IaaS vendors offer the quickest route to market. 2012, HfS Research, Ltd www.hfsresearch.com 12

About the Author Thomas Mendel, Vice President, EMEA Dr. Thomas Mendel, Ph.D., is Vice President, EMEA at HfS Research, where his prime focus is developing the HfS Research footprint in the European marketplace. Thomas is an IT industry veteran with more than 15 years of experience in advising IT vendor and end-user clients as well as performing research-based writing and consulting. He did consulting work with major end-user organizations and vendors in many countries. Thomas is an internationally recognized authority on cloud service management. He also maintains research interests in the areas of infrastructure outsourcing and converging IT and telecommunication technologies and markets, as well as IT-to-business alignment. Thomas is best known for his 9+ years of service at Forrester Research, where he held various analyst and management positions. Most recently, Thomas had the global responsibility for serving the Vendor Strategy professionals and leading a team that delivers research to help these professionals. He was responsible for a research agenda that illuminates strategic opportunities and risks, market demand and competitive dynamics, and go-to-market, as well as organizational strategies and the use of emerging technology to improve business results for technology vendors. Before joining Forrester, Thomas was vice president of the Solution Center Global Network and program director of Global Information Technology Infrastructure at Heidelberger Druckmaschinen AG. He was responsible for the management of the Heidelberg Global Network and the design and rollout of all global infrastructure projects, such as the implementation of the Heidelberg intranet in more than 60 countries. Prior to joining Heidelberg, Thomas was an IT manager at ABB Kraftwerke AG. He is in great demand as a conference speaker, both in Europe and North America. Thomas' work has enjoyed wide exposure in the media. A native of Germany, Thomas is a graduate of business studies at Mannheim University and holds a Ph.D. in computer science from the University of Wales in Swansea. Thomas has lived and worked in both Germany and the UK but has also traveled to many countries for both business and leisure. In his spare time, Thomas enjoys cooking, skiing, football and rock music. Thomas can be reached at thomas.mendel@hfsresearch.com. He can also be found on Twitter: @drthomasmendel. 2012, HfS Research, Ltd www.hfsresearch.com 13

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