Cloud The Impact On IT Services

Cloud's
The
Impact
IT
on
Services
Providers
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Ned May
SVP Research
Dear Reader,
HfS Research
ned.may@hfsresearch.com
As the role that the Cloud is playing in transforming the technology

Puneet Shivam
landscape continues to increase, it has become the topic that is on
Co-head IT Practice
the minds of many within the industry, and with those that invest in
Avendus Capital
both software and services. Given this, there isn't a lack of
puneet.shivam@avendus.com
research reports or bold predictions about how the Cloud will
Jeff Baker
VP, IT Practice
transform enterprises. However, in covering this market we found

that amongst the available research there was a lack of focus on
Avendus Capital
what the effect of Cloud would be on providers of IT services. The
jeff.baker@avendus.com
companies who have largely been built by providing supporting

services to non-cloud products, or to build custom applications and
linkages between disparate systems, otherwise known as system
integrators. What we tried to accomplish in this report was an
understanding of what the current transformation could mean to
these system integrators, and what we found formed the basis for
this report.
Largely, what we discovered is that the effect of the cloud on the
large SI's is still relatively small, but is increasing rapidly with time.
As Cloud becomes the standard for infrastructure and software,
and enterprises become more global and mobile, IT service
providers are being tested. This new marketplace requires a
different business model than what they've employed in the past.
While the prior decade was one where labor arbitrage was a
winning strategy, the future decade will hinge on technology
arbitrage. The operating mantra of providers during this era needs
to be characterized by adding value, because if they don't their
competition will.
As always, we welcome feedback from each of you and apologize if
anything we've written (or left out) offends anyone's sensitivities.
Please do write to us with your feedback on the report and
suggestions of how we can improve our market coverage.
Best,
September 2014
Ned May
Puneet Shivam
Jeff Baker
SVP Research
Executive Director
Vice President
HfS Research
Avendus Capital
Avendus Capital
Methodology
3 :: 5
Cloud's Dramatic Impact on the Procurement of IT
6 :: 8
The Impact of Cloud on IT & Business Services Providers
9 :: 13
The Evolving Professional Cloud Services Provider Landscape
14 :: 32
Deal Activity
33 :: 39
Final Recommendations for Service Provider Success
40 :: 41
Appendix
42 :: 53
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Disclaimer
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Disclaimer
The
promise of IT
and the ensuing opportunity around
its deployment may never have been
greater than it is today.
Method
ology
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Methodology
This report is based on a series of discussions with several dozen senior leaders across
the Cloud Services landscape including CEOs of prominent startups, practice heads of
large global services providers, venture capitalists, private equity investors, and a range
of other participants and observers. We also spoke to those who might be considered
Cloud skeptics within services providers. In addition to the insight gleaned from the effort
of gathering this collective wisdom from a crowd which represented roughly 500 years of
hands on experience, HfS and Avendus brought our own understanding and analysis of
the market through our ongoing interactions with participants. We augmented this with
primary research conducted in the IT services by HfS over the last 12 months, Avendus
experience as a leading investment bank in the IT services space, and with secondary
information available in the public domain.
Sizing methodology
HfS and Avendus market sizing relies on a consistent primary methodology that is used
for each service category. Our primary method is a supply side model that builds market
dimensions by estimating revenues from the most significant service providers in each
category. This is augmented by looking at spending models and contract tracking for
each specific market.
Forecasting methodology
HfS and Avendus forecasting combines historic revenue growth projections, contract
run rate projections, demand side survey data, supply side survey data and economic
projections.
Defining the Cloud

This report examines the impact of Cloud computing on the IT Service provider
landscape with a primary focus on consultants and systems integrators. As such, all
discussions regarding Cloud offerings and services are in the context of the enterprise.
We exclude what could best be described as the Consumer Cloud - offerings such as
personal backup, photo storage, etc.
Today one would be hard pressed to find anyone in the IT services industry that is willing
to debate the premise that cloud computing has emerged as an important and lasting
trend within enterprise IT. However, when one digs deeper into the Cloud, any general
agreement unravels from there. For some, the definition of Cloud Computing is a rigid
one that adheres to the framework published by NIST. Theirs is a world where Cloud
incorporates five critical features:
Methodology
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1.
Self-service
You can effectively pull out a credit card and buy it
2.
Networked
It is offered online.
3.
Multitenant
One instance of the service offering serves multiple
4.
Elastic
immediately online.
customers.
It can be rapidly scaled up and down to align with an
individual customers demand.
5.
Metered
Both provider and customer have clear visibility as to how the

underlying resources are being utilized.
Others approach Cloud with a much broader brush. For example, the collective wisdom
fueling the industry today has settled on a description that includes a comparison to
utility computing and for some it is essentially a metaphor for the internet.
For the bulk of this report, we intend to keep the definition of Cloud purposely vague.
This is not meant to establish some precedent regarding our definition at large. At times,
there is a very good reason for a tight definition, such as when establishing a market
size. However, the primary purpose of this report is to gauge the broad impact of Cloud
on the consumption of IT services, and like many emerging technologies, the specifics
as to what Cloud represents is subjective to an individual buyer. This means that to
explore its impact on the related services market, we need to take the broadest view
since the creation of a rigid box around what Cloud does and does not entail would
detract from the primary message of this report.
As such, we define Cloud as:
A relatively new IT delivery model that leverages broad network connectivity to enable
simplified procurement and allows the underlying technology assets to be centrally
managed and uniformly updated. In doing so, it creates a modular approach to the
delivery and consumption of IT.
Suffice to say, this encapsulates a very broad range of activities being labeled as-aService today. This list of acronyms in the business vernacular is long and seemingly
grows with the issuance of each new industry analyst report. At the time of writing, some
of the more prominent as-a-Service models include: Software-as-a-Service, Platform-asa-Service, Infrastructure-as-a-Service, DataBase-as-a-Service, Unified Communicationsas-a-Service, BigData-as-a-Service, Hadoop-as-a-Service, Data Management-as-aService, Cloud Management-as-a-Service, Application Development-as-a-Service,
Desktop-as-a-Service, Back-up-as-a-Service, IT-as-a-Service, and Mobile Backend-asa-Service. To better make sense of this, we will focus our discussion around four core
areas.
Methodology
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The Four Layers of Cloud

It is generally accepted that there are three primary types of Cloud offerings
Infrastructure-as-a-Service (IaaS), Platform-as-a-Service (PaaS), and Software-as-aService (SaaS). For the purpose of this report, HfS and Avendus will explore the impact
of Cloud across these three offerings as well as the relatively new opportunity unfolding
around Business Process-as-a-Service (BPaaS). While there is also an ongoing debate
regarding the formal definition of each of these sub segments, we are less concerned
with what goes into them than what comes out. That is, we are focused on the outcome
of these services and in particular how they are consumed by an enterprise rather than
specifics around underlying inputs. In taking this approach, we are able to identify the
unique drivers of adoption and their corresponding impact on IT services providers
without getting weighed down by semantics. Taking this outcome based approach yields
the following descriptions:
IaaS
PaaS
SaaS
BPaaS
The provision over a network of one or more elements of core IT

infrastructure enabled for easy integration and consumption
The provision over a network of a software development platform
enabled for easy testing and deployment
The provision over a network of an end user application enabled for
easy and rapidly scalable consumption
The provision over a network of a specified outcome for a particular
business process that encompasses IT and often an element of
workforce augmentation as well
Methodology
Cloud's Dramatic
Impact
on the
Procurement of it
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Clouds Dramatic Impact on the

Procurement of IT
The adoption of Cloud is having a profound impact on the way enterprise IT is procured.
In turn, these changes are creating challenges for IT services providers as there are
times when their traditional marketing and sales models no longer suffice.
Exhibit 1
The Broad Impact of Cloud on Enterprise IT
Rigid and Vast
Flexible and Agile
On Premise IT Environment
Cloud Driven IT Environment
Design, Build, Run
Consume
Purchase
Rent
Complex implementation
Complex integration
Hard coded
Configurable
Weighted toward maintenance
Focused on new applications
Long-term planning
Upfront analysis
Gate keeping
Collaborative
Deep IT skills required
Deep vertical expertise required
Concentration of large mega apps
Proliferation of small discrete apps
As seen in Exhibit 8, the impact of an enterprise IT department moving to Cloud is broad

as it changes the way decisions are made, how IT is procured and accounted for, and
ultimately what role the IT department plays across the firm. What follows are the three
biggest challenges and one misconception that this shift brings to how IT is procured.
1. Cloud Turns Influencers into Buyers

Suddenly an individual outside the IT organization can easily provision access to a new
service without involving IT, a phenomena we see as the democratizing of access and
spending on IT. In fact, many of these potential new buyers have already done so and
that likely drove the first wave of enterprise Cloud adoption more than any other factor. It
was not an IT decision but one made within other functions like Sales and HR. For their
part, IT departments also saw a similar democratization of spending as, for example,
internal developers working on a new Mobile Android App could now secure their
Clouds Dramatic Impact on the Procurement of IT
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development platform and run all necessary testing without having to get approval for the
underlying purchase required to perform the build.
Today, as Cloud adoption matures around a second wave of adoption, one categorized
by the emergence of the large ISVs offering a broad set of offerings, we are witnessing a
more collaborative approach to buying emerge in the enterprise. This is driven by a
realization that greater benefits will be obtained when individual offerings are integrated
with legacy systems and data as well as with each other. But having driven the buying
decision once, many of these functional areas want to maintain a fair amount of control
so decisions are getting drawn out and more individuals are now sitting around the table
as they are made.
Bottom line: New faces like the head of sales are now sitting at the deal table,
requiring vendors to match this level of professional with experienced business
consultants, which in some instances results in an elongated sales cycle.
2. Cloud Shifts Enterprise Spend from CAPEX to

OPEX
One of the most significant changes that occurs for an enterprise as it migrates to the
Cloud is the shift in how spending is allocated. By moving IT from largely a long-term
capital expenditure model to one that is a flexible operating expense, much of the risk
and uncertainty associated with IT development goes away. While upfront
implementation costs do not disappear, the bulk of spending gets tied directly to
consumption and demand thus eliminating the need for forecasting scenarios of usage
that may or may not come into play. In the past, if a business was too aggressive in their
investments in a certain technology they could be straddled with years of excess cost.
However, being too cautious could result in having an IT infrastructure that was unable to
meet business needs. Today, these variances around the accuracy of investments
largely go away in a Cloud based delivery model, freeing up resources once allocated to
forecasting and planning.
Bottom line: Cash is being freed up from large capital intensive projects and will
likely be redeployed to enable enterprises to reinvest for innovation.
3. Cloud Shifts Conversations from TCO to ROI

One of the other most important aspects to understand about Clouds impact on the
enterprise is that it does not necessarily reduce total IT spend. This is because by
aligning usage with cost, cloud eliminates the uncertainty around its outcome. The
conversation around adoption shifts from one centered on the total cost of ownership to
one centered around the return on investment. That shift will likely drive more spending,
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not less. Further, by being able to tap new pockets of spending in other functional areas,
the aggregate allocation of funds spent by an enterprise on IT may also rise. This is
especially true as Cloud enables quicker and easier deployments that are able to tap into
unmet demand in functional areas that previously had to sit and wait while an IT
department crunched the number to let them know if the initiative was worth the cost,
and if so what place they would occupy in line.
Bottom line: Expect the conversation to change to one of how much can be gained
rather than a primary focus on what it will cost.
4. But Cloud Still Requires One to Crunch

Alongside these changes it is important to point out one misconception as well that
Cloud somehow eliminates the need for an enterprise to carefully cost out its ensuing
spend. By some estimates, an enterprise that shifts its consumption of an application to
the cloud can reduce its total spend by well over half as savings from better utilization of
hardware come together with lower licensing and implementation costs. Yet other
estimates show the opposite to be true. That despite the larger upfront cost of an on
premise software implementation total costs are less than what is required for the
equivalent SaaS version. Why the discrepancy? Because like most everything to do with
IT spend, the answer actually depends on the specific. Every enterprise needs to
conduct their own analysis to attempt to determine the ultimate impact on spending of
moving to the Cloud.
Bottom line: Measurable outcomes will need to be demonstrated up front and
backed up quickly for ongoing investments to be made.
The
Impact of
Cloud IT
on
&
Business Service Providers
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The Impact of Cloud on IT & Business

Services Providers
The first step in understanding the opportunity that Cloud creates for IT service providers
is to undertake an effort to remove ambiguity around the related offerings. All too often,
we hear IT services providers dive into the breadth of their Cloud offerings without first
establishing clarity around what primary activity they are targeting. To that end, we
identify five activities that service providers can build specific Cloud offerings around in
addition to the broad category of IT Strategy.
Exhibit 2
The Five Opportunities around Cloud
Strategy Consulting
Transform
Applications
Build
Infrastructure
Integrate
Provide
Manage
The five opportunities are:

