Last week, Saugatuck held a very interesting briefing with Keao Caindec, CMO of Dimension Data Cloud Solutions, on Dimension Data’s overall business and Cloud strategy and realities. In addition to focusing on some of their key short and mid-term initiatives and getting a solid update on the state of the business, our conversation extended into a terrific discussion around application modernization and likely workload migration scenarios for larger enterprises in the coming years, as the Boundary-free Enterprise™ fully takes form.

Caindec reiterated Dimension Data’s publically stated commitment to grow its top line from approximately $6 Billion (US) in 2013 to approximately $12 Billion (US) by YE2018. While acquisitions will play an important role going forward, we got the sense that the company believes it is well positioned to drive significant organic growth.

Meanwhile, the company’s Cloud Solutions division is clearly focused on continuing to expand its large-enterprise user business, but it is also going back to its base and focusing on its significant heritage hosting pure-play SaaS providers, and ISVs transitioning to the Cloud. Most of the core OpSource team is still on board, with some targeted sales and marketing initiatives that should help them gain significant traction in these segments in 2014-2015.

From this briefing, we gained a clear sense of a company on the move that is being transformed by their investments in Cloud, and the launch of a series of large-enterprise workload migration and management services that leverage that foundation. They have already had some good success helping clients migrate and manage Microsoft Exchange workloads, with soon-to-be-announced plans to introduce similar services offerings for other enterprise workloads.

This shift in enterprise workloads is helping Dimension Data – and competitive providers – win larger, and longer-term, transformation-focused projects with enterprise clients. But more importantly, it is also helping to substantially reshape the services revenue mix for these providers.

In Dimension Data’s case, the firm has historically been positioned as a leading professional services firm linked to Cisco products and services (e.g., network integration, converged communications, data center). These new market initiatives are helping to broaden the range and focus of its professional, consulting, managed and support services. In fact, despite the anticipated introduction of continued new Cisco-related services in the coming years, we would not be surprised to see the Cisco-related component of Dimension Data’s service delivery decline from roughly two-thirds of revenue in 2013, to somewhere in the 30-40 percent range by YE2018.

Saugatuck sees this as part of broader IT marketplace trends, specifically issues related to large enterprise migration of traditional application workloads. More than five years ago, we were very optimistic that enterprises would begin to move traditional workloads to the Cloud in a significant way, as early as 2012. However, as we recently forecasted (see Lens360 blog post), Saugatuck estimates that less than 5 percent of traditional enterprise workloads have actually been migrated to the Cloud thus far. However, we believe that this is about to change – and change significantly.

Why is it Happening?

This change is being driven by four key trends:

1) Application Modernization. The shift to mobile-first development and deployment strategies, combined with adoption of real-time analytics will demand significant renovation / modernization of back-end systems adoption (see 1299STR, Cloud Adoption: The “Mobility Multiplier“, 18Dec2013).

A recent briefing with Dell Services supported these trends. As Brandon Edenfield, Executive Director of Services IT at Dell Services recently shared, “we believe that approximately 60 percent of enterprise applications in operation today are currently or will be modernized [over the planning horizon]. The majority of these projects will involve migrating and modernizing applications and databases to a new platform such as cloud.”

2) Accelerating Legacy Packaged Application Retirements. With many core systems of record replaced in the late 1990s, driven by the Y2K hysteria, a growing number of these 15-20 year old on-premises solutions are approaching the end of their useful life – especially those that have not stayed current from a release / version management perspective. Saugatuck anticipates accelerating retirements of major core systems of record – whether focused around financial accounting, HR, ERP or similar apps – across the planning horizon, as customers realize that Cloud-based alternatives are often cheaper, and potentially provide significantly greater value. Interestingly, the entry point for many SaaS alternatives into large corporate shops often occurs at the divisional level, as part of the deployment of 2-tier application architectures.

3) Data Interdependencies. Issues related to the cost and latency of data transmission will motivate significant migration of interdependent workloads. Saugatuck believes that over the next two years many users will reach a critical mass that encourages them to consolidate and co-reside highly interdependent workloads on common Cloud platforms.

4) Total Cost of Ownership Considerations. The shift to Cloud is not just about processing and infrastructure cost savings. It is also about efficiencies and service levels for managing the workloads. Most of the time, Cloud providers can deliver, through economies of scale and skills, less expensive management capabilities (and higher service levels) than enterprise IT organizations. And these savings can be substantial – ranging from five-to-twenty percent – when looking at it from a fully burdened TCO perspective.

Click here to read the market impact.

This blog was originally published at Saugatuck's Lens360 blog on January 22, 2014. Published with permission.

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