Introduction

Digital transformation has taken hold in the enterprise, and hybrid and multicloud technologies have solidified their position as enablers of this critical change. As a result, organizations must adapt and manage the increased complexity that stems from cloud implementation. A widespread shortage of cloud expertise has exposed an opportunity for managed service providers to fill the void and address new organizational challenges. Successful service providers will need to acquire and provide expertise in cloud technologies while also seeking partnerships to take advantage of new opportunities. By solidifying themselves as experts on cloud technologies and taking a dynamic approach to solutions for their customers, service providers can leverage their position as handlers of the complexity that is a necessary byproduct of digital transformation.

The 451 Take

For most enterprises, digital transformation is inseparable from cloud technologies. Organizations seeking the agility, flexibility, cost reduction, security and performance of the cloud face increased complexity and a shortage of skills to handle it. This area of opportunity is connected to a shift in focus for many businesses traditionally focused on the operation of infrastructure. Driven by the advancing operational efficiency, scale and advanced feature sets of the hyperscale public cloud providers, the value of expertly operating infrastructure is becoming a less differentiated capability for service providers. However, the need for the skills associated with expertly designing, implementing, managing and securing the applications and data deployed into modern infrastructures is increasing.

Service providers from the managed infrastructure business are adapting to this opportunity, building new products based on packaging these advanced skill sets, along with their own or third-party cloud infrastructure. But they are facing new competition, from entrants to this market that include datacenter operators, telcos, hardware and software vendors, MSPs and systems integrators. This growing ecosystem comes with an opportunity for service providers to partner across services and platforms, extending their engagement to include the entire life cycle of project implementation, ensuring that customers realize the benefits of cloud technologies and solidifying the service provider role in ongoing execution.
 

Cloud and the Digital Transformation Imperative

The nature of business is evolving, and new technologies are enabling organizations to adapt business processes to changing customer needs. Moreover, digital transformation allows companies to engage more effectively with partners, use resources more efficiently, create new business models and nimbly navigate disruptive market trends. Enterprises are taking notice of this opportunity. According to 451 Research's Voice of the Enterprise (VotE): Cloud, Hosting and Managed Services, Organizational Dynamics 2019 survey, nearly 90% of organizations are on the path to digitally transforming their business, with 46% saying they are currently executing on a strategy for digital transformation. Digital transformation is a universally felt imperative among enterprises today and realizing this transformation will require organizations to adopt new, complex technologies. Many technologies will enable digital transformation, but cloud technologies will play a critical role. According to the VotE: Digital Pulse, Vendor Evaluations 2019 survey, cloud is at the top of the list of technologies that will have the most transformational impact over the next several years.

Figure 1: Cloud is the vehicle for transformation

Source: 451 Research's Voice of the Enterprise: Digital Pulse, Vendor Evaluations 2019

Other technologies that are empowered by, or in some cases, native functions of, cloud platforms such as AI, mobile platforms, IoT and blockchain also land near the top of the list. The recognition that cloud technologies are a driver of transformation is the first step, but these technologies also introduce new complexities. Service providers are targeting these complexities with services and positioning themselves as enablers of digital transformation. But this requires a concurrent shift within service provider operations. In response to 451 Research's Voice of the Service Provider survey, nearly 80% of service providers say they require transformation internally; 12% of respondents report that complete transformation is necessary.

In many cases, transformation for service providers revolves around altering their offerings to accommodate or incorporate third-party public cloud while also wrapping parts of their service around these platforms. Service providers specializing in datacenters, hardware, software and system integration as well as value-added resellers are well positioned to provide specialized knowledge to customers. Increasingly, service providers are shifting from competing on price, features and geography to partnering around their strengths. Most of the time this means collaborating across services and platforms. In doing so, service providers can help manage the growing complexity of cloud technologies, allowing their customers to realize the agility, flexibility, cost reduction, security and performance that they seek.

