Commoditization Threatens Margins In Data Center Management
Annual double-digit declines in revenue per managed server have outpaced fast growth in the number of data center clients, resulting in the world’s largest data center outsourcing and infrastructure utility service providers losing $1.2 billion in North America in 2014.
This market — which is expected to come in at $79.2 billion worldwide and $29.8 billion in North America this year — is slated to grow 1 percent to 3 percent in the coming years, with data center outsourcing sales falling 3 percent to 4 percent and infrastructure utility outsourcing jumping 11 percent to 14 percent as demand grows for external management of on-premise private cloud environments.
Market research firm Gartner’s North American Magic Quadrant for Data Center Outsourcing and Infrastructure Utility Services evaluated 21 IT companies with management services for mainframe and centralized server environments. Here is how the Magic Quadrant shaped up, according to Gartner’s analysis.
The Gartner Magic Quadrant evaluates service providers on two sets of criteria: their success on delivering results today and into the future (Ability to Execute); and their service operating model and strategic plans for growth and service improvements (Completeness of Vision).
Five of the 21 firms Gartner evaluated are considered Leaders, meaning they have a clear vision of the market’s direction and develop competencies to maintain their leadership. Two are Visionaries, meaning they have a clear vision of the market but need to improve their penetration of the North America market.
Nine firms are classified as Challengers, meaning they execute well but have less-defined views of the market. And five providers emerged as Niche Players, meaning they focus only on a particular service or limited number of North American markets.
IBM continues to hold its spot as the largest competitor across cloud and traditional environments, even after a 5.8 percent decline in Global Technology Services revenue.
Gartner estimates that the Armonk, N.Y.-based mainframe management goliath — whose global services practice is No. 1 on the CRN 2015 Solution Provider 500 — will have about $3 billion in revenue in the space.
In 2014, IBM said it would pour more than $26 billion into big data and analytics and continue investing in its cognitive computing initiative, Watson, to the tune of $1 billion. IBM said it plans to increase revenue coming from data, cloud and systems of engagement from $25 million in 2014 to more than $40 billion.
Strengths: IBM said it will be moving away from a business model that focuses on simply providing technology and management services, instead concentrating on helping individual clients solve their business problems. In this way, IBM is actively avoiding market commoditization. Clients applauded IBM for its size, relationship management and willingness to switch to a managed service model.
Cautions: Gartner estimates that IBM’s strategic outsourcing business lost $1 billion in 2014 and said the company will have to review its strategy, expand the reach of its partner ecosystems and manage the tradeoff between its own SoftLayer cloud and enabling client use of other clouds like AWS or Azure. Clients report IBM lacks automation, responsiveness and cost competitiveness under certain conditions.
The then-Hewlett-Packard’s data center outsourcing and infrastructure utility services revenue declined 5 percent in 2014, according to Gartner.
The Palo Alto, Calif.-based company, whose enterprise services division ranked No. 3 on the CRN 2015 SP 500, had more than 30 data centers and 78,000 physical servers in North America.
HP had 490 infrastructure utility and cloud-based services clients globally, of which roughly 35 percent are in North America.
Data center outsourcing and infrastructure utility services are key components of HP’s $14 billion global IT outsourcing business, according to Gartner.
Strengths: HP’s investment in the Helion cloud brand and acquisition of Eucalyptus have moved the vendor toward enabling AWS-compliant private clouds and managing hybrid, traditional and cloud-based services. The vendor offers a comprehensive portfolio of data center services spanning from cloud migration advisory services to high-availability services.
Cautions: The penetration attained by HP’s managed virtual private cloud and utility or managed private cloud is still below 15 percent, according to Gartner. The vendor faces an uphill battle in maintaining its leadership in traditional enterprise services because of a significant loss in market share. Some clients have indicated that HP’s response to contracting and provisioning is slow, Gartner found.
CSC’s overall global revenue declined by 8 percent in 2014, to $13 billion, because of restructuring, cost optimization and product development efforts, the analysis said.
