Managed services beat 'baby datacentres'

Ulrika Hedquist talks to analysts and users about the advantages of abandoning on-premise servers for off-site managed services

Slow but steady growth

According to Gartner, New Zealand customers are currently spending around NZ$800 million on managed services. The Australian managed services market, in comparison, is worth around A$6.1 billion. The research firm expects growth rates in the area of 1.5-2 percent locally, says Sydney-based Rolf Jester, vice president and distinguished analyst at Gartner.

“It’s a growing market and it has been growing for a long time, slowly but steadily.”

The work that goes into maintaining IT operations has slowly but surely shifted – a little bit more for every year – to external providers, he says. Growth may seem small at the moment, but it has had a cumulatively large effect over the years, and Gartner expects that to continue for the foreseeable future, he adds.

This growth is driven by companies wanting to run IT in the most efficient way and being sensible about managing the cost of IT, says Jester. Many are also finding it hard to find enough of the right people for IT.

“And when they do find the right people they want to deploy them on things that make a significant difference to the business – developing or creating new processes, new applications for the organisation, things that help the organisation grow, rather than just keep the lights on,” he says.

So, they turn to external providers. This has created a competitive environment with providers offering quality services with high-level SLAs to lower costs.

“It has become attractive for companies to use external providers and deploy their own people where they can make more difference,” he says.

Cost is a factor, but in Gartner’s experience, “if people outsource purely for cost they are probably going to be disappointed. They may save some money if they manage it well but we’ve often found that people who are short-sighted about their outsourcing don’t actually end up managing their providers very well.”

They don’t get out of it what they wanted and they are also missing the bigger opportunity of delivering better business values and outcomes.

Potential issues

IDC is seeing uptake of managed services solutions across the board – from government and enterprises down to SMBs. There are government departments who have gone down the managed services path quite successfully, for example MAF and NZTA, says Macaulay. It is becoming more generally accepted that government departments opt for this direction instead of having capital tied up in servers and mainframes. This, in turn, is creating big opportunities for local vendors, he says.

However, data sovereignty is still an issue for government departments, and commercial organisations as well.

The principal concern is in the US, where legislation allows the government to access any data held by a US-owned company, he says. Even if a US-owned company holds your data locally, you may find that it isn’t protected from acquisition by US authorities.

Another issue is ensuring that you are getting what you need from your service provider, and that you have at least the same flexibility you would expect if you had your own facilities.

In most cases, the service providers are doing a much better job than you could do internally, especially in terms of scalability, says Macaulay. From that point of view, the model is hugely beneficial, especially for organisations that have a variable workload.

Vendor lock-in is another potential pitfall to look out for. If you have all your IT running with one vendor and then, for whatever reason, need to move to another vendor – how does that happen, asks Macaulay.

“Right now, I don’t think it’s possible to guarantee that is going to be an easy process. In fact, it’s probably going to be just as complicated as going from your own services to a service provider. You need to build in mechanisms that will protect your organisation from [vendor lock-in].”

Gartner’s Jester adds that you need to understand your own capabilities well and have clear strategy for outsourcing.

Classic mistakes include outsourcing purely for cost reasons; choosing a provider that isn’t right for your business; not managing the provider adequately; not managing the relationship with the provider; or simply not specifying tasks sufficiently, he says. Strong management is required because you will become dependent on that provider.

“Outsourcing is not a question of abrogating your responsibility – far from it. You’ve still got the responsibility [for your IT], you are just getting someone else to run it for you.”

Often organisations fail to allocate enough budget to manage the provider.

“If they are going to spend $1 million on an external service, they probably need to spend around $30,000-50,000 of that on managing the deal,” says Jester.

Slow but steady growth

According to Gartner, New Zealand customers are currently spending around NZ$800 million on managed services. The Australian managed services market, in comparison, is worth around A$6.1 billion. The research firm expects growth rates in the area of 1.5-2 percent locally, says Sydney-based Rolf Jester, vice president and distinguished analyst at Gartner.

“It’s a growing market and it has been growing for a long time, slowly but steadily.”

The work that goes into maintaining IT operations has slowly but surely shifted – a little bit more for every year – to external providers, he says. Growth may seem small at the moment, but it has had a cumulatively large effect over the years, and Gartner expects that to continue for the foreseeable future, he adds.

This growth is driven by companies wanting to run IT in the most efficient way and being sensible about managing the cost of IT, says Jester. Many are also finding it hard to find enough of the right people for IT.

“And when they do find the right people they want to deploy them on things that make a significant difference to the business – developing or creating new processes, new applications for the organisation, things that help the organisation grow, rather than just keep the lights on,” he says.

So, they turn to external providers. This has created a competitive environment with providers offering quality services with high-level SLAs to lower costs.

