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Russian aggression will not dampen pandemic-driven cloud demand

After benefiting from COVID-19 disruption, cloud should fare well yet again in the face of the war in Ukraine

We expect cloud vendors to experience limited financial and operational disruption as a result of Russia’s invasion of Ukraine. Most cloud and software vendors generate a small percentage of their revenue from the two countries combined and maintain limited direct investment, partly due to Russian business regulations. The larger potential impact, in terms of the cloud market, is a slowdown in adoption and investment. The effects of the invasion on the global economy, COVID-19 recovery, and energy markets are all still uncertain.

During the last prolonged economic downturn in 2008, the cloud market was still very early in its development and still quite a small part of most customers’ IT environments. That challenging economic environment was a boon for cloud adoption, largely due to the cost reduction and capital expense avoidance benefits it could provide to customers. The general perception and value of cloud have evolved since then to be more focused on agility and innovation rather than just cost savings, a change we believe may again benefit the cloud market.

In times of uncertainty, cloud’s ability to help customers change business processes, gain greater insight into data, and ensure IT services are available regardless of geolocation have proved invaluable. While prolonged economic uncertainty could pressure IT budgets, we expect cloud to remain a priority given the value customers have realized especially during challenging times. The cloud space may not directly benefit from this invasion as it did with COVID-19, but we expect its growth will continue.

Global hyperscalers do not stand to lose significant revenue streams, but will see delays in the already lagging eastern European cloud markets

The most obvious and direct impact of the war is the disruption of revenue streams for cloud vendors with business and footprints in Ukraine and Russia. Especially in Ukraine, business operations have been all but halted as citizens flee, protect their families, and defend their nation from the Russian military.

While the magnitude is not overly significant to most cloud vendors due to the relatively small size of Ukraine in population, economy and overall cloud adoption, certain global vendors, specifically Microsoft (Nasdaq: MSFT), have a sizable presence and generate revenue streams within the country. Microsoft announced a partnership with the Ukrainian government for cloud services and security in 2014 and in 2020 was discussing plans to invest up to $500 million, including two new data centers, to service the Ukrainian market. That investment has not yet come to fruition, but Microsoft’s relationship with the Ukrainian government has intensified as it works to thwart cybersecurity threats arising from the war.

Russia is certainly a larger economy, but also should not lead to material pressures for cloud vendors during the war and its aftermath. As the aggressor, Russia does not face security threats like Ukraine does, but sanctions have wreaked havoc on Russia’s economy. With the ruble plummeting, Moscow Stock Exchange closed, and financial systems facing chaos, the IT and cloud spaces are impacted along with every other industry in Russia. The effects are mitigated by the fact that cloud adoption has been quite low in the country. Europe in general lagged the U.S. in the acceptance and implementation of cloud solutions, and Russia is even farther behind.

According to industry estimates, 5% or less of IT spend in Russia is cloud related, well below worldwide rates in the 25% range, which means that Russia accounts for less than 1% of the total cloud market opportunity. For the U.S.-based cloud leaders, the revenue effects are mitigated even further by the regulatory challenges of competing in the country. Similar to China, Russia’s laws prevent direct operations by foreign firms. Local providers like Yandex, SberCloud and Mail.ru control a majority of the market. Microsoft and Amazon Web Services (AWS) (Nasdaq: AMZN) have partnered with some of these local providers to participate in Russia, but we do not believe those relationships have grown into significant revenue streams. The war will mean cloud revenue will be delayed further for AWS, Microsoft and other leading global cloud providers, and some vendors might opt to shutter their operations in the country.

Business ecosystems must invest in massive supply chain pivots

COVID-19 supply chain impact

COVID-19 laid bare the underinvestment in contingency capabilities during the decades-long pursuit of cost optimization. In short, business leaders assumed a certain status quo in business continuity and did not leave sufficient capital tied up in unfinished inventory to provide necessary buffers in supply chain efficiency. Firms had over-rotated on optimization and perhaps assumed their trading partners were on par with them in terms of the technology “twinning” of their activities. COVID-19 exposed the need for agility, and when scale advantage only enabled top-tier firms to have the automated tool sets, working with the vital Tier 3 and Tier 4 suppliers resulted in the cascading pileups now in the news.

