Managed Services Will Drive Data Market

Transcription

1 Strategic Planning, C. Carr, E. Goodness Research Note 12 November 2003 Managed Services Will Drive Data Market Managed solutions will drive the data services market growth and product strategies in 2004 because of businesses' needs to reduce fixed support expenses as network complexity increases. Core Topic Telecom: Public Network Services Key Issues How important are value-added services and managed data services in the public network service market? How will the Internet and IP-based services impact the public network service market? Strategic Planning Assumptions The U.S. managed public network data services market, approaching 60 percent of the world's managed data services market, will grow by almost 18 percent in 2004 as it is fueled by IP VPN (0.7 probability). U.S. managed premise network infrastructure (LAN) revenue is expected to grow from just over $710 million in 2003 to just over $923 million in 2004 (0.8 probability). In 2004, systems integrators and niche managed service providers will erode the current market share leadership of carriers in managed LAN services (0.9 probability). Improved network efficiency, expected to result in a lower network cost basis, will be the leading driver for the majority of businesses implementing managed services in 2004, but will not be fully realized because of an unproven record of cost reduction and complex pricing structures (0.8 probability). In 2004, at least 25 percent of large organizations deploying IP telephony and IP contact center infrastructure will contract for managed LAN services (0.8 probability). Unclear bundling and service-level agreements will be the leading inhibitor to the adoption of managed LAN services in 2004 (0.9 probability). Enterprises have never been more dependent on communications for the success of their businesses, but their survival ultimately depends on management's focus on their core business. They must reduce fixed support expenses with minimal risk to the enterprise's core business by improving network efficiency. Carriers are looking at managed services as a new, higher-margin revenue stream that can mitigate commoditization in their legacy data services and stabilize their revenue while reducing churn. Systems integrators (SIs) and outsourcers are looking to incorporate managed services into their product mix in an effort to expand contract scope and market reach, and improve revenue. Carriers have an early advantage by controlling the access/transport infrastructure, and generally strong customer relationships and support organizations. However, they lack the depth of LAN/customer premise equipment (CPE) management and integration capabilities of the SIs and outsourcers, and thus the ability to expand their contract scope beyond the transport component. Prediction: Managed data services will drive growth in the U.S. data market. Managed public network data services include managed Internet Protocol (IP) virtual private network (VPN) and WAN/metropolitan-area network (MAN)/network. Growth in the managed public network data services market for 2004 will help steady a sagging data services market. Recent Gartner surveys indicate that all categories of managed data services are growing. This growth is aided, in part, by an improving business environment/economy. The largest managed service revenue impact will still be generated by traditional managed WAN services (approximately $12 billion in 2004), such as managed frame relay or asynchronous transfer mode, which offer the least disruptive/risk free and simplest transition path. This factor is Gartner Reproduction of this publication in any form without prior written permission is forbidden. The information contained herein has been obtained from sources believed to be reliable. Gartner disclaims all warranties as to the accuracy, completeness or adequacy of such information. Gartner shall have no liability for errors, omissions or inadequacies in the information contained herein or for interpretations thereof. The reader assumes sole responsibility for the selection of these materials to achieve its intended results. The opinions expressed herein are subject to change without notice.