The Falls Church, Va.-based company, No. 5 on the CRN 2015 SP 500, has adjusted its data center outsourcing strategy to focus more on cloud-based infrastructure and partners, offering integrated and automated delivery options for both legacy and cloud platforms.
CSC’s data center contracts typically range from $2 million to $500 million, with a market sweet spot of $10 million.
Strengths: CSC is experiencing exponential growth in data center deals worth less than $1 million, thanks to its reliance on cloud and hosting partners and embracing an “as-a-service” delivery model. The company has seen an increase in advocates and 30 percent decrease in detractors, thanks to launching next-generation delivery centers, standardizing service delivery and a new Net Promoter program.
Cautions: CSC’s data center outsourcing business declined in 2014 as small and midsize clients pushed to fill the hole created by a drop in megadeals. Speculation that CSC could be an acquisition target may also reduce clients’ willingness to add the company to their short lists. Clients were dissatisfied with CSC’s offshore service team, reporting to Gartner that local account teams don’t have access to expertise and knowledge.
Leader: HCL Technologies
HCL’s modest data center outsourcing and infrastructure utility services growth in North America and healthy growth in the EU helped drive what Gartner estimates is a 14 percent increase in business.
Gartner also estimated that the Noida, India-based company grew its data center outsourcing and infrastructure utility services revenue in the United States and Canada by 5 percent last year, thanks to automation and investing in third parties’ next-generation data centers.
Gartner said that investment has created a positive perception around HCL’s strategy.
Strengths: HCL achieved one of the highest absolute growth rates in 2014 by creating megadeal pursuit teams that have signed more large, complex deals than the company has historically seen. The company has invested nearly a third of its R&D budget on developing a next-gen data center, as well as using Software-as-a-Service to automate the SoftLayer, Amazon Web Services (AWS) and Azure platforms.
Cautions: HCL is new to the business and IT consulting and verticalization game, and its limited credibility may stunt its growth. Gartner says HCL must raise its visibility and cites HCL’s lack of a physical data center as a challenge, because many clients shy away from vendors that do not have their own data centers. Clients reported HCL faces staffing challenges, especially in skill sets that are hard to find
Dell’s data center outsourcing and infrastructure utility services revenue came in at roughly $850 million in 2014, according to Gartner.
The Round Rock, Texas.-based company — whose services practices is ranked No. 9 on the CRN 2015 SP 500 — has nine multiclient data centers and 39 managed customer and colocation sites. Dell is focused on the data center infrastructure, compute, network, storage and server markets, according to Gartner.
Dell has acquired 12,000 new customers — 7,000 of which have seen line-of-business expansions around hardware, software or services — since going private in 2013.
Strengths: Dell is servicing the software-defined data center by both building its own storage stack and partnering with leading hyper-converged, hypervisor and open-source vendors such as Oracle, SAP and VMware. Dell also expanded its data center portfolio with new switch options. Clients praised Dell for its robust, standardized methodologies, quality assurance processes and technical personnel expertise.
Cautions: Dell still has some way to go to catch other providers that had a head start in cloud-based “as-a-service” solutions. The vendor has sometimes been risk-averse when it comes to innovation, resulting in long implementation lead times for new initiatives. Some clients have been less that satisfied with Dell’s thought leadership and reported that the vendor has a high attrition rate, according to Gartner.
Unisys offers complete managed services solutions that layer on top of IT infrastructure, providing a nearly end-to-end service for customers. The company reported $332 million of its $784 million data center outsourcing and infrastructure utility services revenue was generated in North America.
The Blue Bell, Pa.-based company — No. 19 on the CRN 2015 SP 500 — runs 14 data centers in the U.S. and Canada and operates 36 globally. Unisys is partners with Google, Microsoft Amazon Web Services, and Virtustream to provide public, private, hybrid and multi-cloud services.
Strengths: Unisys is moving to hybrid IT and a more asset-light ecosystem, Gartner said. The company’s focus on combining its services with cloud is a practical approach reinforced by investments in service automation, service management/integration and security. Clients said the costs of Unisys’ services were competitive and appreciated the scalability and technical expertise in data center management.
