Review of Gartner’s “How Cloud Sourcing is Changing the IT Services Market” Webinar

It will come as no surprise to readers of this blog that the topic of the Cloud has received its fair share of attention of late.  The word “Cloud” has been the most searched term on Gartner’s website for both 2009 and 2010.  On the Ridgecrest website, my Above the Clouds post titled “An Interview with Cloud Consultancy CEO John Hallett” has attracted nearly twice the traffic as its closest competitor.  While my Twitter and Google Reader feeds make it clear that there is no shortage of content supply available to meet this insatiable reader demand, I thought it would be interesting to attend and review a Gartner webinar on the topic that was directed specifically at the technology services industry.

Yesterday, Gartner Research VP Ben Pring presented a webinar titled “How Cloud Sourcing is Changing the IT Services Market.”  His presentation was structured in three sections:

• What’s driving change in the global IT services market?
• How are vendors positioning themselves among these changing tides?
• How should enterprises leverage the future shape of the IT services market to ensure they obtain the best business outcomes?

Drivers of Change:

I found some of this section to be stating the obvious with regards to the importance of the Cloud and the indicators that major change is coming.  I think most people are familiar with the fact that Microsoft is spending lots of money on retail market “to the Cloud” advertising and that Mark Zuckerberg has been pretty successful.  And, yes, Salesforce.com has proved the viability of the SaaS concept.  And, no, VC’s are not interested in funding new client/server, on-premise software plays.  However, he did present some interesting tidbits.  For example:

• Salesforce.com is the fastest growing software firm in history, based on time to reach $1 billion in revenue (under 9 years compared to 25 years for SAP, 21 for Oracle and 15 for Microsoft).
• CSC told Gartner recently that 75% of the RFPs they’re seeing include a Cloud element.
• At Gartner’s December 2010 AD Conference, 95% of attendees agreed that “customization should be the last resort, not the first.”
• Over the next 6 years, organizations will spend $112 billion cumulatively on SaaS, PaaS and IaaS.
• The SaaS market is expected to grow from $7 billion in 2010 to $21 billion in 2014.
• The PaaS market (i.e. platform infrastructure & integration services) is expected to grow from $220 million in 2010 to $1 billion in 2014.
• The IaaS market (i.e. compute, storage & backup services) is expected to grow from $2.5 billion in 2010 to $12 billion in 2014.
• He noted signs of a Cloud bubble, including (although he did not name names) Salesforce.com’s recent acquisition of Heroku for $212m despite the target’s lack of any revenue.
• Much of what currently carries the “Cloud” tag is not true Cloud as such is defined by Gartner but is essentially application outsourcing, as it does not include pay-as-you-go mechanisms, may not be “turned down/off” as needed and is not multi-tenant.
• He believes private Clouds are merely attempts by both buying and selling incumbents to diffuse the threat of true public Cloud services and that economic benefits of the former will fall short of those brought by the latter.
• He sees the 2011-2013 period as a sort of technological interregnum, where the old king of client/server computing has passed away but the new king of Cloud computing is still in the definitional, developmental stage and has not yet fully taken up its reign.

Early IT Services Firms’ Positioning:

Pring’s thesis is that IT services firms have gradually been moving from an initial wholly negative reaction to the disruptive threats of the Cloud idea to a largely begrudging acceptance of the inevitability of its expansion.  As this shift is occurring, many firms are beginning to position themselves for the changes that will only accelerate going forward as Cloud computing becomes pervasive.  Some interesting points presented included:

• The current services-to-software revenue relationship for SaaS is around 0.25 to 1, compared to 3 to 1 in the current client/server model.  With $10.6 billion in projected worldwide 2011 SaaS software spend, this equates to a $29 billion services opportunity loss (i.e., in a client/server model, $10.6 billion of software purchased would result in $32 billion of services, compared to only $3 billion in a SaaS model).
• He sees the SaaS services-to-software revenue ratio expanding to 2 to 1 by 2016 as SaaS moves along the adoption curve.  I see this assumption as being critical for technology consulting firms but, unfortunately, he did not provide specific rationale to support it.
• Thus, as the SaaS software spend market increases from $10.6 billion in 2011 to $16.3 billion in 2016, the associated services opportunity will increase from $3 billion to $33 billion.  For recently formed Cloud consultancies, this tremendous growth rate is a huge opportunity.  For client/server model incumbent consultancies, Pring sees the services opportunity as relatively flat, as a decline in the services-to-software revenue ratio is offset by overall market growth.
• Interestingly, he considered other examples of markets with dramatically reduced unit pricing, namely auto manufacturing and music, and wondered whether tech services would see the auto scenario (dramatically higher aggregate demand and spending) or the music scenario (40% lower aggregate spend).  I would love to see a deeper analysis of this question but, given the time constraints of the webinar, Pring merely said he sees a middle-of-the-road outcome, where aggregate services industry revenue will not shrink but growth will be dampened.
• The larger services firms are moving more aggressively to build out a portfolio of offerings that fit the changing market.  Examples given included Accenture’s move toward proprietary IP with its Accenture Software offerings, the Indian providers infusing Cloud-based infrastructure capabilities into their portfolios, HP working to reinvent EDS with Cloud capabilities and pure-play SaaS boutiques (e.g. Appirio, Astadia and Bluewolf) with dominant shares of the Salesforce.com market moving to challenge client/server incumbents in broader markets.

Enterprise Buyers’ Approach to Capitalize on the Evolving IT Services Market

Pring finished up by talking about how enterprise IT is changing from an internal model to an external model, where critical capabilities shift from “rowing” to “steering,” with a primary emphasis on diligence on and management of external suppliers.  He noted the importance of IT policy documents that lay out roles, rights and responsibilities within enterprises and align buying principles with these policies.  Finally, he laid out some fairly high level and, I think, intuitive roles for IT services providers in this new landscape:

• Providers will continue to see demand for strategic advice (e.g. competitive frameworks and cost/benefit analysis), tactical advice (e.g. suppliers, technologies and case/use studies), implementation services (e.g. best practice, deployments and project management) and change management.
• There will be need to be continued emphasis on small & short projects, rapid, iterative models, fewer big bangs, open source & lower cost proprietary development tools and younger talent wanting to work with newer tools

Conclusions:

I have to say I was hoping for more than was delivered by this event.  I would like to have seen less time devoted to the well-known facts that the Cloud is real and results in internal-to-external buyer orientation shifts and more devoted to what IT services providers should specifically do to navigate these waters.  For example, Pring said there will continue to be demand for implementation services but did not adequately explore the changes within this service line or the ways in which consultancies should play within it.  From my discussions with technology consultancy CEOs, everyone intuitively understands that there will be continued demand for strategic and tactical advice.  It’s the much larger dollar implementation offering where the perceived business risk is highest and the confusion over the road ahead is most acute.  I would like to have seen this dealt with in detail.