Infrastructure as a service (IaaS) is the highest growth area in cloud services today. And while industry analysts predict that spending will grow significantly, sadly, it is not all good news.
While IaaS is the highest growth segment in the market it will not be the easiest market in which to compete or build any form of defensible position. The yin and the yang of the situation means that while demand rises, margins will erode as the competitive landscape becomes crowded and barriers to entry become even lower than they are today. The question that arises is:
How can service providers build defensible cloud services?
One area worth investigating is the slower growth market segment of business processes as a service (BPaaS). Here, critical business processes are supported in the cloud, often through the provision of customisable services. Prime candidates include areas such as customer management, finance and accounting, human resources, industry operations and supply management. We are even aware of specialist BPaaS to support project management in film production.
Since the business value of BPaaS to the end user is greater than the provision of more standardised infrastructure services, margins will remain higher. But this is not the critical point. Adrian Slywotzky in his book ‘The Profit Zone’ identified the merit of a range of defensible positions that vendors can take. One of the weakest positions is to compete and try to defend on lowest price market offers. Not only is this extremely hard to defend, but the reward of winning is often insubstantial and fleeting.
At the other end of the spectrum is the extremely defensible position of owning the standard. This in effect creates a barrier to all other vendors since they must comply with your standard and probably pay you for the privilege of doing so or else be irrelevant in the market. This is much harder to achieve since most of us are now ‘gun shy’ of any attempt for a single vendor to have market domination.
Very close in effectiveness to owning the standard is to own the processes by which your customers operate their businesses. If your services and processes are embedded in your customers’ business process, it can create a significant barrier to churn and often the pain and cost of substitution of competitor services becomes too painful to consider. Can service providers build highly defensible, high margin services through BPaaS? Of course they can.
In the first instance, this will require service providers to develop more solution or consultative selling behaviours. Service providers will need to invest time to identify the few target markets where they intend to specialise and to develop a deep understanding of the business processes that are essential to these target markets. One fruitful way of doing this is to explore the ‘jobs to be done’ theory of innovation (this may be a blog for another day).
Once the critical business processes have been identified the service provider then needs to understand how these can be supported, hopefully with additional client benefits, through cloud services. Here the service provider does not need to work alone, but can also consider engaging an ecosystem of specialist vendors to develop a more complete solution.
Is any of this easy? Not from what we have seen. Does it produce differentiation, higher margin and more defensible revenue streams than IaaS services? Absolutely!
Service providers need to think beyond IaaS for future growth. This will require significant change in the way the service provider engages in the market and the customer base. A more strategic and consultative approach will be required. Otherwise the service provider may find its future being determined by new entrants, operating at scale, with a background in book sales.
It is not easy, but it is essential to think beyond IaaS to secure a profitable future.