Author: Rory Duncan Research Vice President , Cloud Service Providers

The business of IT is changing. Service providers moving away from pure infrastructure services, digital transformation, and the advent of the cloud have all created a major shift in dynamics in the traditional supply chain.

The market is evolving, and many companies are offering cloud services now. So, where will the market go in the next two years, and what role will technology vendors play in the success of the opportunities this trend represents?

New Cloud Service Opportunities Drive Service Provider Innovation

Cutting-edge technology and visionary AI and IoT devices grab headlines – and may sound glamorous – but when it comes to cloud and cloud services, the supply chain and the service providers are truly at the cutting edge of the business of cloud. Therefore, it is not surprising that the role of the technology vendor in supporting this is more important than ever. The digital transformation of the service provider is closely linked with pivoting business models in response to new cloud service opportunity.

We are already aware that the digital transformation has been a fundamental top-down shift that is bringing tangible benefits in terms of revenue and client engagement. IDC surveys have found that with 80% of revenue coming from sources other than infrastructure; providers are quickly growing their application, managed and professional services businesses. However, this growth can only be sustainable if the right partnerships are in place.

Businesses that are offering cloud services are reporting that profit margins are quite healthy; leaders are optimistic that this trend will increase over the next year. So much so, that 73% of companies surveyed by IDC plan to change up their business plans within two years.

High customer renewal rates and healthy margins for managed, application and professional services are driving this optimism and willingness to take a second look at business plans and partnerships. The average cloud service provider is reporting 80% customer renewal rates right now and experiencing close to 90% loyalty. That translates to new revenue. Of the 2000 service providers IDC surveyed, there was an increase of $3.2B in incremental revenue in 2018 over 2017. Which means if optimism proves accurate, 2019 could see close to $4B for this group of companies.

As a technology vendor, how do you capitalize on this?

Security and Cloud Infrastructure Offer Service Provider Opportunities

We’ve seen that cloud service providers are optimistic about their growth prospects and are clear about where they will be making money in 2020. They will be looking to spend and invest in bringing these new services to market.  Supplying the technology, platforms and support is a key role for technology vendors – but not the only one.

In the last year, we kept a close eye on what the service providers we talk with are investing in. We see gains in infrastructure and IT purchases, emerging technology and new forms of services. Security and all forms of cloud infrastructure lead this higher than average investment, with customer experience management and mobility also figuring prominently. Emerging technologies feature but less prominently – AI and ML services are the exception, pointing to predicted demand over the next 18 months or so. For Robotics, AR and Wearables, the opportunity is less clear for service providers except for a relatively small number of specialists, which leads to lower than average investments planned.

As a technology vendor, these are the services you should be discussing with your service provider partners now. Because these are emerging markets, skills may be short, staffing may be difficult, and guidance will be needed. This is a prime opportunity for long-term solution-based partnerships. They are complex and require strategic considerations, but we see the benefits coming in the next few years.

Each part of a provider’s organization will be affected, from services, to sales/marketing, to business analytics, risk management and more. Helping partners achieve these objectives is where the vendor has an opportunity to strengthen relationships, provide technology and platform support, as well as executive leadership – including commercial guidance and an ecosystem within which to flourish.The role of the technology vendor will be more important than ever as digital transformation of the service provider is increasingly linked with pivoting business models in response to new cloud service opportunity.