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LICENSED FOR DISTRIBUTION - Gartner Predicts 2017: Infrastructure Services to Become Hybrid Infrastructure ServicesPublished: 18 November 2016 ID: G00316302 Analyst(s): Daniel Barros, William Maurer, DD Mishra, David Groombridge, Mark D. Ray SummarySourcing and vendor management leaders focusing on technology service sourcing must incorporate the trends discussed in this research regarding IaaS, managed workplace services and hybrid IT management to support their organizations' digital business transformation. Overview Key Findings Although cloud is the fastest growing IT service model, sourcing and vendor management leaders struggle to integrate legacy infrastructure platforms with cloud platforms to support digital business growth, failing to deliver the agility, flexibility and scalability necessary to succeed in the digital business. Attracting and retaining people with digital dexterity is one of the greatest challenges organizations are facing in the digital business transformation journey. Virtual personal assistants with artificial intelligence capabilities automation are transforming service desk outsourcing, significantly reducing IT-related staff costs. Microsoft and AWS continue to dominate the cloud IaaS market, causing great changes in competition and continuous price reduction. Recommendations Sourcing and vendor management leaders looking to successfully support digital business transformation: Develop hybrid IT management capabilities by becoming a trusted broker and provider of IT capabilities in order to support your organization's digital business strategy. Adopt digital workplace capabilities to support your organization's talent management initiatives for acquiring and retaining the necessary skills to succeed in the digital transformation journey. Leverage virtual assistance and automation in service desk deals to drive down cost and improve service quality. Although its adoption might be disruptive for end users, it will probably become mainstream as service providers shift from labor arbitrage to automation arbitrage. Prioritize hybrid cloud — combining multiple cloud offerings — over a single-vendor strategy for IaaS to leverage the Microsoft-AWS competition and take advantage of continuously reducing prices. Strategic Planning Assumptions By 2020, 90% of organizations will adopt hybrid infrastructure management capabilities. By 2020, 50% of end-user outsourcing deals will be centered in digital workplace transformation to support the growth of digital business. By 2020, less than 30% of all service desk calls will be solved by a live person. Through 2020, data center and relevant "as a service" (aaS) pricing will continue to decline by at least 10% per year. By 2019, 90% of native cloud IaaS providers will be forced out of this market by the AWS-Microsoft duopoly in new offerings and pricing. Analysis What You Need to Know Becoming a digital organization and uncovering new digital business opportunities that can generate entirely new revenue streams — and possibly new markets — is on the mind of every CEO. In fact, according to Gartner's 2016 CEO Survey, half of them expect digital to transform their industry substantially, or even beyond recognition (see Figure 1). Figure 1. 50% of CEOs Expect Their Industry to Be Significantly Changed by Digital Q: Digital technology and business model innovations are leading some industries to change and others to blend into each other. To what extent do you expect your industry to change in five years' time (2020)? n = 396 Source: Gartner (November 2016) We have witnessed recent examples of emerging startups with no assets dominating a traditionally asset-heavy market, or traditional industrial organizations divesting their low-value businesses to become digital industrial organizations. 1 The digital journey will continue to disrupt how IT is delivered, and sourcing and vendor management leaders focusing on technology service sourcing must evolve the reactive nature of their organization's sourcing practices to reap the benefits of new infrastructure services to support the organization's digital journey. Strategic Planning Assumptions Strategic Planning Assumption: By 2020, 90% of organizations will adopt hybrid infrastructure management capabilities. Analysis by: DD Mishra Key Findings: The data center outsourcing (DCO) market is shrinking. As per Gartner's forecast data, the worldwide DCO compound annual growth rate (CAGR) is expected to decline approximately 5% between 2015 and 2020 in terms of spending. Cloud compute services, on the other hand, are expected to grow at a 33% CAGR between 2015 and 2020 in terms of spending. Colocation and hosting are expected to grow by an 8.7% and 8.8% CAGR, respectively, between 2015 and 2020. Traditional worldwide data center outsourcing (DCO)/infrastructure utility services (IUS) spending will be 49% of the $154 billion total data center services market worldwide consisting of DCO/IUS, hosting and cloud IaaS in 2016. This is expected to tilt further toward cloud IaaS and hosting, and by 2020, DCO/IUS will be approximately 35% of the expected $224 billion worldwide market. This means that by 2020 traditional services will coexist with a huge minority share alongside the industrialized and digitalized services. In Gartner's 2016 DCO Magic Quadrant surveys worldwide, reference customers (n = 303) indicated that 20% are receiving hybrid infrastructure services and 20% more intend to get them in the next 12 months. So, by the end of 2016 or early 2017, we expect 40% of end-user organizations to leverage hybrid infrastructure services. During 2016, in DCO Magic Quadrant surveys worldwide, 65% of the reference customers (n = 303) indicated that they are experiencing increased demand for applying a cloud-first and hybrid infrastructure managed service strategy. Market Implications: The growth of cloud and industrialized services and the decline of traditional data center outsourcing indicate a massive orientation toward hybrid infrastructure services (see Note 1). As the market becomes dominated by the demand for agility and flexibility, this will drive the shift toward more industrialized, less-tailored options. By 2020, cloud, hosting and traditional infrastructure service sourcing will come in more or less at par in terms of spending (see "Forecast: IT Services, Worldwide, 2014-2020, 2Q16 Update" ). Organizations that adopt hybrid infrastructure will better leverage cost optimization and efficiencies (see "How to Leverage Industrialized 'Low-Cost' Market Prices to Optimize Your Data Center Infrastructure Service Cost" ). However, the growth of hybrid infrastructure services will increase the complexity of selecting the right toolset to deliver end-to-end services in a multisourced environment, especially in a fast-changing digital business environment. Recommendations for Sourcing Executives: Include hybrid infrastructure management capabilities in your existing environment by using Gartner's suggested approach to leverage cost savings and efficiency benefits as suggested in "Toolkit: Price Dynamics on the Data Center Services Market Map; The 3D View." Choose your cloud and hosting provider carefully, and mitigate your risks using Gartner's contract Toolkit (see "Toolkit: Compare Your Cloud IaaS Contract Terms With Commonly Negotiated Terms" ). Use the cloud-first checklist (see "Applying a 'Cloud-First' Checklist to Ensure Successful Sourcing and Business-IT Alignment" ) to evaluate the traditional and cloud options. Ensure your service provider is investing in toolsets that simplify the dynamic management of traditional data center and cloud IaaS in a hybrid IT service environment (see "Optimize Multisourcing Service Integration Using the Right Toolsets to Drive Delivery Excellence" ). Related Research: "Magic Quadrant for Data Center Outsourcing and Infrastructure Utility Services, Europe" "Magic Quadrant for Data Center Outsourcing and Infrastructure Utility Services, North America" "Magic Quadrant for Data Center Outsourcing and Infrastructure Utility Services, Asia/Pacific" Strategic Planning Assumption: By 2020, 50% of end-user outsourcing deals will be centered in digital workplace transformation to support the growth of digital business. Analysis by: Daniel Barros Key Findings: Gartner research for end-user service outsourcing indicates that service providers have made significant investments in developing new technologies and services to provide digital workplace capabilities to clients that increasingly deliver more integrated, automated, user-centric, self-serviced, personalized, analytics-based and mobile-first experiences to end users. Gartner's 2015 Digital Workplace Survey indicated that digital workers are less satisfied with corporate-provided applications than with their own applications for work purposes. 2 The same survey also indicated that 57% of respondents, when in need of help for a digital technology issue for work, would either ask a co-worker, look for an answer on the internet or seek a self-serve mechanism, while 35% of respondents would contact the IT support team first. Half of CEOs interviewed in Gartner's 2016 CEO Survey indicated that they expect their industries to be substantially or unrecognizably transformed by digital. 3 CEOs indicated that finding and retaining digital talent is one of the greatest obstacles faced in an organization's digital transformation. Market Implications: Digital workplace (see Note 2) transformation will have a major impact in the managed workplace service market. Automation, analytics and cognitive computing will reshape end-user services from a centralized and IT-centric support model to a decentralized, social-media-enabled and user-centric support model. Increased automation and self-service will also reduce workplace service costs as most service providers progressively shift from labor arbitrage to automation arbitrage. 