1.
Build Infrastructure. This encapsulates the suite of services aimed at enabling

either a third party provider or an enterprise to build out their own cloud
infrastructure for delivering a solution either externally or internally.
2.
Transform Applications. This is the series of services built around either

migrating or modernizing an enterprises application to enable integration with
Cloud services as well as services to assist a tier two ISV to ready their own
applications for delivery as Cloud.
3.
Integrate. This area is a set of services offered to help an enterprise consume
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a third party Cloud service. It includes integration work between legacy and
cloud as well as cloud to cloud
4.
Manage. This can be at either the infrastructure layer, for example managing
an enterprise private cloud environment, or at the application layer, for example
managing the ongoing consumption of a cloud service such as Salesforce.com.
5.
Provide. This opportunity encapsulates the efforts of service providers to enter

the Cloud market directly by creating, selling and delivering their own Cloud
service to the market. These offerings can range from global IaaS provisioning;
such is offered by IBM and HP all the way up the stack to targeted SaaS and
BPaaS offerings.
The activities undertaken within each of these five broad types of offering are not
necessarily unique and there is often an opportunity to bridge multiple offerings. For
instance, an advisory engagement for a particular enterprise may include developing a
strategy for rationalizing their ongoing efforts to build private cloud while also developing
a strategy for transforming a legacy application to SaaS and then integrating and
managing it. However, confusion arises because there are now two distinct buyers for
these services as public cloud providers such as Microsoft AzureCloud themselves have
now become a significant market in addition to the enterprise.
Exhibit 3
Two Unique Market Opportunities
Serving the Enterprise
Supporting the Public Cloud
Transform
Integrate
Build
Complimented by:
Build
Manage
Transform
Manage
Provide
Source: HfS and Avendus Research
Large global IT service providers have mastered the ability to move through an
Enterprise client and maximize the revenue associated with each phase ideally
developing enough trust along the way to enter into a sole sourced deal. But the
dynamics of the Public Cloud market opportunity are unique. First, this is largely two
discrete opportunities one around Build and Manage for infrastructure and a second
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around transforming the applications of Tier 2 ISVs for cloud delivery. Specifically these
are sophisticated buyers that often require significant scale. These differences mean SIs
will need to realign the way they approach that market in significant ways. The upside in
this shift means a narrower sales and marketing effort might be needed to address a
growing but consolidating market.
The Economics of Delivery are Changing

The biggest reason for the divergence across these service areas revolves around the
changing nature of how these Cloud-based offerings are created. In a traditional
enterprise IT deployment, the buyer was responsible for the initial outlay around
hardware and software provisioning. That was the case even in a large IT Outsourcing
deal where a transfer of ownership of the underlying IT assets might eventually occur.
But in Public Cloud offerings like IaaS, the provider of the cloud infrastructure (aka the
seller) is on the hook for all the upfront costs.
As such, this is a business that rewards economies of scale. It is one where only the
largest can effectively compete, as the outlay is so great that only the largest or most
highly capitalized providers can participate effectively. This market is similar to what
weve witnessed occur in telecommunications and mobile phone industries. This is
especially true for IaaS offerings where ultimately it is likely only a handful will succeed
as the spoils eventually fall to those who can drive commoditization at a rate faster than
anyone else. Thats the primary reason you see companies like Dell decide not to
compete in the data center space but instead partner with the likes of Microsoft. More
broadly across Cloud, it is also the reason you see companies like HP adopt
Saleforce.com for its own internal CRM. Forward thinking IT Services understand how
these markets are diverging and they are selectively picking their areas to compete.
Cloud Creates New Demands on Services Providers

Competing effectively in the emerging Cloud Professional Services space requires
providers to change how they package and sell offerings as well. Four of the biggest
changes are outlined below:
A Bigger Table is Required
Given the additional stakeholders involved in most typical Cloud engagements today,
service providers need to grow accustomed to new stakeholders being around the table
as they discuss a deal. This is especially the case within SaaS and BPaaS and these
new participants are not just in a listen only mode. This adds delays to reaching an
agreement on even the simplest of implementation deals. Perhaps worse, the mix of
business and IT personnel risks introducing confusion as different parties may assign
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significantly different meaning to the same set of words. Take careful heed at every
meeting to make sure everyone is using language that is commonly understood. This will
also require a different skill set from providers, whereas the last decade was marked by
labor arbitrage, the next will be defined by technology innovation across areas such as
big data, mobility, and business processes.
Bottom line: This means in turn that business expertise rises on par or above
technology expertise as a critical trait.
New Skills and Shortages at Play
As SaaS offerings start to standardize at least some of the most simplistic of underlying
processes, they begin to lead consultants and integrators deeper and deeper into a
clients industry specific needs. Value-add will come from service providers innovation in
delivering business-relevant information and impact more efficiently than traditional
services allow. Vertical expertise can add-value through various means including a
unique understanding of a clients needs, increased speed-to-market, re-useable IP, and
overall client engagement. This requires IT service providers to bring more to the table
than building to plan, but rather by being able to innovate on behalf of clients. In order to
do so, IT service providers will need to build out these capabilities, and this will in turn,
create strain around the ability to find the right professionals with industry insight. In a
similar fashion, as the need to address business problems via a mix of IT and business
centric offerings increase, it puts more demands on IT service providers to develop
solution architects who need to possess more of a business centric ability to bridge
multiple worlds more effectively, versus the traditional role of someone who has gone
deep, say around network management skills.
Bottom line: Business and industry centricity begins to trump technology
centricity.
Change in Nature of Projects for SI
In the short to medium-term, we are seeing a rise in demand for systems integration
driven by cloud initiatives. However, this activity is of a different nature than the
traditional large scale on premise implementations in the past. These new deals are in
the six figures not seven, and they last for weeks or months not years or decades. As
indicated with the current skills shortage today, they also require a deeper understanding
of industry needs and business processes than prior integration work.
Bottom line: Individual engagements shorten and shrink though aggregate volume
may remain.
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The Potential Convergence of IT with BPO

While we are seeing significant traction around automations adoption by BPO providers,
the impact of Cloud delivery models has yet to drive a similar level of change. With most
Outsourcing deals still revolving around the lift and shift of technology and jobs, there are
only a limited number of deals where BPaaS offerings are effectively combining IT
delivery and embedding it with business processes to deliver a cloud based service. Yet,
there are real examples of this opportunity today such as Wipros recent new offering in
F&A and more are on the way all the time. Service providers are working on these types
of initiatives, which will standardize their delivery models while reducing cost and
allowing them greater reach. These offerings have the potential to leapfrog SaaS and
truly fuse people, process, and technology to enable the standardization of non-core
processes like never before. For example, PaaS platforms like Apprenda could serve as
a way for IT service providers to accomplish two things: 1) begin generating revenue
from non-linear sources; and 2) combine IP with a business process such as application
development and management.
Bottom line: While relatively nascent today, BPaaS has the potential to disrupt the
disruptors in Cloud.
As-a-Service Model Provides Opportunity For Incremental IT Spend
Cloud based applications and SaaS offerings provide a large opportunity for incremental
services spend as corporations look to add functionality on top of their existing systems
and require both domain led consulting services and the requisite systems integration
work required. PaaS and TaaS can substitute for traditional services and open up new
revenue opportunities that are long-term in duration. Next generation services around
analytics, big data and mobility, are large new market opportunities for IT service
providers that offer higher margins than traditional implementation and systems
integration work.
Bottom line: While many believe the pie is shrinking, our view is that the pie will
shift to other areas of IT spending focused more on innovation, rather than cost
reduction.
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The
Evolving Professional
Cloud
Service Providers Landscape
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The Evolving Professional Cloud

Services Provider Landscape
Cloud based delivery models are bringing a myriad of new pressures to the IT services
market. This is coming at a time when many traditional IT services providers have only
recently stabilized from disruption that ensued following the enterprise adoption of the
offshore model. Yet, if the adjustment to offshore delivery was painful for those who were
delayed in responding to that trend, providers are warned that this one may be
catastrophic if they wait. This lesson does not appear lost on those that were laggards in
the last round and we are witnessing some of the most aggressive moves by these firms.
Conversely, it is important to note that the enterprise migration to Cloud may prove even
more problematic for those providers that were early and aggressive in responding to
offshore threats by building their own capabilities in that regard. That is because while
the offshore wave was about labor arbitrage enabled by the Internet, this wave of
disruption is one fueled by technology arbitrage and that means strength and
therefore proximity of relationships will trump labor cost. Further, having succeeded
in this last wave of disruption, theres the risk that a certain level of hubris might cloud
their ability to effectively see and respond to this new wave of change.
Exhibit 4
Cloud Industry Value Chain
IT Infrastructure
Facility
Systems
Infrastructure
Software
Application
Development
Application
Presentation/
Action
Hardware
Colocation
IaaS
Cloud enablers
PaaS
SaaS
BPaaS
End User
Professional Services
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New Entrants Appear

Today, there are no less than five groups of potential new competitors all nipping at the
traditional IT and business services market ISVs, Telcos, Cloud Purists, Web
Natives and Boutiques. As Cloud delivery collapses the ecosystem of IT provisioning,
these traditional partners are increasingly competing with SIs at the edges of their core
markets. This overlap and fuzziness between groups is not entirely new, but today it is
taking on a scale that may alter how we bucket and view the industry as a whole.
In the software segment, take for example ISVs like SAP and Oracle that once ignored
Cloud adoption but are now aggressively building out their own SaaS offerings with
varied success. These new (or more accurately reworked) versions ultimately require
much less integration while at times also allowing the ISV to be closer to their customers
than before. SaaS allows, even requires, these vendors to be regularly connected and
engaged with enterprise buyers and end users. Because of these changes, the
traditional SIs risk getting squeezed.
Similarly, Microsofts new Office 365 has greatly simplified the effort required to deploy
and maintain its productivity suite. That offering now provides perhaps one of the most
compelling examples of the advantages to be gained from moving to the cloud. One
study found that the payback for a typical medium-sized company making the shift would
be realized in a matter of only several months. All this means that for any integrator once
dependent on the Office ecosystem, the need for refocus is immediate. Microsoft
already cut incentives paid to these partners at the beginning of 2014 and as the product
continues to practically sell itself, we would not be surprised to see further reductions in
reseller fees.
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Exhibit 5
Five primary pressure points on traditional IT Services
New Entrants
Area of Impact
ISVs (e.g. Oracle &
Systems Integration
SAP)
How to Respond
Understand some infrastructure provisioning
gets embedded in the ISVs SaaS offering and so
look to serve the needs of these ISVs while
anticipating smaller efforts on the integration
side.
Telcos (e.g. AT&T &
Network Integration,
Realize telcos are starting to provide IaaS as
Verizon)
NOC and Dcs
part of bundled offerings and look to support

their needs while capitalizing on this new
channel to market.
Cloud Purists (e.g.
ADM & Systems
These new public cloud offerings are having a
Saleforce.com &
Integration
direct impact on new application development,
Workday)
maintenance and integration. Look to augment

their offerings with lightweight implementation
teams.
Web Natives (e.g.
Infrastructure
Given the scale of these firms, few present the
Google and Amazon)
management & ITO
opportunity for a traditional SI to help them

build and run. In short, best to realize that a
portion of the infrastructure market is likely
forever shifting to these new firms and look for
ways to build services around integrating these
into the enterprise.
Boutiques (e.g.
Systems Integration
Organized more effectively to sell and deliver
Bluewolf &
around the Public Cloud, these boutiques
CloudSherpas)
present a challenge to traditional SIs. These

global firms are advised to look for ways to
deliver similar set of services while minimizing
cannibalization of their existing practices.
Yet the encroachment on IT services from these former partners does not stop there. For
example, today Microsoft is also building out one of the most robust IaaS and PaaS
platforms globally. This means the company is no longer just writing code, they are
buying up hardware, fiber optic cables, and are building out data centers around the
world. By their estimate, they have spent some $15 billion on the effort to date.
In addition, there are the more obvious new competitors in this space as well. There is
the group of firms that are best labeled Web Natives. Companies like Google and
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Amazon that with their Digital DNA and deep pockets are perfectly suited to go after the
cloud space. There is also a long list of Cloud Purists aimed directly at one aspect or
another across the space. Providers such as Salesforce.com, CloudBees and
Rackspace are by their nature created to sell and deliver new services in extremely
disruptive ways.
Finally, with Cloud largely viewed today as an exciting emerging new model, it creates a
certain mystique with which new boutique services providers can align. Take for instance
Cloud Sherpas and Fruition Partners which today have become the only two ServiceNow
partners to reach Master status beating out the likes of all the major SIs for this
highest level partner designation from this particular SaaS provider. Several other
boutiques such as Meteorix and DayNine (WorkDay), 2nd Watch (Amazon Web
Services), have built fast growing businesses primarily around a single platform;
companies like Appirio and Cloud Technology Partners have become leading cloud
integration vendors. All of this has led to the emergence of Cloud Services Brokerage
where a third party provider adds value by aggregating and simplifying the provisioning
of public cloud services. This new model presents a significant new opportunity for
traditional integrators to define and claim and many are investing to build out proprietary
platforms for enabling the space. Doing so keeps them at the center of activity a role
they have traditionally played and monetized well as it requires a certain flexibility that
only a people first business model can reflect. Today, these Cloud Brokerage efforts
augment the traditional structure and services within most SIs. However, it is foreseeable
that as the broader trend continues to grow that they might one day become the new
operating model for an SI.
Characteristics of Professional Cloud Services

