Is the Infrastructure Services Market Doomed?

It’s easy to push the doom and gloom narrative for the infrastructure services market – we’ve been talking about it for a long time – but the mists have started to clear, enabling us to build a clearer picture of what’s going on in this vital IT service area. If there’s one thing we can say with a degree of certainty, it’s that the need for enterprise IT infrastructure is a strong as ever. Businesses will always need help in getting the IT plumbing right, even more so as increased pressure is placed on estates by a drive toward digital. So, why is the market behaving so erratically for a business area that should be—and has been—the bread and butter of the IT outsourcing world?

How healthy is the infrastructure market?

When we dive into the market performance, it’s easy to see where the doom and gloom narrative is coming from. Traditional market revenues are sliding and are projected to continue doing so for the foreseeable future. If you take a look at Exhibit 1, you can see that it’s tough to put a positive spin on the steep decline for traditional infrastructure services. We should expect the decline to continue long into the future. Even with the continued growth of as-a-service solutions, and with cloud accelerating far faster than anticipated, the market is predicted to just about break even by 2022.

Exhibit 1: Infrastructure Services Market Split Between 2014-2022 ($B)

Source: HfS Research, 2018. Based on an estimate of the IT infrastructure services revenues for the leading providers from publicly stated financial statements.

The challenge has always been to see this for what it is. In other industries, such a steep decline followed by a brief recovery and plateau would be considered disastrous: a sign of weak demand, or of displacement rendering the services and solutions obsolete. But, we know that’s not the case here, as deal announcements from key players in the space continue to focus heavily around the cloud. In Exhibit 2, we can see a microcosm of this demand in a single quarter telling us that weak demand almost certainly isn’t the cause of flagging revenues. So, to get to the real story, we need to dig deeper and find out what dynamics are bubbling under the surface.

Exhibit 2: Significant IT Outsourcing deals ($B) July, August, September, and October, 2017

Source: HfS Research, 2018. Major deals recorded by HfS Market Index. 

As-a-service and cloud

Of course, you can’t get far when talking about infrastructure trends without bumping into as-a-service and cloud. Our data helps build a picture of just how impactful the insatiable appetite for as-a-service and cloud is. Now, we won’t tell you the same old story of how cloud and as-a-service are taking away from traditional infrastructure revenues. Instead, let’s dig into the crux of the decline in revenues overall and how even strong growth is only just enough to combat the decline in traditional revenues.

Given the considerable investment of enterprises in digital, we would expect to see foundational elements of modern business technologies such as infrastructure stand to benefit in some way. Ultimately, all of this expensive and shiny new technology has to be run off something, so why isn’t the market set to grow?

A part of the answer can be seen in the nature and sheer scale of the enterprise cloud industry. The industrialization of server and computing capacity from the cloud giants such as AWS, Google, and Microsoft has had a relatively predictable impact on market revenues, in the same way as do other as-a-service models that encourage higher utilization rates. To use a simple analogy: it’s like the difference between owning a car and using a taxi. While a taxi generates more revenue over time than the stand-alone ownership of the vehicle, if everyone stopped buying cars and started using taxis, the overall market for cars and car services would decline considerably, even though the utilization and demand for them would remain roughly the same.

The same dynamic is at play in infrastructure, which tells us that although infrastructure services revenues are in decline, businesses aren’t necessarily consuming any less capacity or resources. In fact, the opposite is likely to be correct. And what’s more, this dynamic will continue to play a bigger and bigger role in pushing revenues down; vendors and enterprises alike are working on leveraging innovative analytics and cloud management platforms to better manage utilization and keep pushing costs lower. No longer are we seeing mega-deals that carve out a chunk of availability and capacity in exchange for a fixed sum. Enterprises are working smarter and becoming more active in the management of infrastructure spending—constantly pushing vendors and cloud providers to push down costs and build more resilient offerings that give them the capacity they need without the sizeable redundancy that used to be a pre-requisite of any business deal.

Packaged IT deals blur the lines

Another factor that is no doubt contributing to the decline in infrastructure revenues is the way they are packaged with other IT services, most commonly application development and management. In the modern cloudified environment, with trends like DevOps gaining more traction every day, the lines between traditional infrastructure and application business units are blurring. Enterprises are procuring both of these services as a single piece and, often, infrastructure comes out with the worst part of the bargain as far as revenues are concerned—with hosting costs syphoned off but the bulk of revenues sitting in the development space.

This trend is swiftly becoming the norm in the modern IT Services space and our interaction with clients tells us that the core reason behind this is the way solutions are now procured. Far fewer businesses approach providers to ask for on-premise development work; instead they opt to build new business applications and solutions directly in the cloud. To meet this demand, we’re also seeing richer ecosystems develop around the major born-in-the-cloud providers, particularly AWS, as clients push for applications to run off infrastructure that they can readily manage after the engagement has finished, or in their goal to build out a resilient and flexible multi-cloud environment.

Transformation investments

And, of course, we have the two-pronged shift in how engagements are managed in the age of digital transformation. Vendors and enterprises alike are working to make sense not only of the considerable digital technology hype but also of how their business models make sense in the swiftly changing economy. This calls for a change in mindset for both parties; vendors are already telling us their go-to-market has shifted toward strategic and transformation-focused work. In our 2017 iterations of the IT Services Blueprints, a notable shift was highlighted, as vendors pushed to become more selective in the engagements they undertake—particularly in infrastructure—as they shy away from lift-and-shift engagements in favour of more lucrative transformation engagements.

While for many enterprises there is still a need to move down the traditional managed infrastructure route, many more are taking pause and considering the broader transformation work necessary to digitise their business operations. These two trends coupled are, in some instances, translating into mega-deals focused on a whole range of digital services—including cloud. But, many more are building out longer-term strategic and transformation focused partnerships, of which the digital foundation and plumbing layers like infrastructure are being handled directly by vendors. Often this occurs because of an initial need, before they can bring in the other digital layers that are more lucrative, making the revenue lost from infrastructure a worthwhile investment.

While this trend is somewhat murkier and harder to prove at this stage than at others, throughout the Blueprint research process we engage with countless enterprise clients and key vendors in the space, with almost all advising of this considerable change in mindset on their part, making this perhaps one of the most impactful trends to watch out for in the future.

Bottom Line: Although the infrastructure space has showed signs of freefall, it is far from a disaster. It is all because of a positive shift in mindset and market restructure as enterprises and vendors try to make sense of the role of infrastructure services in a digital world.

The good thing about the new market is that it is fit-for-purpose. The old style ‘your mess for less’, lift-and-shift attitude, from the world of IT outsourcing, has finally died. The replacement is a way of buying IT infrastructure services that provide a platform for the way a digital business operates. It provides the business processes with a flexible way to operate, offering better employee-focused products and increased levels of automation. Plus, it provides a platform for the organization to communicate and even deliver its products and services in a way that is more appealing to its customers.