4 Organizations make these changes purposely to meet current and next-generation employee and customer expectations for dynamic interactions, real-time access to performance data, and real-time visualization of services and products. Recommendations for Sourcing Executives: Implement a digital workplace experience for employees that goes beyond pleasing millennial workers. It should also support your organization's digital transformation strategy, as well as attract and retain the talent with the digital dexterity needed to support new digital business initiatives (e.g., supporting new digital customer experiences or analytics initiatives). Select service providers based on their demonstrable capabilities to deliver integrated digital workplace solutions that address all IT and non-IT-related aspects holistically, as provider investment levels vary greatly. Related Research: "Managed Workplace Services Will Transform End-User Outsourcing to Enable Digital Business" "Survey Analysis: Align Digital Workers to Their Digital Workplaces and Coax IT to Share Its Success" Strategic Planning Assumption: By 2020, less than 30% of all service desk calls will be solved by a live person. Analysis by: Mark D. Ray and William Maurer Key Findings: Service desk tools used by service providers continue to improve via artificial intelligence (AI) and smart machines. Clients increasingly accept the tools as a viable approach to improving and reducing client interactions with a live person. 5 Current applied artificial intelligence products and solutions for service desk support — such as IPSoft's Amelia — already support end-user calls covering commercial off-the-shelf (COTS) software support. These solutions will continue to expand machine-learning capabilities that progressively increase in effectiveness as the machine answers questions, enhancing the database and expanding the solution capability. Other tools such as guidance and engagement platforms — like WalkMe 6 — provide self-support functionality, addressing "how to" questions by supporting systematic guidance in live production systems. While automated solutions are relatively new to the marketplace, improvements delivered to end users include shorter interaction times, fewer overall interactions and lower prices. Market Implications: Today, current average worldwide service desk price levels range between $8 and $15 per user per month (PUPM). Based on Gartner's data gathered on recent deals that are beginning to use (or are already using) these new solutions, service desk pricing will move downward over time and will reach somewhere between $3 and $7 PUPM by 2020, as providers and clients move toward a more automated delivery. Additionally, Gartner has also seen a disparate uptake on the use of automated solutions, with millennials embracing these solutions, while those employees who have had good experiences with the current less-automated or nonautomated solutions being less likely to immediately and fully embrace the automated solutions. Most organizations buying solutions from service providers with these automated capabilities will see continued expansion of proficiencies as the automated solutions learn questions and create answers to those questions, thereby creating continued solution improvement and better performance at lower prices. Recommendations for Sourcing Executives: Immediately plan sourcing of service desk solutions to include automated delivery. Ensure that the relevant contracts take advantage of new offerings during the life of existing contracts through contracting for continuous improvement and innovation, and use the contract to maintain access to all intellectual property created during the life of your contract. Evaluate the adoption of virtual personal assistants with natural-language processing capabilities (NLP) for multiple contact methods for your organization's service desk. Include forward pricing reductions for increased adoption of non-human contact methods when outsourcing the service desk. Related Research: "Toolkit: Price Ranges for Service Desk, Desktop and Mobility Services, 2015" "Use Forward Pricing to Reap the Benefits of Artificial Intelligence in Your Infrastructure Outsourcing Deal" Strategic Planning Assumption: Through 2020, data center and relevant "as a service" (aaS) pricing will continue to decline by at least 10% per year. Analysis by: William Maurer and Mark D. Ray Key Findings: From 2008 through 2016 — a span of more than eight years — Gartner pricing analysis of data center service offerings indicates prices have dropped yearly by 5% to 7% for large deals and by 9% to 12% for smaller deals. More recently — from 2012 to present — the prices for the new "as a