Providers Likely to Succeed
The opportunities around cloud for traditional IT services providers boil down to three
options: help build, help consume, or directly provide. While in the past one IT services
provider could easily serve all three, that is a more difficult proposition today. That is
because success within each will depend on the alignment of business models in these
unique ways:
To Provide Public Cloud - Big is Beautiful
Succeeding directly within any Cloud market be it IaaS, PaaS, or SaaS requires one
to drive standardization at a dominant level of scale. Perhaps the best example of this is
found in the group of Web Natives. While not traditionally thought of as cloud providers,
these companies were actually operating as such before the term was even developed
and applied. For example, Google, which is able to spend billions of dollars each quarter,
is running at a pace which few other providers can keep up. One of the few, however, is
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another Web Native Amazon. As the leader in the IaaS market, it continues to spend
massive amounts of cash to maintain its lead. So while these two vendors are not
traditionally thought of as IT services providers, for any provider looking to operate in the
space, they along with Microsoft, represent the bulk of competition in the public cloud
infrastructure space.
Fortunately for the sake of competition and innovation, size is relative. Take for instance
the IaaS market. While entering that market today is now realistically beyond the reach
of all but the largest of global technology providers, visionaries such as Rackspace were
able to enter and establish their stronghold when the market was nascent. In a similar
fashion, while perhaps CRM may no longer be up for grabs, there are a plethora of
smaller software markets still waiting for the emergence of SaaS-based leaders to
emerge. Any service provider looking to participate directly in these markets by creating
their own offering needs to ask themselves, am I committed to investing enough
resources to be one of the largest providers in town?
To Manage Consumption: Nimble is Necessary
For those looking to continue down the more traditional path of acting as a third party
integrator, there needs to be an understanding that the rules of the game will broadly
change. While due to the customized nature and their own large scale as well as broad
installed base of legacy systems at Fortune 100 enterprises, projects will stay for some
time, increasingly large implementations will be replaced with smaller, relatively shorter
deals. For these deals, delivery is no longer measured in years, but in weeks and
months and the number of multi-million dollar implementations is reducing, and in their
place we will see $250,000 deals. This means an entirely different approach will be
required to profitably sell and deliver these deals. At the most extreme level, we are
seeing the sales structure moving from one revolving around a well-seasoned executive
who spends years developing a relationship to revolving around the task of ensuring the
best placement of a tile on a partners web site. (One caveat, we still think that for the
largest Fortune 100 enterprises this will not be the case.)
To Build: Find your Niche
IT services providers with core strengths in technology integration are well suited to
become the builders of Cloud. Pursuing this opportunity will not be without challenges.
First, it means ones core customer base shifts from the Enterprise Buyer to a much
more sophisticated Cloud ISV Buyer whose core value is dependent on the work being
done. As such, they will likely hold onto the role of services integration and management
and hire external help for very specific needs. At the same time, the enterprise market
will remain much as it is today and so a go to market and delivery strategy that works for
one may not work for the other.
Within all three of these areas other secondary factors will be important as the client
expectations of services providers shift.
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Front End Consulting Capabilities & Ongoing Innovation Will Differentiate Winners
from Losers
The ability to engage a client via high-end consulting for a transformative project is
critical in capturing the back-end long term services delivery contracts. Services will
focus more on organizational assessments, optimization, and application transformation
utilizing the cloud vs. historical spending which was centered on ERP implementation.
Bundled Services
Services providers can mitigate the price deflation impact of the cloud by bundling
traditional offerings such as application outsourcing with a SaaS offering, creating a
more valuable solution than the traditional offering alone. As PaaS offerings gain
penetration, IT service providers will need to partner or build their own PaaS delivery
platform to adapt to the cloud landscape, as the benefits of PaaS (reduced cost, agile
development, multi-tenant, and pay per use) outweigh traditional application outsourcing.
IP Driven Offerings
As cloud computing technologies continue to automate processes that have traditionally
been headcount intensive, it will be important for IT services firms to participate in this
shift. Additionally, as the market has become more mature in terms of offshore players,
IP will be a tool to create significant differentiators in terms of client acquisition and
retention, as well as maintaining pricing power. Vertical solutions will be a way to bundle
services, IP and specific industry templates to attract clients and become a dominant
provider in a specialized vertical such as banking, insurance, consumer products and
various sub segments of these markets.
Icebergs Ahead No IT Services Provider is Immune

To date, much of the activity around Public Cloud adoption has focused on small and
medium enterprises (SMEs). Yet this concentration of activity should not be confused
with fit. The primary reason most of the initial efforts were directed at smaller companies
first is that they were often unburdened with legacy systems. These green field
opportunities were the easiest to initially crack but that does not mean they are the most
desirable to do so nor does it mean they are the ones most able to benefit from the shift
in delivery. Large enterprises can and are benefiting from the migration of services to
the Cloud. As they do, they are most likely going to command the focus of Cloud
providers.
That is bad news for the large Global IT Services providers who focus on this space.
This is especially true because having first unfolded as an SMB opportunity and with all
the hallmarks of a classic disruptive innovation, Cloud delivery is driving significantly
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lower pricing across many aspects of enterprise IT. This deflationary pressure is going to
hit integration projects at the same time the engagement time retracts.
At the same time, the fragmentation happening across the IT Services Continuum will
also hit the large global services providers hard. No longer will massive long term
management contracts naturally flow from development and integration work. In this
light, the last disruptive shift to outsourcing and offshoring was relatively minor as it
primarily centered around doing the same things but with different personnel. This time
around, the underlying activities and how they are sold will all see a shift.
Positioning of the 10 IT Services providers today
Knowing this, many global IT Services providers are working aggressively to embrace
the cloud. They are doing this not only externally, but internally as well in an effort to
capture all the advantages Cloud-based delivery brings. HPs migration to
Salesforce.com is one example of how this is playing out, but perhaps the best example
is highlighted in a recent post by IBMs Robert LeBlanc. In it he lays out a new vision for
the entire companys operating model. See: Rethinking IBM: The Company as a
Service.
LeBlanc highlights:
This shift to cloud where hardware, software, and services meld into one, represents
the most significant change in IBMs go-to-market strategy since it built a large bluesuited sales force to cater to businesses in the 1950s and 60s. Its a fundamental
reinvention of the companyhow IBM operates and how it delivers value to clients and
society.
The following table highlights the Cloud positioning of the top 10 IT Services providers
today.
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Exhibit 6
Top 10 Global IT Services Providers Activity in the Cloud
Service
Provider
Est. 2013
Cloud Rev
($Ms)
Est. 2013
Public Cloud
Services Growth
Est. 2013
IaaS
($Ms)
Est. 2013
Paas
($Ms)
Est. 2013
SaaS
($Ms)
Est. 2013
Hybrid
($Ms)*
Est. 2013
Private
($Ms)*
Overview
IBM
4,400
69%
388
200
612
1,900
1,300
Though late to the Cloud game, IBM caught up with a series of major investments and
now leads the pack.
Accenture
3,755
98%
380
25
250
1,750
1,350
A leader in both Innovation and Customer satisfaction, Accenture is a strong player

