4 reasons why Cloud spending will explode in 2015

The Gartner Worldwide IT Spending Forecast report predicts fiercer competition in 2015 between traditional on-premise software vendors, pushing expenditure up to $3.8 trillion (£2.49 trillion).

It says that spending in the enterprise technology market will reach $335 billion (£219.93 billion) this year, increasing by 5.5 per cent over 2014’s figures. Traditional vendors are now having to increasingly compete with cloud-based software-as-a-service (SaaS) offerings, lower prices and vendor software consolidation.

These trends have pushed traditional on-premise software vendors to increasingly offer more discounted cloud services to counter the onslaught by the incumbent SaaS players.

Bimodal IT

Amidst this competitive environment, organisations are looking more strategically at their IT expenditure. They are no longer just seeing IT – including the cloud – as means of creating cost-efficiency gains.

Gartner’s research director for cloud computing, Gregor Petri, says that there is also a move towards bimodal IT, which is driving spending: “In Mode 1 companies are trying to renovate the core of their IT, and in Mode 2 they are exploring new things.”

He believes that the first mode is about efficiencies and the second about improving the customer experience, culminating in growth for their own organisations. In the second mode organisations want to go after new customers, new products, new solutions and new opportunities. “Companies are investing in IT again – that’s true, but many vendors are still in the mode of increasing efficiencies in existing processes using Mode 1 of cloud computing, and yet we now see most firms concentrating on Mode 2”, he explains.

These two modes are challenging from an internal perspective because organisations often have to align themselves with both of them.

To find new opportunities in Mode 2 they need to be bold rather than afraid. This is because they will either need to change their approach, their goals or outcomes half-way through a project. Mode 1 is very different because organisations will often know from the outset what they want to achieve, and it’s all about doing that efficiently.

Spending ratios

In terms of the ratio of clouding spending versus traditional IT expenditure, Karl Deacon – Chief Operating Officer at Canopy - says that the Atos cloud, “has shown that the percentage of contracts requiring or including digital or cloud solutions in outsourcing deals more than doubled in 2014 compared to 2013.”

The Atos cloud is a joint venture backed by Atos, VMware and EMC. Atos claims on its website that it doesn’t: “sell widgets, and we don’t theorise about the future…as business technologists with a pure client focus, we are orchestrators who can put your entire cloud puzzle together.”

In Deacon’s view, this signals a more aggressive growth in demand for cloud solutions and services in comparison to previous years. “Clients are already spending about 20 per cent of their IT budget on cloud technologies or services, and this spending sometimes falls outside of their organisations’ central IT budget,” he explains.

Deacon expects this trend to continue, rising by about 10 per cent of the overall IT budget per annum. This is due to factors such as the rising prevalence of shadow IT and digital transformation across departments.

Hybrid cloud matures

One other important trend forecast this year is the rise of the hybrid cloud, which is expected to reach maturity in 2015 and so it is being seen as the way forward. Cap Gemini is seeing this happen, and spending on it is already increasing.

Paul Hammond, the company’s senior vice-president and chief technology officer, says: “The underlying architecture required offers an option to use Amazon Web Services (AWS), Azure, etc…and when you get into some of the production systems, the security and data sovereignty elements you can see that it either drives the private cloud or it sits within an organisation’s datacentre.”

He adds that this doesn’t mean that an organisation wouldn’t want to use the public cloud because even if it does sit within traditional IT architecture, the cloud may at some point still be used. This may not only involve a public cloud, but much depends on factors such as data criteria and security, which are two elements that are driving the hybrid option within the same architecture.

Buying a complete service

Regarding the threat that SaaS software poses to traditional software vendors, Petri says customers don’t just buy the application functionality from a cloud provider. They are in fact buying a complete service: the underlying middleware, operating systems, hardware and many other things that would traditionally be bought from other kinds of IT vendors.

“In most cases, if you buy SaaS from a SaaS vendor, you don’t have any choice about the underlying layers, so to some extent it offers less choice and it increases your dependency on the provider”, he explains.

Third parties may also not be able to sell any additional software, hardware other tools for the underlying layers – a market which he says has traditionally been bigger than the market for the application itself.

Lock-ins can limit customers’ choice about how and where they spend their budgets to just one vendor – making it harder for traditional vendors to compete while in effect restricting customers’ choice about what systems they’d ideally like to purchase beyond what a SaaS vendor offers.

Cloud alternatives

Due to the large number of cloud providers locking in customers, many on-premise third party software providers are being forced to offer a SaaS alternative to their on-premise and traditional licence-based solutions.

To what extent is this happening? “The impression I have, after operating in this field for the past 10 years, is that - apart from the niche software providers who offer highly specialised applications - most vendors are moving and many are already there in one form or another”, claims Deacon.

He nevertheless feels that it’s hard to offer an exact percentage of how many vendors are making the transition towards offering SaaS products and services, and particularly as even Oracle and SAP tend to still operate using traditional software licensing models. Yet vendors like them are also heavily invested in cloud software businesses – even if they haven’t moved towards adopting a cloud user licensing model as the bulk part of their business.

Predicting 2015

Hammond predicts that there will be a natural uptake because of the benefits of SaaS.

Hybrid cloud environments will pose some challenges that revolve around end-to-end operations. There is a need to tie them up with traditional models. Organisations will otherwise have no idea about reporting, SLAs and problem resolution.

“Some vendors will improve their ability to monitor, provide tools and report – at the end of the day it’s about integrating the stack rather than just selling you a piece of software that does the analytics or something else”, he concludes.

So there will be some challenges, but spending will increase and competition will too because, as Hammond puts it, demand is only getting harder and faster, and so the use of SaaS, public, private and hybrid clouds will increase to fulfil this requirement.

Bimodal IT will be the key driver of cloud spending over the course of the year because organisations are looking more strategically at how they spend their budgets. They now want to focus on delivering a better customer experience; to reduce the time to market of a product, application or service.

Ultimately what drives their spending is a need to increase their profitability rather than just focus on cost-efficiencies.

An improved perception of cloud security will also drive spending; and this why customers will increasingly spend more on SaaS – and in particular on hybrid cloud.