Future supply chains have to be embrace open contributions

Uneven technology enablement with supply chain participants certainly has created a network effect, but not the positive force multiplier discussed in third-wave economics papers. Supply chains, by definition, are a collection of ecosystem participants. For there to be a positive network effect, there has to be democratized access to technology innovations. Tier 3 and Tier 4 suppliers lack the funds and the skills to build digitally transformed supply chains on their own. In this sense all enterprises have to learn a lesson from the technology industry in terms of IP contributions to the ecosystem.

Ecosystems have to provide a common platform of nondifferentiable value-add to all participants —value-add in terms of stripping labor and labor mistakes from process flows, and nondifferentiable as it impacts neither ideation nor sales engagement. Open source is how technology has wrung cost of compute out of the model. This is how platform businesses achieve the network effect, as positively espoused in third-wave economics. 

Supply chain has the attention of the boardroom

The value of the interconnected supply chain ecosystems has been gaining boardroom attention and, as EY notes, COVID-19 only accelerates the need. The pandemic was a blindside disruptor and, as enterprises get back up from the blindside hit, the focus shifts from the diminishing return of investing in supply chain for cost optimization and turns back to the double-digit revenue hits enterprises took due to pandemic-fueled disruptions. The board focus is now on gaming out what other events could have a similar impact on business resiliency that the pandemic has had.

Does the boardroom see value in ecosystems yet?

Boards generally are populated by mature executives well versed in the current ways of working. Ecosystem business models are not a legacy best practice with which TBR would expect many board members to be familiar. They are too new. The idea of taking huge sunk investment costs and donating them to a buyer/supplier consortium will likely be anathema to many boards, but, as technology has proven time and again, open-source communities accelerate innovation. Linux/Red Hat represents just one illustration of that value creation in technology.

Advisory firms have permission to play to educate boards on ecosystem business model best practices

TBR hears a constant refrain in its discussions with services firms that people and process are the constraints and not the technology itself. This rings true with large enterprises but not necessarily with the small businesses comprising many of the Tier 3 and Tier 4 suppliers in enterprise supply chains. Outlining the value of a resilient supply chain will be an easy boardroom sell based on the current pandemic-related constraints being felt throughout the global economy. Convincing the board to contribute sunk IP investments to a consortium will be a harder sell. If any services entities can convince the boards of this efficacy, it will be the tax and audit advisory partners who have been providing business guidance to enterprises for centuries.

TBR’s recently published November 2021 Digital Transformation: Voice of the Customer Research bears out these notions. Based on survey data, respondents allocate 13% of their digital transformation services budget to business advisory services, another 16% to IT advisory services and an impressive 43% for managed services. TBR believes these managed services will more frequently flow from the advisory-led firms rather than the technology-led firms given the advisory firms’ advantage in knowing the business rules and business risks to digitization more than how to get the technology plumbing to work seamlessly.

Figure 1

From a straight technology perspective, firms invest in cloud computing, cybersecurity, IoT and analytics for digital transformation. Cloud localizes the activity where the firm wants it, cyber mitigates risk, IoT allows for more workflow automation, and analytics tells the business leaders what is important from the frictionless business flows. Cloud similarly was brought to the fore during the pandemic given the need to accommodate remote workers and reduce the amount of on-premises IT equipment requiring on-site staff.

Figure 2

Of course, all of these statements hinge on having IT platform plumbing built correctly and then transforming the business workflows that sit atop the IT platform. Figure 3 highlights the need for this gradual rollout strategy. Right now, improving IT operations management dominates the list of respondents’ digital transformation objectives. In two years, however, there will be a string of different business workflows on the customer docket. Workflows are automating business processes that often engage with other corporate entities and customers. This is where the deep knowledge of business rules and business risks come into play, and where tax and audit firms have clear market distinction.

Figure 3

Technology-led firms, hyperscale cloud companies and equipment manufacturers will certainly all play roles in moving industries further along the path of digitization. But just as business is turning to ecosystems, so too must the technology-based firms move to ecosystem offers where advisory-led firms will increasingly take the leadership role to advise boards in formulating business risk and resiliency policies that drag the tech stack participants along as the derived decision from the C-Suite aspirations.

Supply chain is the current example where tech innovations, business rules and employee training will give businesses competitive advantage providedthose ecosystems extend the IP value to the Tier 3 and Tier 4 suppliers. Like a chain only being as strong as the weakest link, ecosystem networks are only as strong as the weakest participant.

The statement stands for all business ecosystems. Other aspects of the business value chain come to the fore as different events trigger different reactions and technological choke points in need of modernization and remediation.