across all areas of Cloud services today.
HP
3,555
60%
355
50
150
1,900
1,100
One of a few providers that truly cover all Cloud services on a global level. Innovative in
its approach to Tier II ISVs
Fujitsu
2,950
97%
275
50
225
1,650
750
Very strong and consistent in APAC and Europe and a demonstrated team player.
CSC
2,900
32%
350
75
125
1,200
1,150
One of the earliest to pursue opportunities in the Cloud and after a few challenges it has
made recent gains.
NTT
2,577
35%
152
75
100
1,500
750
Given its strong communications backbone and recent acquisitions, very strong on cloud
infrastructure side.
Capgemini
2,230
35%
125
15
50
1,150
890
This traditional SI understands the future importance of the Cloud and is working to
position itself for new realities there
TCS
1,760
35%
15
45
200
750
750
Having just made it into the top 10 IT Services firms Tata lags a bit in building out its
capabilities in Cloud.
Oracle
1,200
50%
NA
NA
1,200
NA
NA
After spending years downplaying the model, the company got aggressive with its own
SaaS offering and is coming on strong.
SAP
1,050
20%
NA
NA
1,050
NA
NA
Similar to Oracle, SAP got serious about Cloud but failed to get the same traction in
2013.
Top 10
26,377
56%
2,040
535
3,962
11,800
8,040
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We are also witnessing a range of reactions to the pending impact from Cloud by the
remaining WITCH companies outside the top 10. For example, Cognizant has taken an
aggressive and bold move to set up a standalone business unit charged with developing
new forms of IP to transition itself to a provider of these new services. Others, such as
Infosys have taken a more measured approach though also looking to develop their own
IP in this case under their Edge initiative. Of course, all that may now change with the
recent appointment of a software executive as its new CEO. For its part, Wipro is also
doing some innovative things. With a primary focus on building out its services to help
enable enterprise adoption of Cloud, it brought together those skills sets with others in
Analytics and Mobility in a new group called Advanced Technology Solutions so it could
better source skills from across the firm. On the BPO side, Wipro has partnered with
NetSuite to create a BPaaS offering targeting Finance and Accounting. Finally, HCL,
recognizing its limitations in building out IaaS decided to partner with CSC and potential
others as a way to jointly leverage go-to-market efforts in the face of smaller deals.
Enter the Boutiques
As the opportunity around Cloud computing began to emerge, savvy IT services
professionals branched off to create new enterprise cloud services providers to capitalize
on the trend. Without the burden of legacy business models, these upstarts could
package, sell and deliver services targeting a new reality of smaller sized deals. In doing
so, many experienced rapid growth and success. However, the underlying approach and
target markets of these emerging providers varied greatly.
Exhibit 7 highlights providers who each chose a unique path to success. Appirio, the
largest of these boutiques, originally focused on Saleforce.com implementations, but
now takes a broad approach to the cloud. Through its purchase of TopCoder last year, it
now augments its own capabilities with a very unique crowd sourcing platform consisting
of hundreds of thousands of development professionals. This allows it to effectively
serve a very wide market while keeping its own core capabilities much more focused.
This approach is likely to serve it extremely well.
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Exhibit 7
Select Cloud Boutiques
Service
Provider
Year
Founded
Total
Outside
Funding
Est. 2013
Growth
Est. 2013
Revenue
($Ms)
Est. 2013
Employees
About
2nd Watch
2010
27M
400%
$14
85
Though one of the smaller of the Cloud boutiques, 2nd Watch focus on Cloud infrastructure in particular, the
enablement of Amazon Web Services
Appcrown
2009
NA
NA
$2
20-50
AppCrown delivers cloud based application and financial systems to banking and wealth management. The company
innovates middle office and back office for customers to get to a one bank initiative. Also a premiere Salesforce
integration partner
Appirio
2006
75M
95%
165
825
The largest of the Cloud Boutiques, Appiro covers nearly all the major Cloud platforms and technologies and brings
with it a unique crowd sourcing platform called TopCoder
Bluewolf
2000
NA
45%
90
550
Bluewolf offers a broad range of services built around the cloud and claims to be one of the first firms created with this
focus. As a salesforce.com Platinum partner, its offerings tend to revolve around that platform, but it is globally located
and helps a broad range of industries and functions make the most of Cloud
Cbeyond
1999
NA
NA
$463
1667
Helps companies in IT Infrastructure management specializes in Cloud Services, Mobility, Voice & Broadband,
Messaging & Collaboration, Web Hosting, Backup & Security
Cirrologix
2012
NA
NA
NA
< 50
Promotes cloud based technology by developing software products and offering services of Integration,
Implementation, Migration, Re-engineering, Adoption and Training, Consultation and more
Cloud Sherpas
2007
63M
100%
150
750
Cloud Sherpas provides advisory, implementation and management services around three leading Cloud platforms
Salesforce.com, Google Apps, and ServiceNow. It has rapidly grown to become a global provider with offices across the
US and Asia as well as in the UK and United Arab Emirates
Cohesion IT
1999
NA
NA
NA
200
Cohesion consults on IT and business strategy for the banking and financial services, insurance and retail industries
with expertise in Salesforce.com and infrastructure managed services
Continuum
2011
NA
NA
$195
700 -1000
Enables IT solutions providers to efficiently backup, monitor, troubleshoot and maintain desktops, servers and other
endpoints for small-and-medium-sized businesses. Specialities: Managed Services, Remote Monitoring and
Management, Backup and Disaster Recovery, Virtual Help Desk
Day Nine
2009
NA
NA
NA
230
Workday enterprise services firm deploying and optimizing Workday Human Capital Management, Workday Payroll
and Workday Financial Management solutions
Ebuilder
2003
NA
NA
$16
200+
eBuilders Business Process as a Service (BPaaS) cloud platform complements existing IT investments: it provides
control over processes outside the organization
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Exhibit 7
continued
Service
Provider
Year
Founded
Total
Outside
Funding
Est. 2013
Growth
Est. 2013
Revenue
($Ms)
Est. 2013
Employees
About
Enki
2006
NA
NA
$2
10
Provides Virtual IT TechOps - full Enterprise Production IT Technical Operations and cloud hosting services delivered
remotely
Fino Consulting
2006
NA
NA
$6
20
Fino provides enterprise application design, development, and consulting services. As a Microsoft Gold Partner,
Microsoft Azure Circle Partner, Xamarin Premier Consulting Partner, Hortonworks System Integration Partner and
Apple Enterprise Development Partner, it offers a variety of custom solutions
Fruition Partners
2003
12M
95%
35
200
Fruition Partners is an integrator focused exclusively on ServiceNow. The company has completed over 400
implementations, and has over 50 experts certified in the platform and was one of the first companies to earn Master
status from ServiceNow
Itegrations
2011
NA
NA
$10
20 - 50
Offers operational assessments, consulting and Managed Services to complement clients technical resources and
capabilities. Services include consulting, deployment, migration, integration, automation, Cloud based SaaS Managed
Services for Monitoring and advanced Service Desk solutions
Long View Systems
1999
NA
NA
$50+
1000+
IT solutions and services company with a clear focus on combining business and technology in key areas such as Cloud,
data center infrastructure, user support, and IT outsourcing
Meteorix
2011
NA
NA
NA
200
Meteorix provides workday implementation, optimization and integration services for mid-market companies
Momentum SI
1997
NA
NA
NA
51 - 200
Helps companies with their adoption of Cloud Computing, Big Data and advanced architectures which often includes
moving systems to public cloud providers when possible and implementing private cloud solutions when appropriate
Motif Works
2010
NA
NA
NA
<50
Motif Works is a cloud and mobile solutions company that helps migrate applications and infrastructure to the cloud to
accelerate time to market, fuel efficiencies and drive business growth
NetMagic
1998
NA
NA
$40
500
The company delivers services to Plan, Design, Manage, Support and Migrate IT Infrastructure running mission critical
applications for over 1200 enterprises across the globe
Neuvora
NA
2.3
NA
NA
50 - 200
Nuevora is a Big Data analytics solutions provider that helps leading organizations achieve positive, high-impact
business outcomes through the delivery of continuous and context-sensitive predictive insights
New Signature
2003
NA
NA
NA
51 - 200
New Signature helps customers implementing private, hybrid and public cloud solutions. Helps customers leverage:
Office 365, Azure, Lync, Exchange, SharePoint, System Center, Windows Intune, Dynamics CRM, Yammer, Windows
Server, Hyper-V, Active Directory, Forefront Identity Manager, SQL Server, Windows Desktop, and Office
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Exhibit 7
Service
Provider
Year
Founded
Total
Outside
Funding
Est. 2013
Growth
Est. 2013
Revenue
($Ms)
Est. 2013
Employees
About
Nexio
1994
NA
NA
$11
50
Provides infrastructure services for application development and maintenance, for consulting services and for the
management of IT processes and services
OneSource Virtual
2007
15
40%
$33
275
Implements and customizes cloud-based human resources and finance platforms with a primary expertise in Workday
Optaros
2004
$39
NA
NA
51 - 200
Optaros is a global digital commerce service partner that helps companies conceive, build and operate commerce
solutions that accelerate revenue and decelerate costs with expertise in Hybris, Demandware and Magento
Pragiti
2011
NA
NA
$3
51 - 200
Pragiti is a consulting and technology services company delivering hybris based eCommerce solutions to the global markets
SADA Systems
2000
NA
NA
$2
51 - 200
SADA Systems is a cloud computing information technology consulting, outsourcing, and development firm with a large
focus on helping organizations implement and integrate new cloud computing technologies
Sheepdog
2007
NA
NA
NA
<50
Helps companies realize the potential of cloud computing by successfully deploying it for them. Focus: SaaS IT Strategy,
SasS Deployment, Custom Application Development, Google Apps Deployment, Google Apps Migration, Software
Development, PaaS, Cloud Applications, Cloud Storage, Amazon EC2, Amazon Web Services, Web Apps, Office 365,
Google Apps for Business
Shift
1995
NA
NA
$7
<50
Smart and flexible marketing software for planning, optimizing and analyzing social advertising campaigns
Silverline
2010
NA
NA
NA
50 - 200
Silverline is a Salesforce Gold Cloud Alliance Partner. They focus exclusively on the end-to-end deployment of
Salesforce.com products and powerful third party apps
Siteworx
2002
NA
NA
$42
60
Digital experience agency with deep roots in experience design, web content management (WCM), eCommerce,
digital asset management (DAM), and systems integration
Soasta
2006
63.6
NA
NA
200-500
Soastas web and mobile app test automation solution enables developers, QA professionals, and IT operations teams
to test with unprecedented speed, scale and precision
Tempus Nova
2001
NA
NA
$7
32
Specializes in Cloud Computing, Google Enterprise Solutions, Google Apps Implementations, and Cloud Application
Development
Verecloud
2006
NA
NA
$6
35
Verecloud is a value-added distributor of cloud-based applications. Their nationwide network of partner resellers
specializes in delivering innovative, reliable and cost effective IT and Communications Solutions to their mid-market
customers
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Close behind Appirio in terms of revenue is Cloud Sherpas which has taken a narrower
approach to the market as it focuses around three Cloud providers Salesforce.com,
Google Apps, and ServiceNow. Doing so appears not to have held the firm back but
instead allows it to create focus among its internal staff.
Bluewolf follows the early path of Appirio with its offerings centered on Salesforce.com
but with a willingness to follow a potential client into tangential opportunities. Opposite
this approach is a firm like Fruition Partners which is 100% dedicated to providing
services around ServiceNow. That focus saw it be one of the first to garner Master status
from the firm and serves it extremely well as long as the underlying opportunity remains
strong.
In a similar fashion, there are providers like 2nd Watch that are also focused on
providing services centered around a single Cloud platform but are focused at the
infrastructure layer. In this particular case, 2nd Watch is dedicated to Amazon Web
Services. That singularity of focus allows it to develop significant capabilities on par with
much larger providers despite its much smaller size.
What Enterprise Services Providers are at Greatest

Risk?
While many service providers responded well to the early demands around Cloud related
services, their continued success is by no means guaranteed. The reason for this is
twofold. First, the first wave of enterprise adopters despite being ahead of the pack
often approached the provisioning of these services in much the same way they did
more traditional forms of IT. This is especially true for the activity within private and
hybrid cloud the two areas that to date have seen the bulk of related services activity.
Which leads us to the second reason these services providers will become challenged in
the near to medium term. The opportunity around building private and hybrid clouds,
though currently large, is one that likely has a limited lifespan. These efforts represent a
transitory interim phase along an enterprises migration IT to the cloud. Its the equivalent
of the energy industry which saw power generated onsite until the challenges of
distribution were solved and led it down a path of commoditization. Onsite compute will
go the way of dams and waterwheels. So who is at greatest risk for the pending shift?
We identify three types of providers at greatest risk.
The Pleasers
Service providers that demonstrate a willingness to do whatever it takes to obtain high
customer satisfaction may find this operating approach now gets diminishing returns.
Providers that have done well by organizing themselves to be highly responsive to
customer demands will be challenged in this next phase as they lack a clearly defined
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differentiated expertise. Conversely, those that are highly process driven and maintain a
product mindset will do better. This will mean some of yesterdays winners will fall
behind, while some that did not fare as well in the last round have another chance to
regain the lead.
The Body Shops
Even those services providers with rigid processes in place will be challenged if they
have not translated these into platforms that embed elements of repeatable IP. Simply
doing things more efficiently is not going to create winners if at the core the things they
are now doing better remain the same. Said another way, automation (or robotization) is
an interim stopgap measure that will allow short-term gains but it will not curtail long term
changes coming to the underlying processes themselves. Those without repeatable IP,
companies that have become skilled at efficiently providing cheaper labor whether or not
that is augmented by technology, need to understand that the advantages they bring
today become disadvantages in the era of cloud.
The Muddling Mid-Tier
Cloud computing dictates and rewards scale or specialization. Across each unfolding
opportunity, either the very largest, most efficient will succeed as non-core processes get
driven to a level of commoditization that original outsourcing industry promised but rarely
achieved, or those who possess unique expertise will succeed. As it does, the
distinguishing trait of the winners will be their ability to provide these new services either
at the lowest cost or highest level of differentiation. That means an age of renewed
specialization is upon us and those mid-tier service providers attempting to emulate their
large brethren may be too late to the game. Cloud creates an opportunity for new
providers as depth trumps breadth.
How Services Providers can Address the Threat

