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Update: 2020 Trends in Cloud and Managed Services Transformation

July 7 2020
by Melanie Posey, Owen Rogers, William Fellows, Jean Atelsek, Liam Eagle, Nicole Henderson


Introduction


The coronavirus outbreak has rapidly shifted global markets, including those related to enterprise technology, since we published our 2020 Trends reports on Cloud Transformation and Hosting & Managed Services in December 2019. This report serves as an update to our 2020 predictions in light of market changes due to COVID-19.

The 451 Take

The coronavirus pandemic will be a catalyst and accelerant for cloud adoption. In the short term, enterprises will focus on survival, putting large-scale digital transformation projects on the back burner and focusing on developments that will deliver immediate gains in terms of productivity, revenue and stability. Cloud services provide a quick means for businesses to scale up (or down), reorient their business models for the new social distancing normal and collaborate remotely. These modifications can be made on-demand, without reservation and remotely – all vital when there is so much uncertainty and people's lives are so restricted. These characteristics make cloud a business criticality for companies looking to survive the pandemic.

Post-pandemic, businesses that have already benefited from cloud are likely to continue adoption, now that they've seen its value firsthand. Companies that didn't perform as well as they had hoped may look to cloud for the answer, seeking more professional and managed services. Digital transformation projects that were put on hiatus will be accelerated as the c-level aims to recover lost ground through a more agile business and to prepare for the worst once again. The COVID-19 pandemic gave the cloud paradigm a chance to shine and, so far, it's been a critical component in keeping companies operating, economies alive and the populace entertained and informed. In fact, it's remarkable how much of the technology we used before the pandemic is not only operational but is now vital to society's endurance during this time. Cloud has enabled this.

451 Research's Q4 view of the market – what we said


Figure 1
2020 Trends in Cloud & Managed Services Transformation, as of December 2019 451 Research, 2019

Our updated evaluation of each trend follows.

Cloud shows its teeth


Cloud and managed services are one of the very few technology segments likely to weather, or even benefit from, the COVID-19 crisis. Its value in this crisis results from two key characteristics inherent to the cloud paradigm: the on-demand scalability of resources, and the centralization and outsourcing of labor. The protective measures brought about as a result of COVID-19's spread meant businesses have needed to scale quickly to meet demand and to rebuild their business models for a locked-down world, without needing to buy infrastructure, hire employees and put them at risk sending them into datacenters. It is COVID-19's unpredictability and the cloud's ability to scale without reservation that has made cloud crucial for survival for many enterprises.

Inevitably over the past few months, some web applications have exploded with traffic, while others have dwindled to near nothing. News websites are likely to spike as a frightened public looks for information; travel agents might receive lower hits (or shut down altogether) as consumers wait for more optimistic times. Scalable cloud applications should be able to grow and shrink to meet this changing demand automatically. For those suffering from lower hits, scaling down at least saves a bit of cash – a silver lining in challenging times. For those experiencing a surge, the cloud lets websites continue to perform under pressure.

Twelve months ago, how many enterprises could have predicted their entire workforces would need to move out of offices and work remotely? How many media providers could have expected streaming video would become the de facto source of entertainment for entire populations? How many supermarkets would have expected most of their customers would need to order their groceries online? Did video-chat providers really think their technology would replace the warm embrace of grandchildren with grandparents? Fortunately, the whole point of cloud is that these entities don't actually need to know – they can scale when they need to, based on changing demands. And COVID-19 has changed the behavior of societies more than anything seen in a generation.

Of course, some businesses (especially smaller ones) can't scale in this fashion. But cloud at least gives them a fighting chance by enabling them to throttle down their cloud spend and facilitating rapid business model pivots – for example, setting up or expanding online ordering capacity to replace physical transactions with virtual ones. Unfortunately, many businesses will go out of business, and their infrastructure spending will decline to zero. But we think the net effect for the cloud market will be minimal, or even positive, as more and more businesses embrace cloud to survive in the short term and leverage cloud to evolve and transform after the dust has settled into a new normal. According to our COVID-19 flash survey, 34% of enterprises are spending more on IT resources compared with just 3% that are spending less; 18% of organizations plan to ramp up their spending on external cloud/hosted IT infrastructure.