TBR releases exclusive webinar content from August 2021

Technology Business Research, Inc. (TBR) announces on-demand availability of its August 2021 webinars for market intelligence and competitive intelligence teams. August webinars feature top trends in the hyperconverged infrastructure (HCI) market and IT services and digital transformation markets.

Speed of HCI market evolution accelerates due to COVID-19

Principal Analyst and Practice Manager Angela Lambert sheds light on how HCI purchasing fits into broader IT environment investment plans and key use cases being targeted.

Digital transformation amplifies IT services market trends

Principal Analyst and Practice Manager Patrick Heffernan, Principal Analyst Boz Hristov, Senior Analyst Elitsa Bakalova, Senior Analyst Kelly Lesiczka and Analyst John Croll discuss recent performances of the leading 30 IT services providers and enterprise buyers’ priorities as they accelerate their digital transformation programs. 

TBR webinars are typically held Wednesdays at 1 p.m. EST and include a 15-minute Q&A following the main presentation. To find out what we are discussing next month, check out the Webinars page of our website.

Interested in a one-on-one discussion with one of the above subject-matter experts or a private webinar with one or more of our teams?

Contact us today for more information on our free 60-day trial

IT services market: 2Q21 insights from TBR’s Professional Services team

IT services market rebounding in 2021 after pandemic-caused trough

Revenue growth for TBR’s benchmarked IT services vendors was flat during 2020 as growth challenges stemming from the COVID-19 pandemic negatively affected vendors’ revenue generation. Investments in cloud, cyber, AI and industry specialization will accelerate revenue growth for benchmarked vendors during 2021. This pent-up demand is also fueling a rebound in additions of resources with skills in cloud, cybersecurity, AI and product engineering services, following year-to-year deceleration in 2H20. Vendors, though, must account for digital exhaustion, especially as remote working will likely continue for the time being. 

In this upcoming webinar, Patrick Heffernan, Boz Hristov, Elitsa Bakalova and Kelly Lesiczka will reveal insights and latest trends of the IT services market and global service delivery. The group will also discuss vendors’ roads to recovery post-pandemic based on findings in TBR’s latest IT Services Vendor Benchmark and Spring 2021 Global Delivery Benchmark.  

Don’t miss:

  • TBR’s overview of performance and key trends during 2020 for the 30 vendors in our IT Services Vendor Benchmark
  • How pursuing technology-enabled transformational opportunities will enable vendors to ramp up revenue growth during 2021
  • How vendors have managed resources amid the global pandemic, and what is next for their headcount strategies in 2021
  • State of adoption of automation in service delivery and the impact on vendors’ P&L

Register today to reserve your space

TBR webinars are held typically on Wednesdays at 1 p.m. ET and include a 15-minute Q&A session following the main presentation. Previous webinars can be viewed anytime on TBR’s Webinar Portal.

For additional information or to arrange a briefing with our analysts, please contact TBR at [email protected].

WEBINAR FAQS

Cloud vendors make the most of their COVID-19 stimulus

Join Allan Krans, Nicki Catchpole, Evan Woollacott and Catie Merrill for a glimpse into the continued acceleration of cloud adoption as the COVID-19 pandemic abates. The discussion will shed light on how the value of cloud was reinforced during the pandemic, leading to accelerated spending as conditions have stabilized and improved in the first half of 2021. 

Don’t miss:

  • How technology and business strategies have changed for cloud customers and vendors
  • How mission-critical workloads are now moving to hybrid and cloud delivery methods
  • The role consumption-based pricing options are playing for customers

Mark your calendars for June 9, 2021 at 1 p.m. EDT,
and REGISTER to reserve your space.

COVID-19 will fade, but cloud reliance will remain

The COVID-19 pandemic and its wide-ranging effects forced businesses to adjust in 2020 and now into 2021, but these changes will persist much longer than the pandemic. Most businesses made a wide range of changes to their IT strategies over the past year, but there are a number of commonalities. The first commonality is that technology is at the heart of how organizations have adjusted to COVID-19’s effects, to service their own employees and the changing needs of their customers. Cloud-delivered technology, in particular, has been core to providing the speed and scalability needed to support these adjustments in the most agile manner possible. The other commonality in COVID-19 responses is that organizations found a way to support increased technology spending, even in a time of much economic uncertainty. Cloud investments were prioritized during the course of 2020, which is reflected in the overall stability and continued growth of the market throughout the year.