The disruptive forces impacting the IT and business services market by the arrival of
cloud computing has not gone unnoticed by most providers. Yet the range of reactions to
the pending shifts have been wide. Some, like IBM, have declared an all-out and
aggressive effort to remake the very way they do business. Others, like Cognizant, have
created an autonomous unit to tackle it while maintaining business as usual elsewhere.
Still others seem to view it only as an incremental new market, treating it like any other
emerging technology and are taking only a few steps at best to meet the pending
challenge. We believe those in the first two categories are not only in the strongest
position to win share as this opportunity evolves, but that those in the latter may see their
very business in jeopardy. To that end, we will be watching this space carefully over the
next twenty four months as it continues to unfold.
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That said, there is still time to address this threat, and to do so we see three core tactics
in use by several industry leaders:
Build or Acquire Platforms:
Developing and capturing repeatable IP is a core component of creating these new
Cloud services offerings. In short, services are becoming codified as software and while
the accepted description of SaaS is Software as a Service, it could as easily be reversed
to Service as Software. The same rationale applies farther down the stack where IaaS
could as easily be described as Infrastructure as Software. As this shift to codifying
processes occurs, the uniqueness of an enterprises operating model increasingly gets
expressed not in how it deploys its workforce but in what software it selects and
integrates.
This has created a significant opportunity around services brokerage and we are seeing
almost every major SI from IBM to Dell enter the market. It is a natural transition for
these SIs to help an enterprise procure and integrate a myriad of small cloud services
components. These components temporarily allow legacy systems to emulate (the full
functionality) of cloud systems. These applications have been bolting on capabilities for
many years as they attempt to offer a single answer for some function across multiple
enterprises. As such, these legacy applications often required years of additional
development layered on top to customize, bend and mold them to the needs of a
particular enterprise. In the Cloud services world, the needs around customization are
significantly reduced, yet the points of integration multiply.
This means that for any hope for efficiencies to be realized, the demands around
integration must be greatly reduced and wherever possible, even automated. To that
end, service providers are building proprietary tools and cloud management platforms to
act as the glue to bind together these services while also adding a common layer of
visibility and control. So it is no surprise that we are seeing companies like Unisys, which
for a variety of reasons had stumbled to migrate its resources to lower cost regions fast
enough to keep pace with the broader market, now double down on these new platform
efforts as a way to leapfrog competitors in this new phase. While certainly not the only
effort like this underway, Unisys Edge Service Management platform offers a standard
but configurable framework underpinned by analytics and represents a winning strategy
for a new reality of how IT is increasingly provisioned, deployed, and run. Whether or not
it will succeed will be determined over the test of time, but it absolutely represents the
right path to pursue. Another example is Appcrown, who have developed a platform that
integrates Salesforce's CRM with back end systems such as clearing and commissions
for financial services firms.
As they do this, the operating models of these traditional services providers start to look
more like that of a software firm. At least some of the development talent is deployed not
on behalf of a customer, but on behalf of itself. Funding is required up front rather than at
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the time of delivery and the potential trajectory for growth breaks away from a linear
model to one of increasing returns.
In the same fashion, we see the likes of Dell making a similar move. Early on its
enterprise services division found good work building out cloud infrastructure for other
providers such as Microsoft. Along the way, they built out their own IaaS capabilities and
started offering it directly to enterprises as well. But, in doing so, they began competing
directly with their own customers. Recognizing the immense effort and capital
requirements required to compete rather than ramp up, Dell walked away from the direct
IaaS business and focused on building it for others. At the same time, they also pursued
the brokerage model by acquiring and investing in Boomi which has become a leading
integration platform serving the needs of Dell and its clients extremely well.
Create New Divisions:
One of the biggest challenges cloud presents for traditional service providers is the
disruptive shift required to transition their business from one built around people to one
built around technology and IP. That is because the shift requires a change in how
services are created and delivered which cannibalizes existing business and ultimately
may lead to reductions in staff. Most middle managers are simply not prepared for such
a change, and if they are it is unlikely the proper metrics and incentives are in place to
allow them to lead the way.
The senior leadership of several forward thinking companies have grasped this and
responded to the challenge by setting up unique operating structures to tackle the
opportunities around the cloud. The best example of this is Cognizants adoption of the
three horizons model where it incubates potentially disruptive new offerings outside the
day-to-day pressures of its core business. Overseen directly by its CEO, Cognizants
third horizon labeled Emerging Business Accelerator taps the global wisdom and talent
from across its entire 170,000+ workforce but in a safe environment where failure is
acceptable and disruption is lauded, not kept in check.
Other services providers are beginning to follow suit and while their structures are not
quite so formalized they are creating new operating entities that fall outside of existing
business lines. Doing so allows flexibility to incorporate a mix of capabilities, say
infrastructure, software, and services, into a single offering that would traditionally have
fallen across unique P&Ls.
Acquire Capabilities:
Given the depth of change occurring, we are also seeing a wave of acquisitions as
services providers look to catch up in building out skills around new technologies as well
as control the critical IP building out leading cloud platforms. One of the best examples of
this is what IBM accomplished around both the emerging opportunity in mobility and
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cloud. Though late to each of these, IBM spent aggressively over the last several years
to acquire leading platforms across each and now stands as a leader across many
aspects of both. The challenge for them today is not to build the capabilities but to bridge
internal structures around its software, services, and remaining hardware lines and
perhaps to entirely restructure some of these in an effort to compete most effectively in
Cloud.
While the big get bigger, we are also witnessing pressure among the mid-tier to
consolidate as well. Recently, SOPRA and Steria, two major European providers both
based in France, announced plans to join forces in an effort to remain competitive
among heightened demands on scale. This strategy could make sense for other mid tier
players, particularly those built as offshore/labor models.
Even small boutique players are feeling the pressure as new service models are
increasingly based on leverageable technology in addition to people based workloads.
As such, we see acquisitions in this space as providers look to augment their own
offerings. Several players like Appirio and Cloud Sherpas have used acquisitions as a
major part of their strategy. As an example, you have the recent tie up between
Highstreet IT and Computer Network Solutions (CNS) to extend the formers capabilities
deeper into the Cloud.
Where to Invest
Deeper Verticals
Certain vertical industries are likely to experience the greatest impact from cloud
computing in the short term and are already feeling the impact today. As a common
thread, all of these have a direct to consumer element that is largely commoditized,
driving price sensitivity and dictating the need to quickly adapt to changing demand as a
means to gain advantage. Markets seeing some of the heaviest activity are Retail,
Telecom, Financial Services and Media and more recently post the implementation of
the Affordable Care Act, Healthcare. However, opportunities will remain strong across
the board and services providers are advised to focus instead on their own current
strengths. New market realities favor depth over breadth, so if a provider has decent, but
not great capabilities in a vertical, they are advised to build these up or spin them out
regardless of that industrys relative market demand.
Critical New Skills
As the market for enterprise cloud services unfolds, certain cross industry skills sets will
be increasingly in demand. Security is an area that will be of particular demand as
providers look to mitigate, if not eliminate the risks with hosting sensitive data off
premise. To that end, building out depth around privacy and data protection as well as
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identity management and authentication will be critical. At the same time, despite the
move toward creating platforms to solve the task, the need for services integration is
going to rise. Providers will need to deepen their bench of skilled generalists who can
quickly adapt to and weave together the myriad of new emerging services rather than
those with very deep knowledge of a single enterprise app.
New Business Models / IP
Providers are advised to look for ways to effectively add new go-to-market models that
successfully combine a complete mix of people, processes and technologies rather
than just one or two of these at a time. That is the promise of cloud and enterprises of all
sizes who will increasingly be looking to obtain this complete mix at the outset rather
than as some foreseen milestone down the road. Yet these new models will bring
operational challenges to existing providers. That means they need to be aggressive in
transitioning to them or they might be unable to bring about the change.
The Net Net

On paper, most of the large global IT services providers are competing effectively under
the new demands and opportunities emerging with the migration to Cloud. Yet, if one
looks at a medium to long term horizon, some troubling challenges arise. In particular,
the bulk of activity today revolves around creating private cloud environments or enabling
hybrid cloud. Such activity, while good work to get, may lead to complacency around the
much more significant shift to services delivery that is being driven by public cloud. Some
of the global providers are addressing that opportunity as well but without an outright
effort to cannibalize themselves, such initiatives will likely fall short.
This brings us to the darlings that emerged during the last wave of technology disruption,
the offshore outsourcers collectively known as WITCH. As we highlighted earlier, some
of these are being very aggressive in their efforts to implement change. Most notably,
Cognizant is taking a lead. Yet others are not being quite as bold and they may find that
strategy causes them to eventually run out of steam. Those in the latter camp tend to be
doing well around cloud today, but like their larger global brethren they are primarily
strong in helping an enterprise build out elements of their own cloud rather than in
consuming that from someone else. Todays strength may be tomorrows weakness as
the delivery demands and business models change.
Which brings us to the outlook for the new breed of truly Cloud-focused providers
companies like Appirio, Cloud Sherpas, Cloud Technology Partners, Highstreet IT and
Fruition Partners. While each of these approach and define the opportunity in different
ways, they share some common traits that serve them well. First, they are organized to
sell smaller shorter engagements profitably to both large and smaller providers. They
aggressively own and continue to develop proprietary IP that drives this profitability while
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also allowing for recurring revenue from support and managed services while keeping
them in close contact with customers. Perhaps most important though, is that they are
not burdened with large implementation practices that they need to continue to feed. On
the other hand, these newer providers dont have resources, scale or deep relationships
with the client organizations. This creates a fertile environment for enhanced mergers
and acquisition activity as highlighted in the following section.
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Deal
Activity
AVENDUS
Deal Activity
Introduction
Each decade over the last 40 years, the technology industry has undergone a
generational shift in business models that reshapes the landscape. What is currently
happening with Cloud is the latest of these generational shifts. Much like the 1980s saw
the introduction of mainframe computing, followed by the 1990s with a shift to the
client/server model and the introduction and rapid growth of the Internet, the current time
period is in the midst of the transition to cloud computing. These shifts result in a high
volume of financing activity whether in the form of VC or PE investments, mergers and
acquisitions or public market activity.
The growth potential and end size of the cloud market is rivaled only by the introduction
of the Internet in terms of sheer scale. As such, investor interest in cloud technology and
services, as well as adjacent markets such as big data and mobility is high. Many of
these investors have been prior participants and enablers of the previous generational
shifts and the growth of the Internet. As such, they are aggressively pursuing
opportunities in Cloud across the 4 primary areas covered in this report, as well as the
professional services that support these areas. This interest has remained steady over
the last several years even amid the economic recession.
Today, the market remains in an early stage of its lifecycle, with new companies
emerging rapidly with a new cloud based solution or service offering. This leads to a
highly fragmented market with a limited number of assets of scale. In the services
segment, this is especially true as there is typically a lag between the creation of new
technologies and the subsequent creation of services companies to support these
technologies. As technology platforms like Salesforce, ServiceNow, Workday,
Demandware, and NetSuite continue to scale, and traditional ISVs like SAP and Oracle
move more to the cloud, there remains a tremendous opportunity for investors to
capitalize on the ecosystems that emerge to support the growth of these platforms. By
focusing on investing in the services companies supporting these platforms, or even
more broadly cloud services in general, they are able to invest in a market where there
will be far more winners created than in the technology platforms alone. For every
successful technology platform like ServiceNow, there will be a factor of services
companies that emerge and are able to scale. One need only look at companies like
Oracle, SAP, and Salesforce and the ecosystem of services companies that exist to
support those products to get a sense of opportunity. So while SaaS and IaaS may
generate the most buzz, the number of winners will be limited.
For strategic acquirers, there are opportunities abound to acquire capabilities in the
Cloud. The question for many strategic acquirers remains what and when to acquire.
Deal Activity
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With respect to what to acquire, there are many dimensions that need to be answered.
As traditional implementation services become shorter in duration and pricing pressure
increases, as cloud slowly eliminates the need for manual implementation, the nature of
services are becoming more IP centric and platform in nature. Given that, does it make
sense to acquire IP in the form of SaaS or PaaS applications to begin the decoupling of
revenue and headcount growth, strengthen the customer relationship, and sell a bundled
offering? The answer is perhaps, as valuation, integration and an expanded competitive
landscape loom as challenges to such a strategy. On the service side, the what and
when to acquire are linked, and while there are many high growth cloud focused services
firms, a lack of scale continues to define the segment. The result is hesitancy on large
SIs to make a bet on these firms, as they are alternately betting on which platforms will
be the winners of tomorrow.
So far the SI community can be characterized as taking a cautious approach, as they
wait and watch what unfolds in the SaaS and IaaS markets to get a better sense of
where to invest their resources. While this is a prudent strategy as transition to the cloud
is happening at a measured pace, particularly within the Fortune 100 and the Tier 1
ISVs such as Oracle and SAP, there will come a time when this transition accelerates
rapidly. As noted previously, the SI community has a recent example to learn from in
terms of how quickly the industry can change with the shift from local to global sourcing
that occurred in the early 2000s. During that transition, the Indian SI industry was able to
rapidly take market share from established vendors via labor arbitrage. The lack of a
quick response by several players allowed this to occur, and in the aftermath while firms
like Accenture were able to overcome this shift, many were not (IBM).
We think that the SIs would be well served by acquiring platform capabilities to integrate
and manage cloud delivery, similar to the $400 Mn investment made by Accenture in its
Cloud Platform, a set of services and solutions designed to help clients integrate and
manage the hybrid cloud environments across multiple platforms. On a smaller scale,
Cloud Technology Partners has developed its PaaSLane platform with a similar goal in
mind, to help companies efficiently migrate and optimize applications for the cloud.
Additionally, developing PaaS capabilities for application development and management
across Java, .net and other programming languages would be a way to both generate
revenue from IP and create stickiness with application development and support clients.
If an SI can offer application development and management services as well as provide
a client with a more efficient platform to perform these activities (see: Apprenda) then
they would be extremely valuable to the client.
On the pure services side, SIs could first look to acquire broader cloud integration
specialists, followed by platform focused providers with multiple areas of expertise (See.
CloudSherpas ServiceNow, Salesforce, Google Apps), and then single platform
focused providers who are the number 1 or number 2 partner of a growing platform
(Fruition Partners).
Deal Activity
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Investments and M&A Deal Volumes

We analyzed 600 key transactions involving acquisitions of/or investments into cloud
companies over the period of January 2011 to June 2014. The transaction details were
collated both from primary sources as well as secondary sources and formed the basis
for our analysis.
While on a quarter to quarter basis there are fluctuations in terms of total deal volume,
deal value and the segments with the largest percentage of deals, one thing is clear,
investment activity in the cloud segment continues to increase. This increase is
characterized by a breadth of interest from both financial and strategic acquirers, as well
as venture capital funds and early stage investors.
Between Q12012 and Q12014, the total number of transactions in our research
increased from 38 to 137 respectively, or more than 3.5x. As seen in Exhibit 8, the
overall deal volumes in the cloud industry have been fluctuating, but still point to a high
level of transaction activity in the space.
Exhibit 8
Cloud Industry Quarterly Transaction Volume