Short-term survival


In the short term, enterprises are likely to put time and effort into immediate survival, rather than longer-term growth. This means cutting costs by delaying projects focusing on strategic growth and spending more on opportunities likely to result in immediate gains in productivity, revenue or business resiliency. We can expect to see greater demand for managed and professional services as enterprises desperately seek the ability to capture these new gains before they are critically impacted by the pandemic. Alternative clouds may too have an opportunity, by providing immediate and more customized support to those facing challenges, although they also face their own financial challenges. Enterprises will seek new pricing and payment arrangements with service providers to reduce their outgoings, which will accelerate the creation of new consumption-based models, although these will often be on a custom basis.

Bigger transformation projects will be delayed in the short term. Navigating and optimizing partner programs will be put on the back burner, as will the introduction of new managed bundled service capabilities. Both hybrid cloud and cloud-native architectures can help application scalability, but only if they are deployed and ready to go when such scalability is needed. If the hybrid control plane and decoupled cloud-native architecture weren't ready a few months ago, then it's too late now. Enterprises will take immediate steps now to enable some level of scalability, rather than dwelling on hybrid and cloud-native innovations that may take a while to bring up to speed.

Longer-term evolution


We think the biggest impact of the pandemic will be that enterprises will take advantage of what worked for them during the crisis, and will take note of where they were disadvantaged.

In some respects, COVID-19 has presented an opportunity for experimentation – enterprises have had to try things that haven't been done en masse before. Doctors pushed diagnoses to video calls; offices asked employees to work from home; local stores asked customers to email their orders. Many of these were stimulated by survival; but many companies will find these experiments have paid off. For example, many enterprises are still functioning well with most of their employees stuck at home. How much office expenditure could be cut, with employees also benefiting from smaller commutes? Similarly, people are still managing to collaborate without flights – how much business travel will there be post-pandemic, given the money that can be saved or reallocated by using collaboration software and holding virtual meetings and events instead? In our recent COVID-19 survey, 38% of enterprise decision-makers say expanded/universal working from home policies will remain in place longer-term or permanently; 23% say travel limitations bans will remain in place.

In a similar vein, enterprises will revisit their approaches to innovation, lending credence to those in the organization who complained about being given a short leash on using technologies and processes that result in improved agility and efficiency. This type of flexibility can help organizations respond more rapidly to changing business conditions, thus providing a measure of protection against the unforeseeable future. Questions include: What applications were too rigid and monolithic? Which data was too centralized and therefore inaccessible? Which sites couldn't be remotely managed?

These common threads of capitalizing on the situation and defending against it happening once again will ultimately act as a catalyst to cloud adoption. We can expect enterprises to intensify their efforts to manage all their applications across hybrid environments using a single control pane and use consumption-based pricing to consume only what they need, when they need it. Service meshes and other cloud-native frameworks will be accelerated to help applications become more resilient and scalable.

Many enterprises will appreciate that cloud is 'the answer' but practically, help is needed. As a result, professional and managed services will be in huge demand, especially as a result of hiring freezes and difficulty in finding talent. Managed service providers will further streamline and package their services for greater appeal and easier procurement and delivery. Service providers offering modular services may benefit where companies are desperately squeezing costs. Alternative cloud providers are in a position to help smaller companies who don't know where to start but have limited requirements for services beyond simple compute storage.

Figure 2
Impact of COVID-19 on Our 2020 Trends 451 Research, 2020

Measuring the impact


451 Research has created a number of scenario analyses on how the IaaS market will be impacted by coronavirus. Of course, many scenarios have been produced because it's impossible to know how the virus, and the economy, will weather and recover from the events of the past few months. However, considering the aforementioned points, 451 Research expects the cloud market is unlikely to be significantly negatively impacted by coronavirus. There is bound to be a loss in customers as companies go out of business, but this will be offset by increased spends from other customers looking to scale to take immediate revenue opportunities and to remain operational. The most likely trajectory is that the baseline forecast will continue today. We think it is more likely that revenue will grow at a rate above the baseline than below.

Figure 3
IaaS Scenario Analysis ($M) 451 Research, May 2020