Enterprise spending plans show shrinking role for non-cloud hosted infrastructure

The use of cloud-based technologies in IT operations is widespread to the point that non-cloud types of hosted infrastructure (such as dedicated server environments) are absent from the spending plans of many IT decision-makers. Responses to 451 Research's Voice of the Enterprise (VotE), Cloud, Hosting and Managed Services, Budgets and Outlook study indicate that hosted, non-cloud infrastructure environments are in use at a significant portion of businesses. However, those environments make up a comparatively small portion of hosted infrastructure spending. They are commonly identified as the hosted infrastructure area expected to see the greatest spending decrease, and rarely the area expected to see the greatest increase.

Most businesses describe reduced spending on these environments as the result of workloads moving to other types of hosted infrastructure. Survey responses describe a transformation in cloud and hosted services spending that poses an immediate threat to service providers whose businesses are not transforming in similar ways. Service providers dealing in hosted, non-cloud infrastructure (such as dedicated servers) should have a clear understanding of the increasingly niche role these services will play. They are unlikely to form the basis of a strong infrastructure market competitor. Service providers should have hooks into cloud services as builders, enablers or resellers.

The 451 Take
A decline in the enterprise appetite for hosted, non-cloud infrastructure will narrow the overall market for traditional hosting services. The shift to cloud is not new, but the short-term prospects for non-cloud services should be of concern to service providers that operate in these segments or emphasize these types of services. Even providers that believe themselves to have a reliable business in non-cloud infrastructure services should carefully examine these service types, the projects they support and the types of customers that consume them. Understanding how each of these things is likely to evolve in the context of cloud services is critical to these service providers' continued viability. There are certainly service providers that continue to rely on non-cloud product types such as dedicated servers for both existing and new business. There continue to be customers using and adopting these services. But that pool of users is shrinking. Even those providers that continue to rely in part on non-cloud services should already be incorporating offerings that are more directly the focus of IT spending plans – adding cloud services, or tying dedicated environments to application-focused services. Maintaining relationships with customers as they transform their IT environments will require service providers to offer alternatives, potentially by building or brokering cloud infrastructure services, and possibly by recasting themselves as enablers of this transformation.

Hosted, non-cloud infrastructure within the enterprise spending mix
Encompassing legacy hosted environments that in some cases predate cloud technology, non-cloud infrastructure services play a part in the IT operations of a significant number of businesses, with 32% of respondents indicating they are using some hosted, non-cloud infrastructure services (Figure 1). However, these services make up a comparatively small part of spending, accounting for just 8.6% of hosted infrastructure services spending on average.

There are markets in which non-cloud infrastructure services are more prominent. They are in use by 43.1% of respondents in Europe, the Middle East and Africa, for instance. This is likely driven in part by the positioning of non-cloud services such as dedicated servers as more central offerings by some of the hosting market leaders in Europe, in particular.

Expected spending shifts detail IT transformation
Businesses pointed to a range of areas targeted for the largest increases in their total IT budgets in 2018 (Figure 2), with environments specifically operated by service providers topping that list. SaaS and hosted applications were the most commonly named (by 31.9% of respondents) as the area of largest increase. Fewer than 3% of respondents identified it as the area of largest decrease.

Hosted infrastructure services are the focus of significant spending shifts. Notable portions of respondents identified hosted infrastructure services as either the largest area of IT spending increase (14.8%) or largest area of decrease (13.6%) in 2018. Decreased spending on hosted infrastructure services can, in many cases, be traced to workloads moving to other hosted environments, including shifts from hosted infrastructure to SaaS, or to other infrastructure environments that may create cost savings through more efficient use of resources.

Within the more limited category of hosted infrastructure services (Figure 3), only a small portion of businesses (10.6%) expect hosted, non-cloud infrastructure to be the largest area of spending increase, while nearly a third (28%) of respondents expect non-cloud infrastructure to be the largest area of spending decrease.

Expectations for hosted non-cloud infrastructure contrast significantly with plans for public cloud IaaS, which 57.5% of respondents expect to be the area of largest increase in hosted infrastructure spending, and only 8.9% expect to be the area of largest decrease.

Workload movement and cost savings
Taken together, plans to decrease spending on hosted, non-cloud infrastructure and increase spending on public cloud illustrate a migration of workloads from non-cloud to cloud environments. Respondents that named hosted, non-cloud infrastructure their area of largest expected decrease in hosted infrastructure spending most commonly cited moving the workload to other hosted infrastructure environments (Figure 4) as the reason for that decrease, at 41.3% of respondents. A significantly smaller portion of businesses (17.4%) cited discontinuing services they no longer need as the top reason.

Workloads moving to other hosted infrastructure environments is also the reason most commonly cited (by 37.6% of respondents) for spending decreases across all hosted infrastructure types. Among businesses moving workloads from non-cloud infrastructure into other environments, more efficient resource utilization based on virtualization and other core platform functions can make this type of transformation a net cost savings, leading to the decrease in overall hosted infrastructure spending indicated by a portion of respondents. Along with cost, businesses may also seek improvements in performance, flexibility or security as a result of such a migration.

A changing game for hosted infrastructure providers
A large portion of the businesses that responded to the VotE Cloud, Hosting and Managed Services survey indicated plans to decrease spending on hosted, non-cloud infrastructure services. However, it is infrequently the case that these customers are turning off projects altogether. Responses suggest that, most frequently, they are moving these services to cloud infrastructure environments.

The movement of workloads away from hosted, non-cloud environments poses a clear threat to the prospects of the service providers operating those environments. However, these service providers may find ways to stay involved with these customer projects, even as they enter new infrastructure environments.

Service providers that have a large existing business in non-cloud infrastructure services must find ways to participate in their customers' migration of workloads to cloud environments – by operating or otherwise supplying or influencing the cloud environment – or they risk losing those customers altogether. Understanding that this transition is taking place will be critical to preserving customer relationships.

Businesses adopting cloud often name similar drivers – improvements in operating cost, application and performance, security, and flexibility are among the most common objectives. Service providers looking to remain involved with customers moving workloads to cloud should focus on helping customers achieve these benefits, whether they are building, advising or enabling these environments.