Predictions 2014: UK Infrastructure Services

The undeniable move towards the cloud from the traditional ‘old world’ of IT outsourcing will be one of the most influential factors for supplier revenue, margin and share price performance in 2014. Infrastructure suppliers are jostling for position (as either cloud ‘builders’ or cloud aggregators), making substantial investments in data centre assets and technologies, tools and orchestration platforms.

However, the Race for Change in infrastructure services is more like the 400m hurdles than the 100m sprint. Pace is of course important, but it is not just about who is fastest out of the blocks. Buyers have dabbled with cloud and (largely) understand its potential. They now face the enormous challenge of trying to differentiate the many options for cloud infrastructure services on the market. Not only that, but they must try to understand how well their entire range of requirements (across ITO, hosting, private cloud, public cloud and so on) can be met. In 2014 suppliers must therefore take the time to refine their offerings and clarify their positioning and differentiation.

Here are some of our key predictions for 2014:

The increasing shift to hybrid cloud environments will drive the requirement for supplier orchestration and automation capabilities: We see an intensifying Race for Change around these platforms as suppliers invest and/or acquire to create flexibility and control for customers, and differentiation versus other suppliers. Infrastructure-as-a-Service (IaaS) on its own will not be enough to ensure customers will stick by a supplier, especially where Amazon Web Services (AWS) is a suitable alternative. SITS suppliers will need to provide both public and private cloud environments (their own or partner-owned), that can be cleverly managed alongside existing legacy systems.

The flow of revenue through the G-Cloud framework will build steadily: The running total as of November 2013 was £64m, which is a very small drop in the ocean versus the total UK SITS market. Nonetheless, we believe the question suppliers need to be asking themselves is not “should we be on it?” but “what should we put on it?”. Government buyers are moving away from traditionally structured outsourcing deals (see more on this here: Race for change 2014: UK public sector predictions), and cloud services will without doubt play a key role in this shift.

The requirement for CIOs to provide a high-performance working environment will accelerate in 2014: Buyers are looking for innovative ways to create a more satisfying and effective workplace experience for their users. This of course ties in with the consumerisation of IT trend and employee demand for choice and quality of devices and access. A couple of years ago the buzz phrase was BYOD – but this is only part of the solution. Devices were the starting point; now end users want vastly improved functionality – for example, mobile access to core company data or infinitely improved analytics of customer buying patterns. CIOs are under pressure to help staff become more productive and the enterprise more competitive.

Private Equity firms will start to consider selling their data centre services investments: Within the next year or so, we think it likely that mid-sized cloud and hosting firms will come up for sale. Over the years, investors have backed their numerous acquisitions, and there are now many examples of financially strong, decently-scaled PE-backed entities (see Mid-market Data Centre Services: Opportunities and Competitors for examples and analysis). With good market growth rates in hosting and cloud - and interest from parties looking to expand capabilities and customers - now might feel like a good time for backers to reap the rewards for their hard work. 

The gap will widen between well run and poorly run infrastructure services firms: In markets where top line growth is difficult to achieve (read more about the infrastructure services market sub-sectors here: Infrastructure Services Market Trends and Forecasts 2013), weaker operational models will be hit further in 2014. Those that are able to grow margin (e.g. IBM and Computacenter this year) have done so because they have been able to sign the right deals (in terms of margin and/or growth potential) and run those deals in a cost efficient way. Furthermore, poor cloud commercial and investment models will be also start to be exposed; in the worse cases suppliers will be unable to achieve a return on investment and/or service levels will be dissatisfactory.

Posted by Kate Hanaghan at '17:12' - Tagged: predictions