140
Services
Software
120
100
80
60
40
Q2-2014
Q1-2014
Q4-2013
Q3-2013
Q2-2013
Q1-2013
Q4-2012
Q3-2012
Q2-2012
Q1-2012
20
Activity by Buyer Type

Since 2012, there has been a shift in the number of deals being done by strategic
investors. While strategic acquirers have been quite active, their activity has increased
over the last several quarters as the number of cloud companies whove been able to
scale continues to increase. In Q12014 85% of the completed deals were from strategic
acquirers. This compares with an average in 2012 of approximately 53% of deals being
the result of strategic acquirers.
Deal Activity
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Exhibit 9
Cloud Industry Quarterly Transaction Volume by Buyer Type

140
Financial
Strategic
120
100
80
60
40
20
Q2-2014
Q1-2014
Q4-2013
Q3-2013
Q2-2013
Q1-2013
Q4-2012
Q3-2012
Q2-2012
Q1-2012
Deals by Segment
When looking at the deal across the various segments of cloud - SaaS, IaaS, PaaS,
Professional Services, it has been fairly consistent across the quarters that SaaS has
been the most active segment. This is followed by professional services with the least
amount of activity in the IaaS and PaaS segments, largely due to the lower number of
available assets in these segments. In 2012 SaaS accounted for 62% of transactions,
and in the first half of 2014 this trend has held with SaaS accounting for 58% of the total
transactions.
Exhibit 10
Cloud Industry Quarterly Transaction Volume by Segment

140
IaaS
SaaS
PaaS
Services
120
100
80
60
40
Q2-2014
Q1-2014
Q4-2013
Q3-2013
Q2-2013
Q1-2013
Q4-2012
Q3-2012
Q2-2012
Q1-2012
20
Deal Activity
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This activity has been driven by a large number of acquirers, but traditional IT industry
leaders such as IBM, SAP, Oracle and Accenture have led the way. SAP and Oracle
have pursued an acquisition strategy focused on adding cloud capabilities through the
acquisition of various SaaS products, while Accenture has focused primarily on the
services side, adding capabilities in eCommerce and cloud transformation services. IBM,
has followed a strategy that encompasses all the relevant areas of cloud, having
acquired SaaS and PaaS products, along with cloud services, all while investing heavily
in its own infrastructure capabilities.
These four firms have completed ~25 transactions in the last two years alone. Prominent
deals in this list include:
Exhibit 11
Deal Activity
Recent Acquisitions by Leading Vendors
Qtr
Acquirer
Target Rationale
Q3-2012
IBM - Kenexa
Added capability in integrated cloud-based

workforce and human capital management solutions
Q1-2012
IBM - Green Hat
Software that enhanced capability to test cloud

and service oriented architecture (SOA)based
applications
Q4-2013
Oracle - BigMachine
SaaS options for traditional ERP segments such

as sales configuration, quoting, B2B eCommerce,
and proposal generation
Q4-2012
Oracle - Engine Yard
An investment by Oracle, which gives it exposure

to a leader in the PaaS space
Q3-2013
SAP - Virtustream
Investment by SAP to penetrate the enterprise

cloud software & services space for hybrid cloud
deployment
Q4-2013
SAP Ventures Convercent
Investment into a high priority vertical of cloudbased GRC (Governance, Risk and Compliance)
software
SAP
Investment in cloud based HCM platform
SAP - Hybris
Cloud-based eCommerce platform
SAP - Syclo
Enterprise mobility solutions
Accenture - Accuity Group
Investment in digital eCommerce services
Accenture - Clienthouse
Acquisition to increase Salesforce capabilities in

Europe
Accenture - Fjord
Expansion of digital marketing capabilities
Accenture - Mortgage
Cadence
Platform BPO in mortgage industry
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As is evident from the above, traditional players are hungry to acquire software
companies which add to cloud capabilities in their strength areas within ERP. For these
tech giants, the need to fill capability gaps and move ahead quickly is driving their M&A
strategies.
Cloud Strategic Buyer
For the larger PE-backed cloud companies, market consolidation and the objective of
dominating the industry is driving greater investments to acquire smaller players with
niche capabilities. For the cloud buyer, acquiring services capability is much more
important than for other strategic buyers / PE buyers due to the need to: (1) gain scale;
(2) develop deeper and closer ties with large clients; and (3) position themselves as a
full-service cloud player. Simultaneously, adding on niche product capabilities remains a
priority so as not to fall behind competition.
CloudSherpas (backed by Greenspring Associates, Columbia Capital and Delta-V
Capital) and Appirio (backed by General Atlantic, Sequoia Capital, GGV Capital) are two
examples of firms who have pursued a roll-up strategy. Their recent transactions are
listed below in Exhibit 12.
Exhibit 12
Recent acquisitions by Appirio
Qtr
Target
Q4-2012
Knowledge Infusion
Target Description
Services Vs. Software
Provides human capital management-
Cloud Services
focused (HCM) Software-as-a-Service

(SaaS) migration and integration
Q4-2011
Saaspoint
UK-based company engaged in the
Cloud Services
provision of cloud computing and

related consulting services
Q1-2011
InfoWelders
Provides Salesforce.com CRM systems
Cloud Services
integration services for enterprises in a

broad range of industries
Q1-2011
TRE3 Group
Provides Salesforce.com and social
Cloud Services
CRM systems integration services for

enterprises in a broad range of
industries
Deal Activity
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Exhibit 13
Recent acquisitions by CloudSherpas
Qtr
Target
Q1-2013
Innoveer Solutions
Target Description
Services Vs. Software
Provides CRM systems integration
Cloud Services
services, with a focus on

Salesforce.com, Oracle and Microsoft
software, for businesses in the US
Q1-2013
Navigis
Provides IT service management
Cloud Services
systems integration services, with a

focus on ServiceNow software, for
businesses globally
Q4-2012
CloudTrigger
Provides Salesforce.com CRM systems
Cloud Services
integration and software development

services for businesses globally
Q1-2012
GlobalOne Group
US based technology consulting firm
Cloud Services
engaged in the provision of cloud

computing services
Q3-2011
Devnet
Provides Google Apps systems
Cloud Services
integration services for businesses in

Australia and New Zealand
Q2-2011
Omnetic
Provides Google Apps and Salesforce
Cloud Services
platform-based systems integration

and software development services for
businesses
We see an opportunity for others to pursue such a strategy, as there are numerous
Cloud services companies with niche capabilities whove yet to scale, or others that are
focused on serving a single product such as ServiceNow. These players are ripe for
acquisition as they could be combined to either achieve scale more quickly or fill a
capability gap of another player to offer services across various products. For example,
CloudSherpas currently has Salesforce, ServiceNow and GoogleApps capabilities. They
could look to add Workday capabilities as it is not a completing platform with those
theyve already partnered with, or they could add capabilities in the eCommerce area as
well.
Deal Activity
39
Final
Recommendations
Service Providers
Success
AVENDUS
Final Recommendations for Service

Provider Success
Brace Yourself
The enterprise migration to cloud computing has been underway for several years, if not
more than a decade, depending on how it is defined. Given the limited aggregate impact
it has had on the service provider landscape to date, one could be excused for
extrapolating that into a belief that not much will change in the short term. But Cloud is
not a linear trend and nonlinear trends do not bring steady change. We believe the
deeper onset of Cloud computing will mark a period of dramatic realignment, a realignment which is already being seen today. Services providers are looking more like
software vendors while traditional software vendors, say Microsoft, are suddenly building
out infrastructure and capital intensive businesses and looking more like some types of
traditional services providers. The ultimate re-alignment is likely to be large.
Bottom line: The broader adoption of cloud will bring lasting change to the IT
service provider landscape.
Be Realistic
Understand that even if you build it they might not come. For most traditional IT services
providers, public cloud markets have the allure of a Siren's song. For decades these
providers have been organized around a model that favored building one off solutions for
a client's problem and then moving on to the next. While some managed to capture and
leverage some re-usable elements, most of that activity always seemed more about
appeasing the investor and analyst communities rather than representing any wholesale
change. Now, however, with the broad acceptance of standardized / repeatable solutions
brought about by Cloud, traditional IT services providers are eager to develop their own
intellectual property and directly enter the Public Cloud game. But just as ISV's
perpetually struggle to branch deeper into IT services beyond maintenance and support,
IT services will be hard pressed to remake themselves as essentially a software firm.
Quite simply, product development is not in their DNA.
Bottom line: Gaining traction for repeatable solutions takes a different skill set
than most IT services firms have.
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Play Nice
The notion of Co-opetition is not a new one but it takes on increased importance under
the new demands of Cloud. As engagements get broken down into smaller and smaller
deals, yet require deeper and deeper skills, a comprehensive partnership strategy will be
required to maintain activity at scale. This means fierce competitors may find that the
best strategy to participate in any particular segment is to jointly go to market via a
partnership approach. As an example of what this might look like, one can refer to a
recent announcement from HCL and CSC. These two competitors realized there are
certain times in certain markets where their collective strength serves them both better
than going it alone.
Bottom line: Be prepared to partner with firms you once considered your fiercest
competitors. That won't come easy but it might just determine whether you
flourish or fail.
41
Appendix
Appendix I - Drivers of
Cloud Adoption
Appendix II - Worldwide
Cloud Computing
Forecast
Appendix III - Valuation
Metrics
AVENDUS
Appendix I - Drivers of Cloud Adoption

Despite the concept of Cloud being in play for decades, and the current wave of activity
being well past ten years, the interest and opportunity around Cloud is stronger today
than ever. HfS recently surveyed over 700 IT and business executives globally inquiring
about their IT focus in 2014 with respondents indicating that Cloud remains their number
one investment priority today. As seen in Exhibit 2, nearly one in five (19.3%) of
respondents indicated the migration to some form of Cloud remains their top area of
spending for 2014. This level of interest exceeds that of Big Data and Mobility and
dwarfs that of other areas such as Application Modernization.
Exhibit 14
The Number One Investment Area in IT for 2014
Cloud (Infrastructure, Apps, or Hybrid)
19.3%
BI, Big Data and Analytics
14.2%
Mobile Apps and Dev (incl. BYOD)
10.8%
IT Operations and Service Management
6.8%
Flexible re-negotiating of outsourcing contracts

Standardized, yet flexible APIs
6.1%
5.0%
Data Center optimization (incl. green IT)
4.6%
Application modernization
4.3%
N=740 IT Managers in Enterprises
Why Now?
While the underlying drivers of adoption are in themselves nothing unique, there is a
growing realization that Cloud truly addresses the triumvirate of basic IT drivers.
Specifically, Cloud allows one to perform activities better, faster, and cheaper. Rarely
does a new technology address all three. With most technological advances, gains are
incremental and require painful tradeoffs across these three needs. For example, speed
to market could increase, with the tradeoff typically in the form of higher cost, fewer
features, or both. When it does combine all three, the result is a pivotal wave of change.
In short, the promise of IT and the ensuing opportunity around its deployment may never
have been greater than it is today.
Why? Because Cloud is enabling a virtuous cycle of supply.
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Exhibit 15
Clouds Virtuous Cycle of Supply
Faster
Better
Cheaper
Better. Cloud offers the promise of lowering the complexity of not only deployment
but also ongoing support and management as well. Because it is delivered as a
centralized service, it also allows a deep specialization of skills to ensure that the
task being performed is at the highest level. This means an enterprise gains
access to the very best talent working day in and day out on this tool. That
level of specialization is not something all but the largest of enterprises can
afford as most must require their internal IT resources to operate across
multiple roles. Skeptics will raise the issue of ones inability to finely tailor a cloud
solution for their particular enterprises unique needs as a reason these offerings are
not better than one that is customized. However, given the legacy of disorganization,
interoperability, and incompatibility that such customization efforts have left behind
in the past, coupled with a growing acceptance that most core enterprise processes
are not areas of differentiation, naysayers within large enterprises are in shorter and
shorter supply. This is especially true now that the latest wave of Cloud offerings
allow one to customize them for their own needs.
Cheaper. The underlying economics of IT deployment are improved by Cloud in