Cautions: Unisys may be overdependent on federal and other government contracts in the future. Unisys is incorrectly perceived as having a hardware-limited focus on the market, which the company needs to change by marketing its infrastructure utility services and cloud-based resources in North America. Clients reported that they wanted more access to offshore resources to reduce project costs.
CompuCom’s data center practice grew to $125 million in 2014, representing an 8 percent jump over the year before. The growth rate is well above the North American average for data center practices, Gartner said.
The Dallas-based company, No. 23 on the 2014 CRN SP 500, supports 48 secure data centers throughout North America.
CompuCom offers a full range of data center outsourcing services, including managed services and remote infrastructure monitoring capabilities that can be integrated to provide end-to-end support.
Strengths: CompuCom has recently partnered with AT&T around network access, cloud access and mobile access solutions. The solution provider is well-suited for midsize financial services or retail clients, Gartner found, as well as Canadian firms. Many clients said that CompuCom has excellent account management performance, with a strong focus on service delivery and responsiveness.
Cautions: CompuCom is focused on private and hybrid cloud, and is not making significant investment in public cloud Infrastructure-as-a-Service. The company also frequently hires subcontractors for delivery, resulting in a lack of clarity, accountability and ownership. Gartner said CompuCom should focus more on process improvement, with clients reporting little complex issue coordination and management.
Atos’ data center outsourcing business passed the $2 billion mark globally, Gartner reported, 20 percent of which is based in North America.
With market trends slowing organic growth, Atos has acquired enterprise data company Bull as well as Xerox’s Information Technology Outsourcing business.
The company’s acquisitions are focused on creating new services for big data and security and leveraging its Canopy enterprise to enable the creation of hybrid clouds.
Atos’ use of proven practices for data center, server consolidation and virtualization help it standardize all of an enterprise’s IT infrastructure and provide services on a pay-per-use, “utility” basis.
Strengths: The acquisition of Xerox’s ITO business provides Atos with a strong foothold in North America and is in sync with the company’s 2016 ambition to become a Tier 1 global service provider. Atos’ focus on optimization is intended to result in less expensive and more secure data centers able to deliver scalable cloud services at lower prices. Clients liked Atos’ flexibility and responsiveness to changes.
Cautions: Atos’ organic data center outsourcing revenue declined in every region last year. Atos’ initiatives surrounding its new acquisitions, consolidating its data centers and expanding globally will require strict focus to avoid reducing customer satisfaction. Gartner reported that clients said Atos has shown limited ability to deliver projects that are not part of its core data center services.
Infosys’ North American data center outsourcing and infrastructure utility services sales grew by 18.7 percent in 2014, to $531 million, according to Gartner, with global revenues from those technology segments climbing to $910 million.
The Bangalore, India-based company’s strategy of design-led thinking and innovation appears to be working, Gartner said, with the solution provider recently winning 16 deals each worth more than $15 million.
Infosys also runs a $500 million investment fund to develop promising IT startups focused on helping enterprises move into cloud computing and software-defined technologies.
Strengths: Infosys has increased its investment in innovation by five orders of magnitude as the company unifies its go-to-market strategy for cloud and infrastructure services. The solution provider also acquired automation technology firm Panaya, expanded its data center networking presence and developed data center capabilities to host business platform offerings.
Cautions: Infosys has been struggling with high attrition rates for the past two to three years, which can result in a short-term challenge for clients. Gartner said the company must continuously revise its portfolio, broaden its country footprint and improve its global visibility. Clients said that Infosys lacks technical expertise, especially in database domain, and has a limited ability to scale on-site resources.
Wipro’s North American data center outsourcing and infrastructure utility services revenue increased 13.8 percent in 2014, to $555 million, making it the largest chunk of service revenue in the region.
Wipro’s global growth in this technology area is even more impressive, with sales rising nearly 20 percent in 2014, to $1.18 billion.
The Bangalore, India-based company, No. 21 on the 2013 CRN SP 500, has achieved this growth by demonstrating leadership in automation capabilities and through a strong focus on both traditional and industrialized low-cost services, according to Gartner.
