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Rackspace Analyst Day recap: New leadership rallies around modular managed services

November 15 2019
by Liam Eagle, Nicole Henderson, Melanie Posey, Al Sadowski


Introduction


At its Analyst Day in San Antonio, Texas, Rackspace laid out its vision for supporting customers through every phase of their cloud transformation, with a modular approach to managed clouds and professional services that aims to deliver 'unbiased but opinionated expertise.' The event was also a chance to hear from CEO Kevin Jones (who joined in April) and new additions to the senior executive team, some of whom worked with Jones in prior roles at DXC Technology and Wipro, and have relocated to work in its Texas headquarters.

The 451 Take

Last year, we reflected on how Rackspace was in the process of its own transformation, necessary to position itself as a catalyst for its customers' digital transformation journeys, and to deliver on its ambitions to compete with international enterprise-focused service providers. A year later, it has made progress under new leadership that brings experience from DXC Technology, Hewlett Packard Enterprise and Wipro. Rackspace has narrowed its focus to align around three priorities: best place to work, superior financial performance, and its Fanatical Experience initiative. There is strong demand in the market for what Rackspace has to offer. According to 451 Research's Digital Pulse, Budgets and Outlook 2019 survey, 45% of digital leaders are prioritizing IT spending around new IT projects that enable digital transformation. The challenge for Rackspace is to retain core talent and foster its distinct culture through its transformation, particularly as it aligns around new senior leadership and integrates professional services and staff from its recent acquisition of managed services provider Onica.

New service approach


Rackspace, equipped with a new leadership team drawn largely from the IT outsourcing world, is entering the execution phase of its ongoing reinvention. Ironically, its 'modern IT services at scale' strategy is reminiscent of efforts undertaken in the pre-cloud era to transition from managed hosting to managed services-led IT outsourcing for the masses. The difference – nearly 20 years later – is cloud technology and the deconstruction of monolithic IT, which enables Rackspace to innovate in a more modular fashion, and allows customers to consume capabilities in a mix-and-match manner via subscriptions rather than tightly bundled multiyear contracts.

Service Blocks, launched in late 2018, lies at the heart of Rackspace's new approach, which features better alignment with customer requirements at different stages of their cloud transformation journeys, and a consumption model beyond the previously either/or options of self-service and full-on service management. The modularized capability bundles span Day 0 discovery and assessment services, to Day 1 architect/deploy services, to Day 2 and beyond capabilities, such as ongoing operational management as well as optimization services and support for complex operations.

By early 2020, Rackspace expects to have 47 Service Blocks on the market, encompassing managed public cloud services, containers/cloud-native, managed applications, managed security and private clouds. Professional services are also being sold within the Service Blocks construct, covering the up-front tasks involved in general areas such as cloud transformation, architecture and governance, as well as more specific areas such as cloud-native development and integration. This will be bolstered by its November acquisition of Onica, which is focused on cloud-native application development and management.

Advancing strategy for application-focused services


Application services have been a growing focus at Rackspace for several years, driving the acquisitions of TriCore and RelationEdge along with other initiatives. The application services part of Rackspace's business is not growing at the rapid pace seen in other areas, such as professional services. However, it is growing, both as a source of revenue and as a point of increasing strategic focus.

451 Research sees this market opportunity as being relatively early in its growth. Survey responses show a significant portion of enterprises indicate plans to engage with service providers on this basis in the future. In response to our Cloud Hosting and Managed Services, Workloads and Key Projects 2019 study, 26% of respondents indicated they engage with a service provider to access management of applications deployed in the cloud, and another 15% plan to do so over the next two years.

Rackspace indicated it continues to expand its application services portfolio both in terms of the applications it supports (including Microsoft Dynamics 365, MuleSoft, Adobe Experience Platform) and the platforms on which it can manage the applications it does support (including SAP deployed on AWS and Azure, Oracle Enterprise Business Suite and GCP).

Expanding the potential footprint of its managed application services creates new opportunities in the professional services space, including providing assessments of where, across that footprint, a business's legacy and next-generation applications might best be deployed, as well as providing a guided roadmap for businesses to modernize to the cloud. This is an intended positive outcome of complementary managed and professional services, which should create services pull-through in both directions.

With a continued focus from Rackspace, and the benefit of associated professional services, we expect continued (and likely accelerated) growth in the contribution from the company's managed application services business.

Going head-to-head with SIs


Rackspace has evolved from a hosting and public cloud provider trying to compete head-to-head with the likes of AWS and Microsoft Azure. It pivoted into a managed cloud provider that instead embraced partnerships with the hyperscalers. Under the guidance of the company's new CEO, Rackspace is evolving in order to win enterprise IT transformation business. This time it wants to be smarter than the systems integrators that are competing for the same business. This includes Accenture, Wipro, Fujitsu, Deloitte and InfoSys, among others.

Rackspace thinks it can compete with these traditional SIs with the operational efficiencies and automation it built over the years as a hoster and cloud provider. Rackspace's organization structure has been flattened, and new leaders in sales and product management roles were recently plucked from traditional IT outsourcers and legacy SIs. It has outsourced back-end IT systems operations to Tech Mahindra.

Rackspace doesn't want to be considered a systems integrator though. Rather than delivering monolithic IT offerings, it wants to deliver 'IT as a service' across on-premises, private and public cloud venues. Its differentiation claim is having a cloud specialization. The midmarket (enterprises with less than $3bn in revenue) is a sweet spot for sales. The company will have its hands full with its latest strategy.

Bringing partners into the mix


At last year's analyst event, Rackspace discussed its new approach to the channel, and highlighted the establishment of a formal strategic alliance program with increased emphasis on joint product development and go-to-market. The company set a goal of increasing the percentage of channel-derived revenue to 40% (up from 20%).

According to Rackspace, the partner/channel focus has paid off, with 45% of the current pipeline coming through the channel, fueled by top-tier strategic partners such AWS, Google, Microsoft and Dell/VMware, as well as VARs and distributors-turned-MSPs such as CDW, SHI and Tech Mahindra (which signed an IT outsourcing/go-to-market partnership with Rackspace in July).

The newly created position of chief relationship officer signals a shift in Rackspace's channel approach, featuring deeper engagement with strategic partners, intensified efforts to ramp up partnerships with tier 2 vendors such as SAP, CloudFlare, HPE, Cisco and Oracle, and targeted joint value creation with VARs.

Competition


Rackspace used to compete head-to-head with AWS and Microsoft Azure, but pivoted into managed cloud services rather than face certain extinction as a public cloud provider. For managed public multi-clouds, Rackspace competes with global systems integrators such as Accenture, Capgemini, Cloudreach, Hitachi Vantara and BT Global Services, as well as cloud service providers 2nd Watch, CenturyLink, effectual, Ensono, INAP and NTT DATA. Systems vendors are also building out platforms and professional services practices, promising public cloud integrations along with private clouds. These include HPE, VMware, Cisco and IBM/Red Hat.