multiple ways. First, by shifting most of the onus around upfront hardware, software
and development costs to the provider, an enterprise buyer can provision these new
services for a fraction of the initial spend that was once required. The immediate
benefits of doing so are significant. IT departments can spread scarce resources
farther and do more with less as failures cost less and successes generate an
immediate rationale for securing additional funds. Second, because these
services are easily provisioned directly within the enterprise function that
seeks the resulting outcome rather than indirectly through an IT department,
they can unlock new pools of spending. Third, because of the specialization and
focus within cloud services, providers can make better use of repeatable processes
and IP and pass the ensuing savings along. Finally, because these services are sold
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AVENDUS
in a metered fashion an enterprise can pay for only what it needs even if thats the
equivalent of only one third of a server and half the personnel. All of this means for
any single effort of implementation, upfront costs are reduced. Not all these savings
hold when migrating from an existing on-premise system to a cloud offering as costs
associated with transition and integration come into play, but over the medium-term
these migrations also provide a cheaper alternative than maintaining legacy
environments.
Yet all this is not meant to imply that aggregate enterprise spending on IT is going
down because of Cloud. On the contrary, we see it steadily on the rise as history
tells us that when companies are able to do more with less they typically look to do
even more. (i.e. the favorable economics behind individual implementations drive
broad demand within an enterprise.) For example, efficiencies generated by rapid
growth and proliferation of the web led to more convenience and services being
offered to customers by enterprises rather than reducing costs in absolute terms.
Additionally, the pace of technological change continues to increase, requiring
organizations to invest more in technology innovation rather than less.
Faster. Since Cloud offerings are created before they are sold, the time between
purchase and deployment for any individual customer is greatly compressed.
Provisioning can be done in a matter of days or weeks when previously it might
have taken years. Further, maintenance is performed centrally and therefore
effectively distributed to everyone at once eliminating countless efforts of
duplication around an update. Cloud also fuels speed in a much larger way as
well especially for smaller enterprises unburdened by legacy systems. Because of
low upfront costs, potential failure of new systems does not have as detrimental of
an effect. Yet even the largest enterprises, where significant customization is
required, are seeing decreased implementation times thanks to the emergence of
new cloud enablement platforms.
While all of these outcomes are rarely realized within a single implementation, the allure
of them coupled with a plethora of available success stories is leading enterprise IT
departments to overcome a general reluctance to change. Further abetting the
acceleration of Cloud adoption in the enterprise has been the broad acceptance of Cloud
services within our personal lives. That has established an expectation across the
enterprise from the C-suite, to the finance department, and down to the shop room
floor that IT enabled services should be broadly available, easy to consume, and
secure.
All of these drivers are now combining into a self-fueling conflagration of demand. As this
happens, one can begin to see this new delivery approach consuming a larger swath of
the traditional IT industry and eventually engulf the IT services market along the way.
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Inhibitors to Adoption Remain

Given all this, one may find it surprising that Cloud adoption has not occurred more
rapidly. When measured against the entire IT services market, despite its relatively rapid
growth, Cloud continues to represent a very small fraction of activity today. An oft cited
reason for slower adoption is the litany of buyer concerns. In Exhibit 16, we explore the
most prominent reasons buyers are avoiding a Cloud-based BPaaS offering today.
Exhibit 16
All the Standard Reasons for No

Very concerned
Not concerned
Somewhat concerned
Worried about data portability if we want to switch
52%
Security in the cloud isn't robust enough
Won't know with whom the issue resides when a

failure occurs
Uncertainty as to where our data is actually

residing
The difficulty of integrating data across multiple
cloud apps
Lack of customization to suit our needs
28%
8% 13%
41%
33%
12%
14%
41%
33%
15%
12%
40%
34%
15%
12%
30%
22%
Don't know
46%
46%
7%
15%
16%
16%
Yet, while this exercise of identifying leading concerns is an important one that is useful
for refining offerings and marketing messages to generate incremental sales, it is
important to note that these concerns do not collectively aggregate into some meaningful
rationale for not pursuing Cloud. Concerns around implementing any technology will
always exist. The critical question is whether or not momentum around adoption will build
to a critical mass so that efforts are undertaken to overcome the underlying challenges
involved.
With Cloud, there have been three primary constraints holding back broader deployment.
They are:
The Slow Pace of IT Change. IT upgrade cycles have historically been long. Some
of it is due to the herculean effort often required to update or replace a legacy
enterprise application. Even relatively simple upgrades like PC operating systems
get delayed as is evident with the recent announcement that the British government
would be paying additional fees to Microsoft to continue its support of the 12-yearold Windows XP operating system. Which brings us to another reason - most IT
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AVENDUS
departments work hard not to rock the end user boat. Couple all this with the
millions of dollars spent on integrating, customizing, and continuing to operate these
large legacy systems such as an enterprise-wide CRM package, the decision to
make any switch is carefully weighed and often not considered until prior
expenditures are completely amortized. As a result, changes are measured in
multiple years if not decades.
Established Independent Software Vendors (ISV)s Not In Any Rush to Change.

With all the advantages that Cloud brings to the enterprise buyer, it should come as
little surprise that traditional software vendors and their respective ecosystem of
service providers have viewed it cautiously. After all, decisions around technology
adoption are now rooted firmly in the notion of total cost of ownership and that
means it is viewed as a zero sum game. Even worse, moving an offering to the
cloud requires an ISV to bear not just the upfront development or migration costs but
often the expenses associated with provisioning the underlying delivery
infrastructure and ensuring it all stays up and running and able to rapidly meet
elastic demand. A Cloud based ISV must also assume a disproportionate amount of
risk as contract terms move from an outright sale or a perpetual license to one of a
much shorter duration and often with lower switching costs. These smaller contract
sizes mean they need to reach a larger initial customer base to cover initial outlays.
Finally, by moving to the Cloud, software vendors also reduce the pool of associated
support and upgrade cycle spend that for decades served as a valuable source of
revenue with enterprises locked in and unable to avoid these ongoing fees.
Systems Integrators and Consultants. Given the smaller size of upfront services
and implementation revenues, systems integrators have lower incentives to push
cloud solutions aggressively. This reluctance is further enhanced as most leading
SIs have deep partnerships with established/legacy software vendors and are
cautious about push technologies that might strain these partnerships.
Classic Model of Disruptive Innovation Emerges

Given the constraints above, there was a disincentive for traditional ISVs to embrace this
new model with many positioning it as nothing more than overhyped marketing until a
new set of upstarts began to erode their business in meaningful ways. Salesforce,
Netsuite, and Workday have all not just taken market share from competitors like Oracle
and SAP, but compounded their impact by eroding overall market pricing at the same
time. As the pendulum of acceptance began to swing towards these upstarts,
established software vendors were left with one choice produce their own Cloud-based
solutions or face an increased rate of erosion.
By doing so, they began to legitimize a market that up until then only technology
visionaries and leaders had readily embraced. That then accelerated a shift in the
46
AVENDUS
mindset of those within more mainstream views of Enterprise IT. Further, as functional
departments outside of IT began to act on their own to migrate core processes to the
Cloud, pressure continued to build.
The forces that result in the slow pace of IT change rarely abate but when they do we
often see a period of rapid transition typically marked by a fundamental industry change.
This happens when IT departments suddenly and collectively re-orient themselves to
view the adoption of some new model as the norm. That level of change appears likely
and within a year or twos time, we might be witness to a rapidly different approach to
Cloud across most enterprise IT departments.
Exhibit 17
The State of Cloud Adoption Today

100%
Adoption
Cloud Adoption Today
75%
Market Share
Cumulative Adoption
50%
25%
0%
Innovators
2.5%
Early Adopters Early Majority

13.5%
34%
Late Majority
34%
Laggards
16%
Today, this means that alongside the venture investment pouring into a new breed of
pure Cloud software providers aiming to disrupt, we see massive multi-billion dollar
investments by established vendors. Companies like Cisco, Oracle, IBM, and SAP are all
re-investing their earnings to disrupt themselves. In January, IBM announced that they
would invest $1.2 billion to significantly expand its global cloud footprint. This investment
includes a network of cloud data centers designed to bring clients greater flexibility,
transparency and control over how they manage their data, run their business and
deploy their IT operations locally in the cloud. Similarly, SAP has invested in its cloud
capabilities through its HANA platform as well as acquisitions including Ariba,
SuccessFactors, Syclo and most recently Hybris and Fieldglass. These acquisitions are
supported by a goal of growing cloud related revenue from approximately $1 billion in
2013 to $4 billion in 2017. These acquisitions have also driven up the valuations of cloud
ISVs as well as cloud services companies attracting more investments into this space.
These efforts are now beginning to pay off for many vendors and in turn they are serving
to accelerate the shift to the cloud. Next up, we anticipate a broad wave of migration by
tier two ISVs as they too re-align their offerings with this new delivery model to fend off
competition and meet rising demand.
47
AVENDUS
Appendix II - Worldwide Cloud

Computing Forecast
The net result of all this activity around Cloud Services is a sizeable opportunity for
traditional IT Services providers. Cloud creates a large opportunity for systems
integrators and consultants to help enterprises make this transition. With 84% of new
systems expected to be SaaS according to Forbes, enterprises are faced with a large
task of integrating and eventually replacing legacy systems with cloud applications.
While the economic benefits for the enterprise exist, eventually employees and clients
will force this change as instant and remote access to data becomes a requirement. HfS
sizes the current opportunity for professional consulting and integration services that are
directly related to the Cloud at $8.4 billion in 2013, with an expected compound annual
growth rate of 25.1% from 2013 through 2018. This opportunity is in addition to the
opportunities around provisioning for hybrid and private clouds as further detailed below
as well as providing any direct offerings within the public cloud services market. Each of
these opportunities is significant as well.
Exhibit 18
Worldwide Cloud Consulting and Integration Services Market

2013-2018 ($B)
30
25
CAGR 25.1%
20
15
25.7
10
5
5.9
8.4
11.0
14.2
17.5
21.4
0
2012
2013
2014
2015
2016
2017
2018
Consulting and Integration Services
Beyond this consulting and integration market, there is also additional spending on what
is known as hybrid and private cloud. These markets also offer significant opportunity for
growth and as we detail in depth later in the report, they represent a unique and
important opportunity for traditional IT service providers. HfS forecasts these two
segments to amount to revenues of $39 billion. In addition, the 5-year CAGR for this
combined market of private and public cloud will amount to 17.5% through 2018. This
compares to a 2.1% CAGR for the entire IT services market and these two Cloud related
markets account for nearly all the growth. By 2018, they will also account for nearly 18%
of the entire IT services market, up from only 8% today.
Appendix II - Worldwide Cloud Computing Forecast
48
AVENDUS
Exhibit 19
Worldwide Market for Hybrid and Private Cloud 2013-2018 ($B)

100
90
80
CAGR 17.5%
70
60
50
40
30
20
10
2012
2013
2014
Private Cloud
2015
2016
2017
2018
Hybrid Cloud
Appendix II - Worldwide Cloud Computing Forecast
49
AVENDUS
Appendix III - Valuation Metrix