Figure 1

AWS, Microsoft Azure and Google Cloud Platform are even more critical to the IT industry

While the market continued to grow and leading firms maintained their momentum, they were not unscathed by the effects of COVID-19. Vendors experienced a dip in revenue growth rates during 2Q20, at the height of uncertainty and pessimism. The dip was driven by businesses pulling back spending in anticipation of a pronounced economic slowdown. Even though COVID-19 infection rates grew worse through the end of 2020, economic expectations recovered and the uncertainty around how COVID-19 would impact business results diminished, putting cloud revenue growth from the leading vendors back on previous trajectories. Though the business strategy and dynamics were much changed, the continued growth of the leading firms was back on track.

In many ways, COVID-19 accelerated but did not actually alter the course of cloud technology’s impact on the IT market. As a delivery method, cloud was already eroding traditional IT and far outpacing the overall growth in spending. Most customers had some level of cloud investment prior to 2020, with many using cloud solutions for mission-critical elements of their enterprises. After a year of dealing with pandemic-driven disruption, cloud utilization has grown significantly. Cloud adoption happened faster than most organizations planned moving into 2020, as business changes forced customers to overcome cultural, budgetary and technological barriers in making adjustments to their operations. The good news for cloud vendors is that this change in behavior should last well beyond the direct impacts of COVID-19. The challenge is how to meet this enhanced level of demand, which requires investment now to get additional data center capacity and services online ahead of increased needs. The market may have reached this place eventually, but both customers and vendors are accelerating their cloud strategies to account for the more prominent role cloud will play in the overall IT market moving forward, even as COVID-19 fades, hopefully sooner rather than later.

Society depends on the enterprise edge to safely navigate and mitigate COVID-19

Society depends on the enterprise edge to safely navigate and mitigate COVID-19

COVID-19 enterprise edge use cases

Atos collaborated with Eupry to develop a Vaccine Logistics Monitoring as a Service solution that enables supply chain management for large-scale COVID-19 vaccine distribution activities. Benefits derived at the edge include the monitoring of temperature, differential pressure, humidity and carbon dioxide throughout the vaccine transportation process. 

IBM and Salesforce are working together to integrate the IBM Digital Health Passport, built on IBM Blockchain technology, and Salesforce Work.com to enable organizations to verify an individual’s COVID-19 vaccination status and other health information, such as test results or temperature checks.

Israel-based AI and IoT startup Youtiligent has developed an AIoT-based technology that enables organizations in the COVID-19 vaccine distribution chain to ensure their refrigerators are set to the correct temperature required for the vaccines. The solution leverages edge sensors for real-time refrigerator temperature monitoring as well as machine learning and AI algorithms for predictive maintenance that can detect refrigerator performance anomalies in real time to prevent spoilage.

TBR’s Enterprise Edge Compute Market Landscape, which is global in scope, details edge compute trends among both vendors and their customers. Vendor coverage includes: Amazon Web Services, Atos, Cisco, Dell Technologies, Digital Realty, Equinix, Huawei, Hewlett Packard Enterprise, IBM, Lenovo and Microsoft. This research includes current-year market sizing and a five-year forecast.

Accelerated cloud adoption will persist even after COVID-19 pandemic subsides

The outbreak of COVID-19 led to constraints around enterprise IT budgets, but the emergence of a digital workforce resulted in accelerated adoption of cloud applications, particularly those related to productivity and customer-facing suites in the front office. Enterprises needed to rapidly shift operations to the cloud to support remote workforces, increasing the value of service arms and IT services partners to mitigate client risk in the form of cloud road-mapping, migration and implementation services.

In the long term, internal service capabilities and IT services partners will become critical to enabling enterprises’ digital transformations, particularly as front-office cloud deployments mature and as clients explore migrating more customized environments like ERP to cloud or pursue industry-based solution deployments in highly regulated industries like healthcare and the public sector.

The bulk of enterprises are employing a best-of-breed approach to the development of their cloud IT architectures, evidenced by 42% of respondents stating that they currently use three or more SaaS vendors. As a result, application vendors have been driving alliance activity with infrastructure providers to give clients more flexibility around how they consume cloud, evidenced by SAP’s decision to offer SAP Business Suite 4 HANA with leading infrastructure players like Microsoft Azure and Amazon Web Services. While best-of-breed IT will remain prevalent, cloud players have increasingly driven investments to tighten the integrations of complementary suites to expand share of client wallet by enabling multiproduct deals, a tactic that has been effectively employed by Salesforce and Microsoft in 2020.