service" (aaS) offerings, including IaaS and storage aaS, have dropped in similar to higher ranges. Market Implications: Continued price reductions will cause traditional DCO vendors (those in the DCO/IUS Magic Quadrant) to exit the DCO market due to price pressure, while others will develop solution capabilities and continue to compete in the DCO market. Still, other vendors (those not in the DCO/IUS Magic Quadrant) will enter the market. This will lead to market-to-market competitiveness from DCO through IaaS, PaaS and other "aaS" solution markets. Buyers will have the ability to choose between many more vendors (traditional and nontraditional), choose traditional or new solutions, and achieve price reductions year over year (YOY) through 2020. Recommendations for Sourcing Executives: Build pricing controls into the outsourcing contract, such as benchmarking or progressive price reduction based on efficiency, for the life of existing contracts and when renegotiating contracts. These allow you to take advantage of market conditions (including, but not limited to, competitive price reductions), new tools and technologies that can lead to price reductions or better solutions. Expect that vendors must continue to update their tools, technologies and related solutions, and continually review market conditions using all results to maintain market-competitive pricing levels, capabilities and position. Anticipate that vendors will need to develop strategies to proactively offer new solutions at market-competitive prices and build flexible contracts that allow competitive benchmarking, which leads to positive relationships with their clients. Related Research: "Can You Save Money Migrating to Cloud IaaS?" "Calculating and Comparing Data Center and Public Cloud IaaS Costs" Strategic Planning Assumption: By 2019, 90% of native cloud IaaS providers will be forced out of this market by the AWS-Microsoft duopoly in new offerings and pricing. Analysis by: David Groombridge Key Findings: Over the last four years, the IaaS public cloud market has begun to develop two dominant leaders — AWS and Microsoft Azure — that are beginning to corner the market. Both providers are the only two to make consistent progress toward the top right-hand corner of Gartner's Magic Quadrant for Cloud Infrastructure as a Service, Worldwide . In 2016, they have both grown their cloud service businesses significantly — AWS at 80% and Microsoft Azure at 125%, in constant currency — and are now the only two Leaders in this Magic Quadrant. At the same time, the other players in the market are sliding backward in comparison to these two. Five of the providers analyzed on the 2015 Magic Quadrant dropped out of it altogether in 2016, and seven of the remaining others are now Niche Players, with only Google managing to hold its 2015 position. It is clear that IaaS provision is now a market rapidly separating the also-rans from the leaders: AWS and Microsoft. Between them, they not only have many times the compute power of all other players in the Magic Quadrant combined, but also they are investing in innovative service and pricing offerings that others cannot match; and this is driving a duopoly of dominance. It is only in new markets that AWS's and Microsoft's dominance will be challenged perhaps by businesses such as Aliyun, the cloud service arm of Alibaba. Aliyun underpins a billion-dollar-a-year business and is the dominant player in China, where it provides a strong alternative to the two major U.S. suppliers. Market Implications: The competition between AWS and Azure in the IaaS market will be of benefit to sourcing executives in the short to medium term but may be of more concern in the longer term. Currently, while these two compete with each other for market share, sourcing executives will have the ability to leverage their competition to create deals with extensive cost savings, as well as to benefit from their pace of innovation. Once the market settles down, though, the risk of lack of substantial competition for two key providers could lead to an uncompetitive market. This could see organizations locked into one platform by dependence on proprietary capabilities and potentially exposed to substantial price increases. Recommendations for Sourcing Executives: Utilize the competition between AWS and Microsoft Azure to create competitive IaaS deals in the shorter term. Ensure the provider commits to securing any cost savings achieved if the IaaS contract is extended. Develop a hybrid cloud strategy, making use of both AWS and Azure. Utilize either cloud service brokers or appropriate tools and standards for file and data exchange to allow workloads to be moved seamlessly between cloud providers and users, without significant cost. Avoid the use of proprietary technologies that could cause lock-in to one provider without a clear business justification. Undertake a full assessment