Cloud Complexity and Skills Gaps

Complexity is the natural result of the organization-wide application of new technology. Consequently, finding the right skills to enact this change will be a fundamental challenge for enterprises. Since new technologies create new requirements for expertise, businesses are forced to make decisions about where they want to acquire or develop talent, and where they want to look outside their own IT department for help. Businesses undergoing digital transformation are more frequently looking outside the organization for the necessary skills to help them achieve their plans. Skills gaps and insufficient IT staff are among the top IT pain points facing organizations today.

Cloud is a key example of a technology that exhibits an incredible pace of innovation and rollout of new features. This trait of rapid technological development coupled with the inherent shift of resources outside the organization makes cloud a good candidate for acquiring skills through services. Not surprisingly, many of the skills enterprises find most lacking are related to cloud and its features. Platform expertise, advanced platform functions and cloud-native application development are cited as areas where organizations lack necessary skills. Finding proper cloud expertise is emerging as a critical hurdle for digital transformation because successful cloud implementation is a key item in organizations' transformation plans. According to 451 Research's VotE: Digital Pulse, Vendor Evaluations 2019 survey, 86% of businesses identify a skills gap associated with implementing cloud.

Figure 2: Cloud skills gaps are a roadblock

Source: 451 Research's Voice of the Enterprise: Digital Pulse, Vendor Evaluations 2019

Many enterprises report that they are looking to service providers to fill some of these gaps – nearly half of businesses using cloud today plan to work with a service provider to acquire cloud platform expertise over the next two years. Other organizations are looking to service providers for help with cloud information security. As organizational needs grow, opportunities for service providers to help with cloud implementation will continue to emerge.

Service Providers Adapting to the Opportunity

The fact that enterprises are looking outside their own organizations for cloud skills should serve as confirmation that the users of public cloud believe that necessary expertise resides in managed service providers. This opportunity is only beginning to develop, and cloud platforms are investing in their partner programs with the expectation that more business will arrive from these channels and rely on their services for success. Among businesses surveyed, there is a strong intent over the next two years to implement managed services in combination with public cloud in functions other than backup and recovery. Areas of focus include security of cloud environments, migration and integration, monitoring of performance and optimization of cloud deployments.

Figure 3: Much of the opportunity lies ahead

Source: 451 Research's Voice of the Enterprise: Cloud, Hosting & Managed Services, Workloads and Key Projects 2019

With enterprises targeting new areas of cloud adoption, service providers that build around access to talent should start marketing their existing areas of specialization. Looking toward the future, service providers must plan to continually develop expertise to support the key requirements of the vertical markets they wish to serve. At the same time, they should consider their role within the larger partner ecosystem and identify how and where they want to fit. Along with delivering services up and down the technology stack, service providers have the opportunity to engage along the entire lifecycle of project implementation, including up-front consulting services, migrations and finally, ongoing operational management and optimization of cloud deployments.

By tailoring services to customer needs, service providers can directly enable the business outcomes that enterprises seek such as improvements to agility, operating cost, performance, availability and security. Service providers can build their offerings around the present cloud skills gap and embrace the role of ensuring that cloud delivers on its promise of being a key transformational technology for businesses. The ability to take advantage of this opportunity will define the success of managed services providers in the coming years.
Liam Eagle
Research Vice President, Cloud, Hosting and Managed Services

Liam Eagle is a Research Vice President, Cloud, Hosting and Managed Services. He is responsible for the Voice of the Enterprise: Cloud, Hosting and Managed Services study, and the Voice of the Service Provider study. His research examines web and application hosting, managed hosting and cloud infrastructure. His research focuses in part on the adaptation of traditional hosting technologies and models to accommodate emerging needs. 

Matthew Utter
Research Associate

Matthew Utter is a Research Associate at 451 Research. Prior to joining 451 Research, he conducted quantitative and qualitative academic research ranging from financial analysis to Arabic cultural and language studies. Matthew graduated Summa Cum Laude from the University of Florida with degrees in Information Systems and Arabic.

Keith Dawson
Principal Analyst

Keith Dawson is a principal analyst in 451 Research's Customer Experience & Commerce practice, primarily covering marketing technology. Keith has been covering the intersection of communications and enterprise software for 25 years, mainly looking at how to influence and optimize the customer experience.

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