IT Services Trading Comparables ($ in USD Mns)
Source: CapitalIQ
TTM
TTM
Market Cap
Company
Revenue
EBITDA
EBITDA Margin
Tata Consultancy Services Limited
14,300
4,378
31%
Accenture plc
29,312
4,529
15%
Infosys Ltd.
8,391
2,321
Cognizant Technology Solutions Corporation
9,245
1,955
Wipro Ltd.
7,459
1,708
23%
EV
EV/Revenue
EV/EBITDA
P/E
81,873
5.7x
18.7x
24.3x
50,809
47,325
1.6x
10.4x
19.6x
28%
31,860
27,156
3.2x
11.7x
17.7x
21%
30,398
26,533
2.9x
13.6x
23.6x
22,331
19,739
2.6x
11.6x
16.4x
84,097
HCL Technologies Ltd.
4,763
1,223
26%
18,523
17,465
3.7x
14.3x
21.2x
Tech Mahindra Limited
3,143
698
22%
8,386
7,879
2.5x
11.3x
17.0x
MphasiS Limited
1,061
192
18%
1,578
1,381
1.3x
7.2x
12.9x
MindTree Limited
535
106
20%
1,439
1,325
2.5x
12.5x
19.7x
Hexaware Technologies Limited
406
83
20%
722
660
1.6x
8.0x
12.6x
KPIT Technologies Limited
461
63
14%
500
522
1.1x
8.3x
12.5x
Zensar Technologies Limited
398
60
15%
308
287
0.7x
4.8x
8.1x
EPAM Systems, Inc.
591
97
16%
1,874
1,693
2.9x
17.4x
29.3x
Syntel, Inc.
881
291
33%
3,722
3,094
3.5x
10.7x
15.4x
Sapient Corp.
1,308
168
13%
2,151
1,877
1.4x
11.2x
25.7x
Virtusa Corp.
397
53
13%
945
806
2.0x
15.2x
25.5x
Perficient Inc.
369
49
13%
680
1.8x
14.0x
29.3x
Mean
2.4x
11.8x
19.5x
Median
2.5x
11.6x
19.6x
Appendix III - Valuation Metrics
635
50
AVENDUS
BPO Trading Comparables ($ in USD Mns)
Source: CapitalIQ
TTM
TTM
Market Cap
Company
Revenue
EBITDA
EBITDA Margin
Automatic Data Processing, Inc.
11,958
2,490
21%
Paychex, Inc.
2,519
1,088
43%
Genpact Limited
2,156
385
18%
Altisource Portfolio Solutions S.A.
952
262
28%
MedAssets, Inc.
683
203
EV
EV/Revenue
EV/EBITDA
P/E
37,923
3.2x
15.2x
27.6x
15,061
14,510
5.8x
13.3x
24.3x
3,809
3,904
1.8x
10.1x
18.0x
2,592
2,858
3.0x
10.9x
17.8x
30%
1,518
2,294
3.4x
11.3x
53.0x
1,069
996
1.9x
9.7x
23.4x
8.8x
20.3x
39,605
WNS (Holdings) Ltd.
511
102
20%
Exlservice Holdings, Inc.
488
89
18%
947
780
1.6x
eClerx Services Limited
140
59
42%
615
557
4.0x
9.5x
14.8x
Mean
3.1x
11.1x
24.9x
Median
3.1x
10.5x
21.8x
51
AVENDUS
SaaS Trading Comparables ($ in USD Mns)
Source: CapitalIQ
TTM
TTM
Market Cap
Company
Revenue
EBITDA
EBITDA Margin
Salesforce.com, Inc
Workday, Inc.
ServiceNow, Inc.
NetSuite Inc.
Concur Technologies, Inc.
athenahealth, Inc.
The Ultimate Software Group, Inc.
Veeva Systems Inc.
Xero Limited.
Demandware, Inc.
Cornerstone OnDemand, Inc.
Medidata Solutions, Inc.
Proofpoint, Inc.
Castlight Health, Inc.
Zendesk, Inc.
RealPage, Inc.
Fleetmatics Group PLC
Marketo, Inc.
Cvent, Inc.
Constant Contact, Inc.
Benefitfocus, Inc.
LogMeIn, Inc.
RingCentral, Inc.
SPS Commerce, Inc.
Qualys, Inc.
Wix.com Ltd.
BroadSoft, Inc.
Textura Corporation
Jive Software, Inc.
Bazaarvoice, Inc.
LivePerson Inc.
IntraLinks Holdings, Inc.
Mean
Median
4,405
537
542
477
628
672
458
234
62
115
205
305
164
28
83
389
191
122
118
307
112
192
188
115
113
94
183
53
153
168
191
239
-33
-132
-84
-40
29
61
66
46
-32
-17
-32
25
-25
-82
-22
54
46
-42
3
35
-29
18
-34
11
13
-35
-3
-26
-61
-30
8
11
-1%
-25%
-16%
-8%
5%
9%
15%
19%
-51%
-15%
-16%
8%
-15%
-296%
-27%
14%
24%
-34%
3%
11%
-26%
9%
-18%
10%
11%
-37%
-2%
-49%
-40%
-18%
4%
5%
34,538
15,910
9,024
6,573
5,500
4,966
4,075
3,080
2,753
2,302
2,355
2,539
1,383
1,263
1,247
1,285
1,204
1,169
1,168
1,019
1,015
1,035
1,011
893
834
658
711
639
568
593
551
465
EV
35,951
14,528
8,790
6,354
5,369
5,073
3,994
2,734
2,575
2,048
2,283
2,556
1,315
1,103
1,214
1,243
1,080
1,057
967
879
965
814
891
756
729
558
630
568
462
548
471
477
EV/Revenue
EV/EBITDA
P/E
8.2x
27.1x
16.2x
13.3x
8.5x
7.5x
8.7x
11.7x
41.6x
17.7x
11.1x
8.4x
8.0x
39.9x
14.6x
3.2x
5.7x
8.7x
8.2x
2.9x
8.6x
4.2x
4.7x
6.6x
6.4x
5.9x
3.4x
10.7x
3.0x
3.3x
2.5x
2.0x
10.4x
8.2x
NM
NM
NM
NM
209.4x
82.8x
60.1x
59.9x
NM
NM
NM
101.5x
NM
NM
NM
22.8x
23.6x
NM
296.0x
25.4x
NM
45.2x
NM
67.6x
57.8x
NM
NM
NM
NM
NM
62.3x
42.1x
82.6x
60.0x
NM
NM
NM
NM
NM
NM
144.0x
144.3x
NM
NM
NM
NM
NM
NM
NM
65.5x
39.0x
NM
NM
96.5x
NM
NM
NM
NM
NM
NM
NM
NM
NM
NM
NM
NM
97.9x
96.5x
52
AVENDUS
Enterprise Software Trading Comparables ($ in USD Mns)
Source: CapitalIQ
TTM
TTM
Market Cap
Company
Revenue
EBITDA
EBITDA Margin
Oracle Corporation
38,275
16,717
44%
SAP SE
23,275
8,032
35%
EV
EV/Revenue
EV/EBITDA
P/E
168,389
4.4x
10.1x
17.2x
95,381
96,855
4.2x
12.1x
22.5x
193,533
230,419
2.3x
9.1x
12.2x
23.0x
47.0x
182,472
International Business Machines Corporation
98,267
25,286
26%
Cerner Corporation
3,075
806
26%
19,382
18,549
6.0x
Microsoft Corporation
86,833
33,098
38%
359,043
297,078
3.4x
9.0x
16.6x
67,575
75,570
0.7x
5.8x
12.7x
28.8x
63.3x
Hewlett-Packard Company
111,820
13,106
12%
Autodesk, Inc.
2,296
392
17%
12,672
11,299
4.9x
Dassault Systemes SA
2,899
846
29%
16,745
15,478
5.3x
18.3x
40.0x
Mean
3.9x
14.5x
28.9x
Median
4.3x
11.1x
19.9x
53
AVENDUS
HfS
Architects of Global Business
HfS Research serves the research, governance, and services strategy needs of
business operations and IT leaders across finance, supply chain, human resources,
marketing, and core industry functions. The firm provides insightful and meaningful
analyst coverage of best business practices and innovations that impact successful
business outcomes, such as the digital transformation of operations, cloud-based
business platforms, services talent development strategies, process automation and
outsourcing, mobility, analytics, and social collaboration. HfS applies its acclaimed
Blueprint Methodology to evaluate the performance of service and technology in terms of
innovating and executing against those business outcomes.
HfS educates and facilitates discussions among the world's largest knowledge
community of enterprise services professionals, currently comprising 150,000
subscribers and members. HfS Research facilitates the HfS Sourcing Executive Council,
the acclaimed elite group of sourcing practitioners from leading organizations that meets
bi-annually to share the future direction of the global services industry and to discuss the
future enterprise operations framework. HfS provides its sourcing executive council
members with the HfS Governance Academy and Certification Program to help clients
improve the governance of their global business services and vendor relationships.
In 2010 and 2011, HfS Research's Founder and CEO, Phil Fersht, was named Analyst
of the Year by the International Institute of Analyst Relations (IIAR), the premier body of
analyst-facing professionals. He also achieved the distinction of being voted the research
analyst industry's Most Innovative Analyst Firm in 2012.
In 2013, HfS was named first in rising influence among leading analyst firms, according
to the 2013 Analyst Value Survey, and second out of the 44 leading industry analyst
firms in the 2013 Analyst Value Index.
Now in its seventh year of publication, HfS Research's acclaimed blog Horses for
Sources is widely recognized as the most widely-read and revered destination for
unfettered collective insight, research, and open debate about sourcing industry issues
and developments. Today, Horses for Sources receives over one million web visits a
year.
To learn more about HfS Research, please email research@HfSResearch.com.
About
54
AVENDUS
Our office
HfS Research
90 Sherman Street, Suite B
Cambridge, MA 02140 USA
(800) 449-4206
About Avendus
Avendus Capital Pvt. Ltd. (Avendus Capital)
Avendus Capital is a leading financial services firm which provides customised solutions
in the areas of financial advisory, equity capital markets, alternative asset management
and wealth management.
The firm relies on its extensive track record, in-depth domain understanding and
knowledge of the economic and regulatory environment, to offer research based
solutions to its clients that include institutional investors, corporations and high net worth
individuals/families. In recent years, Avendus Capital has consistently been ranked
among the leading corporate finance advisors in India and has emerged as the advisor
of choice for cross-border M&A deals, having closed around 38 cross-border
transactions in the past 5 years. Avendus Securities through its Institutional Equities
practice is able to offer high quality research-driven advice to help its clients take
investment decisions. Avendus PE Investment Advisors manages funds raised from its
investors by investing in public markets, while Avendus Wealth Management caters to
investment advisory and portfolio management needs of Family offices and Ultra High
net-worth Individuals / families, spanning all asset classes.
Headquartered in Mumbai, the firm has offices in New Delhi and Bangalore. Avendus
Capital, Inc (US) and Avendus Capital (UK) Pvt. Ltd. located in New York and London
respectively are wholly owned subsidiaries offering M&A and Private Equity syndication
services to clients in the respective regions.
For more information, please visit www.avendus.com
Our offices
About
55
AVENDUS
Avendus Capital Pvt Ltd

Mumbai :: IL&FS Financial Centre, B-Quadrant, 5th Floor, Bandra-Kurla Complex,
Bandra (East), Mumbai 400 051
Tel :: +91 22 6648 0050
New Delhi :: Suite 22A/B, The Aman Resort, Lodhi Road, New Delhi - 110003
Tel :: +91 11 45357500
Bangalore :: The Millenia Tower, A-10th Floor, No. 1 & 2 Murphy Road, Ulsoor,
Bangalore 560 008
Tel :: +91 80 6648 3600
Avendus Capital, Inc
New York :: 499 Park Avenue, 12th Floor, New York, NY 10022
Tel :: +1 646 707 0789
Avendus Capital (UK) Pvt Ltd
London :: 33, St Jamess Square, London SW1Y 4JS
Tel :: + 44 203 159 4353
Avendus Capital, Inc and Avendus Capital (UK) Private Limited are authorized and regulated by the FINRA and
FSA respectively.
About
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Cloud's

As the role that the Cloud is playing in transforming the technology

landscape continues to increase, it has become the topic that is on

both software and services. Given this, there isn't a lack of

research reports or bold predictions about how the Cloud will

transform enterprises. However, in covering this market we found

what the effect of Cloud would be on providers of IT services. The

companies who have largely been built by providing supporting

Cloud's Dramatic Impact on the Procurement of IT

The Impact of Cloud on IT & Business Services Providers

The Evolving Professional Cloud Services Provider Landscape

Final Recommendations for Service Provider Success

Defining the Cloud

You can effectively pull out a credit card and buy it

One instance of the service offering serves multiple

Both provider and customer have clear visibility as to how the

The Four Layers of Cloud

The provision over a network of one or more elements of core IT

Clouds Dramatic Impact on the

The Broad Impact of Cloud on Enterprise IT

Rigid and Vast

Flexible and Agile

Cloud Driven IT Environment

Design, Build, Run

Weighted toward maintenance

Focused on new applications

Deep IT skills required

Deep vertical expertise required

Concentration of large mega apps

Proliferation of small discrete apps

As seen in Exhibit 8, the impact of an enterprise IT department moving to Cloud is broad

1. Cloud Turns Influencers into Buyers

Clouds Dramatic Impact on the Procurement of IT

2. Cloud Shifts Enterprise Spend from CAPEX to

3. Cloud Shifts Conversations from TCO to ROI

Clouds Dramatic Impact on the Procurement of IT

4. But Cloud Still Requires One to Crunch

Clouds Dramatic Impact on the Procurement of IT

Business Service Providers

The Impact of Cloud on IT & Business

The Five Opportunities around Cloud

The five opportunities are:

Build Infrastructure. This encapsulates the suite of services aimed at enabling

Transform Applications. This is the series of services built around either

Integrate. This area is a set of services offered to help an enterprise consume

The Impact of Cloud on IT & Business Services Providers

Provide. This opportunity encapsulates the efforts of service providers to enter

Two Unique Market Opportunities

Serving the Enterprise

Supporting the Public Cloud

Source: HfS and Avendus Research

The Impact of Cloud on IT & Business Services Providers

The Economics of Delivery are Changing

Cloud Creates New Demands on Services Providers

The Impact of Cloud on IT & Business Services Providers

The Impact of Cloud on IT & Business Services Providers

The Potential Convergence of IT with BPO

The Impact of Cloud on IT & Business Services Providers

Service Providers Landscape

The Evolving Professional Cloud

Cloud Industry Value Chain

The Evolving Professional Cloud Services Provider Landscape