Competing against the hyperscale providers

Main visual : Competing against the hyperscale providers

When an asteroid slammed into the Yucatan peninsula 66 million years ago – give or take – triggering the so-called ‘K-Pg extinction’, the early mammals alive at that time did not look like probable candidates to survive and, eventually, dominate.

However, their ability to adapt rapidly to new circumstances turns out to have been the crucial factor when it came to surviving and thriving.

We are witnessing a similar event right now in the IT services landscape, where the arrival of massive-scale cloud service providers looked like it was about to drive a whole ecosystem of smaller service providers to extinction.

But many businesses are actually reconsidering switching over to the hyper-scalers. Some are disillusioned with, for example, the lack of flexibility and cost control – and are now planning to work with smaller, local, more flexible, agile service providers (xSPs).

Hyperscale adoption is only part of the puzzle

New research data from Fujitsu underlines how selecting the hyperscale clouds are not the only option.

Respondents1 anticipate that, in five years’ time, only about a quarter (28 percent) of their organization’s IT infrastructure will still be rented via a public cloud model.

The remainder will be either owned and hosted on-premises (37 percent ) or owned and hosted by a service provider and delivered as a managed service (35 percent ). This underlines that the move to cloud is very much a transitionary phase, not an epoch in itself.

In fact, hybrid environments remain the dominant model about as far out as anyone can reasonably predict, in such a fast-moving environment. Many organizations also recognize the need to partner with a number of different infrastructure providers in order to accommodate complex needs and achieve business success.

There is positive news here for local service providers.

Some nine in ten respondents felt it important to work with a combination of local service providers and global systems integrators (89 percent ) and to use a combination of cloud offerings (both hyper-scaler and local service provider) in building a hybrid IT environment (87 percent ).

There is also further evidence that customers are increasingly recognizing that working with xSPs is a viable solution: although on average, respondents estimate that just 35 percent of their organization’s IT estate is managed by a service provider today, this is expected to rise considerably (to 59 percent ) over the next five years.

Business as usual is not an option

Although the underlying trend looks positive for service providers, a complacent, “business as usual” approach is not going to cut it for xSPs.

Merely providing services is not enough anymore to stop hemorrhaging customers to the hyper-scalers.

Successful xSPs are evolving into service integrators: the large majority (86 percent) of our research respondents want future service providers to integrate their own and third-party services together, to deliver improved business outcomes.

And there is a limit to the level of acceptance for multiple partnerships. Customers say having countless different partners is not ideal: nine in ten (90 percent) prefer fewer, more business-focused and strategic relationships.

The increasing importance of service providers to organizations suggests that those who can bring fulfillment of several needs into one place could be massively valuable and answer the ‘too many partners’ problem.

The array of valuable data in our research, available on request, includes an analysis of which service offerings look most attractive to customers, both now and into the future.

It also identifies the precise expectations customers have from using – or planning to use – a service provider for IT delivery. Alongside freeing up internal resources to support digital transformation, equal top ranking is awarded to helping deliver innovative IT solutions that will differentiate their business.

Remarkably, reducing costs ranked only third. The fact that this was not one of the top motivations for customers shows a real shift in how they expect to use partners, towards objectives more aligned to their digital goals.

Clearly, organizations do not see service providers as simply dinosaur ‘providers of services’, but seek help in defining what their IT strategy and digital transformation efforts look like, longer-term.

In fact, over eight in ten respondents (83 percent) expect their future service providers to offer consulting on their current IT estate and suggest personalized offerings based on digital transformation aims, with 80 percent expecting them to be capable of working directly with business leaders to achieve this.

The need for flexibility and vendor accreditation

The flexibility and availability of more bespoke solutions that better cater to specific needs are among the main ground for respondents in choosing a local service provider’s cloud offering ahead of the hyper-scalers.

We think service providers ought to have this in mind when positioning their cloud offerings. Note that more than seven in 10 respondents would be willing to consume a service consistent with that of a hyper-scaler, coming from a service provider’s private data center.

Vendor accreditation is an important differentiator, as you would expect, with around three-quarters of those polled more likely to choose vendor-accredited xSPs to service and maintain the underlying infrastructure platform.

Service providers accredited by a number of mega-vendors are likely to have the edge here – particularly as customers look for fewer, more trusted service providers to partner with in the future.

The squeeze on VARs creates new opportunities

Finally, the long-term squeeze on value-added resellers continues, with two thirds (69%) of organizations now more likely to fulfill new hardware requirements via a trusted service provider ahead of a traditional reseller.

Although it doesn’t look good for resellers, there’s a clear opportunity for them to evolve. Almost all (95%) of organizations working with a VAR partner would consider extending these contracts to cover managed services if they were offered this, ahead of engaging with a new service provider.

In conclusion, service providers need to be able to rely on a robust ecosystem which they can tap into when they need to deliver services outside of their major competency.

This needs to be flexible enough to be accessed when necessary, taking into account that these partners may also sometimes be competitors, and lightweight enough that a complex strategic partner management relationship is not needed.

Fujitsu’s fundamental belief is that micro-alliances are the future - a series of lightweight partnerships formed to create customer value – and accessed via an ecosystem of likeminded specialists with different expertise, focus areas, and geography focus.

 1 Our survey covered 700 IT decision-makers with involvement in their organization’s decision whether to use or not use managed service providers to assist with IT. Respondents were in Belgium, Germany, the Netherlands, the Nordics and the UK, and were interviewed in March and April 2019.