Cloud players aim to accelerate the proliferation of their IP by employing industry-based go-to-market capabilities to provide clients with prebuilt data models that alleviate concerns around data compliance and governance. This tactic aligns with clients’ needs, as 51% of respondents who deployed industry solutions cited compliance and regulatory standards as a key benefit. To strengthen the value of industry clouds to clients, vendors are offering prebuilt integrations with leading data providers, such as Microsoft’s integrations with electronic health record providers through Cloud for Healthcare. These types of integrations will be critical to accelerating client time to value, while ensuring the integrity of data by meeting industry-specific regulations.

TBR’s Cloud Applications Customer Research tracks how customers are modernizing application environments and choosing between different cloud delivery methods. Leveraging in-depth conversations between TBR and enterprise customers, the Cloud Infrastructure & Platforms Customer Research provides subscribers with actionable insight that they can use to better understand their customers’ behavior and win cloud infrastructure deals. Topics covered for both reports include public, private and hybrid delivery options; decision-making involvement and criteria; leading vendor perception; field positioning and competition guides; and the impact of emerging trends (e.g., containers, security, platforms).

Cloud migration rises to top as central IT investment for driving IaaS and PaaS adoption

Cloud migration rises to top as central IT investment for driving IaaS and PaaS

Key Insights

The pandemic has laid bare the benefits of the cloud, serving as a proof point for the central role cloud plays in supporting organizations’ short- and long-term digital transformation road maps.

COVID-19 has dramatically accelerated the timeline for cloud adoption for many organizations, with public cloud as the most common method of delivery for IaaS and PaaS workloads.

The use of cloud professional services will continue to grow due to the challenges of migrating increasingly complex workloads to the cloud while working in a remote environment.

TBR’s Cloud Applications Customer Research tracks how customers are modernizing application environments and choosing between different cloud delivery methods. Leveraging in-depth conversations between TBR and enterprise customers, the Cloud Infrastructure & Platforms Customer Research provides subscribers with actionable insight that they can use to better understand their customers’ behavior and win cloud infrastructure deals. Topics covered for both reports include public, private and hybrid delivery options; decision-making involvement and criteria; leading vendor perception; field positioning and competition guides; and the impact of emerging trends (e.g., containers, security, platforms).

Vendors pursue tactical run-the-business engagements to help clients react to COVID-19 and maintain operations

Management consulting market summary

Outlook

The COVID-19 pandemic will continue to pressure discretionary spending and challenge vendors’ interactions with clients due to social distancing and travel restrictions. The vendors that will succeed are the ones that immediately adjusted their portfolios and service delivery models to accommodate clients’ pandemic-related run-the-business challenges and are now looking ahead to provide services to support clients in the post-pandemic world. TBR expects vendors to master the hybrid engagement model, navigate more smartly through the technology alliance ecosystem, deliver digital transformations and expand activities around decarbonization to recover ground lost in 2020.

Changes

Hybrid sales and service delivery, in which consultancies interact with clients both virtually and face-to-face, existed before the COVID-19 pandemic spread across the world in 2020; however, the dramatic difference from pre-pandemic days is the universal acceptance that hybrid engagements are a necessary and valuable way to conduct business. Vendors are now more adept at delivering services in person and remotely and have made collaborative technologies a natural extension of the job. Clients now receive services and adapt to different ways of working, recognizing that value in a services relationship can be sustained without face-to-face encounters. In 2021 IT services vendors and management consultancies that perfect the hybrid engagement model will outperform peers and accelerate consolidation across the IT ecosystem.

Market overview

TBR expects benchmarked vendors in the management consulting segment to increase revenue 0.9% year-to-year in 2020, a growth trend that will continue to surpass that of benchmarked IT services vendors in TBR’s IT Services Vendor Benchmark, which we expect to decrease 1.7% year-to-year in 2020. The Big Four vendor group will remain the largest revenue contributor at 55.2% of benchmarked revenue in 2020; however, strategy-led vendors will increase their market share by 50 basis points year-to-year to 28.6%. Solutions-led companies, the Big Four and strategy-led firms are all expanding their technology capabilities, intellectual property assets and managed services capabilities to address clients’ run-the-business needs with holistic capabilities.

Total Benchmarked Management Consulting Revenue 2015-2020E

The Management Consulting Benchmark provides key service line, regional, vertical and operational data and analysis for 13 leading management consulting firms. The research program also includes a deep dive into 11 vendors’ management consulting business strategies as well as SWOT analysis.