“It has become attractive for companies to use external providers and deploy their own people where they can make more difference,” he says.

Cost is a factor, but in Gartner’s experience, “if people outsource purely for cost they are probably going to be disappointed. They may save some money if they manage it well but we’ve often found that people who are short-sighted about their outsourcing don’t actually end up managing their providers very well.”

They don’t get out of it what they wanted and they are also missing the bigger opportunity of delivering better business values and outcomes.

Potential issues

IDC is seeing uptake of managed services solutions across the board – from government and enterprises down to SMBs. There are government departments who have gone down the managed services path quite successfully, for example MAF and NZTA, says Macaulay. It is becoming more generally accepted that government departments opt for this direction instead of having capital tied up in servers and mainframes. This, in turn, is creating big opportunities for local vendors, he says.

However, data sovereignty is still an issue for government departments, and commercial organisations as well.

The principal concern is in the US, where legislation allows the government to access any data held by a US-owned company, he says. Even if a US-owned company holds your data locally, you may find that it isn’t protected from acquisition by US authorities.

Another issue is ensuring that you are getting what you need from your service provider, and that you have at least the same flexibility you would expect if you had your own facilities.

In most cases, the service providers are doing a much better job than you could do internally, especially in terms of scalability, says Macaulay. From that point of view, the model is hugely beneficial, especially for organisations that have a variable workload.

Vendor lock-in is another potential pitfall to look out for. If you have all your IT running with one vendor and then, for whatever reason, need to move to another vendor – how does that happen, asks Macaulay.

“Right now, I don’t think it’s possible to guarantee that is going to be an easy process. In fact, it’s probably going to be just as complicated as going from your own services to a service provider. You need to build in mechanisms that will protect your organisation from [vendor lock-in].”

Gartner’s Jester adds that you need to understand your own capabilities well and have clear strategy for outsourcing.

Classic mistakes include outsourcing purely for cost reasons; choosing a provider that isn’t right for your business; not managing the provider adequately; not managing the relationship with the provider; or simply not specifying tasks sufficiently, he says. Strong management is required because you will become dependent on that provider.

“Outsourcing is not a question of abrogating your responsibility – far from it. You’ve still got the responsibility [for your IT], you are just getting someone else to run it for you.”

Often organisations fail to allocate enough budget to manage the provider.

“If they are going to spend $1 million on an external service, they probably need to spend around $30,000-50,000 of that on managing the deal,” says Jester.

New kinds of players

Gartner also sees broad uptake, from government and large enterprises down to SMBs. However, among the smallest companies, IT services might be less formalised. “The services might just be provided by a value-added reseller,” says Jester.

New kinds of players are entering the market, he continues. Increasingly, managed services are being provided by telcos and their resellers, he says. The hosting and datacentre companies are also getting into this business, to some extent, as well as internet companies, with Amazon as a classic example.

“This means that the whole traditional outsourcing and managed services market is really being shaken up by these new kinds of players,” he says.

Gartner also expects more consolidation amongst the traditional outsourcing providers, and other kinds of transactions, such as Gen-i’s sale of its applications services to Infosys, says Jester.

The looming cloud

Cloud services are beginning to impact the managed services area and will change the nature of this model, says Jester. In the past, a customer would ask a service provider to take over management of servers and desktops, whereas now, providers come to customers, offering to provide access to the equivalent of the service that you would have in-house. “It’s turning the industry upside-down.”

From the buyers’ point of view these changes create new opportunities, but also bring new risks. From the providers’ point of view, it means that anyone who has “serious scale and the ability to manage an asset-intensive business can get in there and do some good business”, says Jester.

Rasika Versleijen-Pradhan, senior services analyst at IDC New Zealand, says: “We don’t know what is going to happen with the cloud. The notion of the cloud is that customers don’t invest in IT, [and instead] basically tap into IT resources on a need-basis.”

IDC defines managed services as smaller and shorter contracts, often with clients still owning the assets, whereas outsourcing is defined as long-term contracts with the provider generally owning the assets. The outsourcing services market as a whole, including managed services, reached around $648 million in 2010, according to IDC numbers. It is growing at a rate of about 0.5 percent over the next five years, says Versleijen-Pradhan.

There is no doubt that managed services is a growing market, she says.

“We do expect that to continue for some time, but with the cloud, it’s hard to judge what the impact will be,” she adds.

In terms of outsourcing, New Zealand is a mature market compared to the rest of Asia-Pacific. Over the past 20 years or so, many companies locally didn’t have the resources in-house, while at the same time many vendors were developing their portfolios to include managed services, she says.

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Tags GartnerIDCpeter macaulauySpecial IDManaged ServicesRolf Jester

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