Strengths: Wipro’s vision for the future focuses on data center services, Internet of Things initiatives, cloud brokerage and smart automation. The company is embedding its numerous tools into “as-a-service” based pricing and delivery mechanisms. Clients said Wipro is very accommodating, willing to adapt to changes in requirements without asking for a change request or imposing additional costs.
Cautions: Wipro lags behind large firms when it comes to competing for some global contracts because of its lack of a strong global cloud partnership ecosystem. The company may also be somewhat stressed by efforts to integrate local culture and meet local data protection and security requirements. Clients said that Wipro’s procurement activities for new offerings need to be more responsive and effective.
Capgemini reported its North American data center outsourcing and infrastructure utility services business reached $390 million in 2014, a 12.1 percent increase over 2013. Gartner reports that the increase was boosted by improved margins as a consequence of the company’s globalization program.
Paris-based Capgemini, No. 5 on the CRN 2014 SP 500, owns 39 data centers, along with several offshore locations spread across the Americas, Europe and Asia/Pacific. The company has been increasing its focus on RIM, automation, cloud migration, orchestration and brokerage services.
Capgemini recently acquired Bridgewater, N.J.-based IT services company iGate for $4 billion, broadening its offerings in North America and increasing its scope globally.
Strengths: Capgemini has been increasing its footprint and revenue in the U.S., with its focus on service delivery optimization to enhance profitability. Capgemini’s portfolio includes “as-a-service” offerings that allow the company to focus on delivering technologies that are manageable through a vertical integration approach. Clients said that Capgemini is flexible with its contract structure and pricing.
Cautions: Capgemini’s progress in its data center consolidation and service delivery standardization currently lags behind competitors’, Gartner reports. Unless Capgemini links its go-to-market strategy with capabilities in its consulting, application services and vertical expertise, the company will not be able to take advantage of emerging opportunities in digital business and the Internet of Things.
Challenger: Tata Consultancy Services
Tata Consultancy Services — No. 4 on the CRN 2015 SP 500 — increased its data center outsourcing and infrastructure utility services global revenue by nearly 25 percent in 2014. That increase was heavily influenced by its growth in North America.
The Mumbai, India-based company has consistently stressed the importance of leveraging secure, regionally interconnected locations, effective leveraging its own cloud and seamlessly integrating its offerings across public, private and hybrid clouds. The company’s focus has consistently propelled Tata’s solutions forward.
Strengths: TCS has created more than 10 vertical-specific strategies in areas ranging from government to manufacturing. Gartner reports that Tata has a 98 percent customer retention rate and strong delivery pipeline. Its automation, business management, cloud and global delivery approach coupled with its new automation product may further improve the company’s market traction, Gartner said.
Cautions: TCS’ infrastructure utility services growth has historically been curtailed by its selective pursuit of deals providing end-to-end solutions. TCS’ attrition rate also continues to grow every quarter, and unless it figures out how to retain personnel, TCS will not be able to meet projected head count requirements. TCS must improve its leadership presence and use of junior resources, clients said.
CGI’s North American data center outsourcing revenue dropped by 12.8 percent in 2014, to $591 million, with global data center outsourcing revenue coming in at $1.27 billion.
The Montreal-based company, No. 15 on the CRN 2015 SP 500, runs both traditional integration services and programs to standardize its services across the globe, setting up partnerships with companies like Dell and Hitachi to help it do so.
Strengths: CGI is developing higher-level services like multicloud management and is moving toward a service integration and asset management solution for its customers. CGI’s focus on cloud migration and application modernization is a sound strategy for avoiding overexposure to commoditized services. CGI is moving toward a partnership-based approach to its service delivery and go-to-market strategy.
Cautions: CGI’s geographic structure increases the risk of inconsistent service delivery and can hurt its ability to deliver global solutions. CGI also suffers from a lack of brand recognition since it was a latecomer to integrating global delivery. Clients report a lack of relevant automation initiatives by CGI and stated the need for CGI to improve its cloud offerings and backup technology.
Toy can red more information at: CRN-Here’s Who Made Gartner’s 2015 Magic Quadrant For Data Center Outsourcing