of the risk of using any public cloud IaaS provider, other than AWS and Azure, prior to its use (see "Take a Risk-Based Approach to Public Cloud IaaS" ). Contingency or exit plans, and risk reviews for every cloud provider should be undertaken regularly. However, they should be executed more frequently for cloud providers other than AWS and Microsoft due to the higher probability of a major change in their cloud strategy in the future. Related Research: "Magic Quadrant for Cloud Infrastructure as a Service, Worldwide" "Magic Quadrant for Public Cloud Storage Services, Worldwide" "SWOT: Alibaba Group, Aliyun Cloud Services, Worldwide" A Look Back In response to your requests, we are taking a look back at some key predictions from previous years. We have intentionally selected predictions from opposite ends of the scale — one where we were wholly or largely on target, as well as one we missed. This topic area is too new to have on-target or missed predictions. Evidence 1 Uber is a recent example of an asset-light company that has dominated an asset-intensive market by focusing on the platform and the digital experience (see "Uber Rides Social Media Dominance to $17B Valuation" ). 2 In 2015, Gartner conducted a survey to understand current digital workplace trends and how workers felt about their IT departments. This study focused on analyzing the usage of devices and applications in the workers' personal lives for work purposes; the workers' perceptions of their organizations' plans for their future workplaces; and digital workers' sentiments, behaviors and preferences. Research participants were required to use digital technologies for work, and, of these, 98% indicated they use digital technologies for both work and personal purposes. However, approximately 63% indicated they were completely satisfied with the devices and applications they used for personal purposes, while approximately 46% indicated complete satisfaction with the devices and applications provided for work purposes. 3 Gartner's "2016 CEO Survey: The Year of Digital Tenacity" indicated that 50% of CEOs expect their industries to be profoundly changed by digital. 4 Gartner analysis of YOY head count from 2010 to 2014 for the top Indian service providers, such as Cognizant, Tata Consultancy Services, HCL Technologies, Infosys and Wipro, indicated a strong decline in head count growth, although most of them reported consistent YOY growth. 5 IBM Watson and Wipro Holmes are examples of virtual intelligence platforms that can be applied for virtual assistance with cognitive capabilities. 6 WalkMe Inc , founded in 2011, launched the WalkMe guidance and engagement platform in April 2012 with the vision to transform the world's online user experience into one that was simple, effortless and efficient. Note 1 Hybrid Infrastructure Managed Services Gartner defines "hybrid infrastructure managed services" as the service provider managing the multiple infrastructures used by the organization (legacy and traditional environments, private cloud and public cloud). Hybrid infrastructure managed services include the management of traditional data center environments, other infrastructure utility services and private cloud, as well as Amazon Web Services (AWS), Google, Microsoft Azure and other public cloud functionality, by the number of server instances, applications, users or environments on the multiple clouds. Traditional and cloud functionality would be considered seamless to the organization as the provider maintains the relationship with the multiple cloud vendors and provides end-to-end visibility and management of the hybrid platform. Note 2 Digital Workplace The digital workplace is a business strategy to boost employee engagement and agility through a more consumerized work environment. The idea is that substantial business value can be created by exploiting and encouraging employee digital dexterity, which is critical for three primary reasons: Most jobs now require substantial use of technology, and the digital component of labor is growing all the time. Many organizations are pivoting to a digital business model, requiring large parts of the employee base to adroitly participate in the digital business value chain. It is increasingly obvious that the ability to quickly exploit emerging technology will be a significant source of competitive advantage as technology evolution accelerates along with business cycles. One of the best ways to foster digital dexterity in the workplace is to more fully embrace the technology that employees use in their personal lives. These consumerized services make it easier for employees to learn and exploit existing and emerging technologies through, for example, the use of apps, user experience design services, embedded social tools, and self- and community-support options. ................
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