2 particularly important for smaller companies that are dependent on a single network and provider, or those with a high comfort level with the underlying technology, performance and pricing structure. The service contributing most to this robust annual growth rate is managed IP VPN, of which CPE-based IP VPN services will comprise about 80 percent of total IP VPN revenue in Network-based IP VPN multiprotocol label switching (MPLS) is also showing rapid growth and expected to improve its share of total IP VPN revenue to more than 50 percent by Fully meshed MPLS services will be the preferred new networking and replacement service choice displacing legacy packet and private line services. Most of IP VPN service will be sold as a bundled group network and CPE service in the midsize and large enterprise market, which have larger networks and complex network requirements. The U.S. managed public network data services market, approaching 60 percent of the world's managed data services market, will grow by almost 18 percent in 2004 as it is fueled by IP VPN (0.7 probability). Although traditional managed WAN services cannot be ignored as the least risk managed alternative, IP VPN services will generate the most attention from businesses and will remain the fastest-growing data service with the least entrenched provider competition. Network-based IP VPN, which offers greater flexibility/scalability and network simplicity, will be targeted at businesses most interested in grooming and future proofing their network, which ultimately leads to reduced operating costs. Long-term success will go to providers that are able to bring a full-range of managed solutions online, particularly network/mpls-based IP VPN, early to establish market share. Prediction: Large systems integrators and outsourcers will lead managed LAN market into the near future. Systems integrators and IT outsourcers will continue to aggressively take managed LAN service market share from carriers and dominate this managed solution segment. The carriers' current dominance in total managed services revenue is misleading when compared with their penetration of managed LAN services actual share consists of large enterprise accounts and entrenchment in smaller small and midsize business deals where they must extend the same service portfolios downstream. A recent Gartner survey indicates that the managed LAN market in North America is split evenly so that November

3 percent belongs to the carriers and 50 percent belongs to the SIs/outsourcers/managed service providers (MSPs). The carrier's inability to maintain its current managed LAN service market share is the result of the following inherent weaknesses (and the SIs/outsourcers strengths): Inadequate solutions and positioning to bridge business requirements and IT management Lack of visibility in large enterprises beyond purchasing agents and midlevel IT managers Inability to sell IT services in the enterprise market Lack of investment in network and systems management platforms that are competitive with the offerings of SIs, IT outsourcers and niche MSPs U.S. managed premise network infrastructure (LAN) revenue is expected to grow from just over $710 million in 2003 to just over $923 million in 2004 (0.8 probability). In 2004, systems integrators and niche managed service providers will erode the current market share leadership of carriers in managed LAN services (0.9 probability). Carriers must stabilize their current managed LAN installed base, as well as grow it. Success in each endeavor will require a mixed strategy of build, buy and borrow. Carriers must build operations support systems (OSSs) and network and systems management (NSM) platforms that present market-driven capabilities. Carriers must consider targeted acquisitions (buy) that offer a contract base and innovative intellectual property from the MSP or independent software vendor's products. Lastly, carriers must engage in partnerships that aggregate platform and service capabilities (borrow) and connect with new vertical markets and segments to bolster the managed LAN's long and difficult sales cycle. Prediction: Improved network operation efficiency will be a key driver supporting managed data service growth. Businesses' bottom-line need to reduce fixed support expenses will have the greatest impact on demand for managed solutions in 2004 by overriding application integration, which is on a slower development path. As networks become increasingly too complex to handle diverse types of traffic/applications, network grooming (cleaning up), flattening and simplifying the established aggregation of communications infrastructure becomes crucial to reduce operation costs and is a clear advantage for managed 12 November

4 network-based IP VPN solutions. However, businesses' expectations of predictable service pricing and network cost levels are key to managed services uptake. Uncertainty about their ability to predict and then achieve these projected network cost savings, in addition to real-world experience with complex/confusing pricing structures, has limited early adoption of managed solutions, particularly IP VPN, below potential. Budget/plan and monitor pricing structures that are difficult to decipher also inhibit service penetration. A recent Gartner survey indicates that half of U.S. midsize businesses (100 to 999 employees) experienced essentially no net network cost change from implementing managed data services, and the average net direct cost savings was only a little more than 3 percent. Failure to achieve projected cost savings was the top reason cited for businesses to drop their managed services. Although widespread penetration in the midsize and large business market has been generally achieved, it has not generally been on an enterprisewide basis (shallow) such as proof-of-concept pilots to prove benefits on a larger scale and expose hidden costs. Improved network efficiency, expected to result in a lower network cost basis, will be the leading driver for the majority of businesses implementing managed services in 2004, but will not be fully realized because of an unproven record of cost reduction and complex pricing structures (0.8 probability). Efficiencies must lead to demonstrable network savings or clearly understood intangible benefits for providers to fully exploit this market. For IP VPN to succeed in the market, out-tasking must be based on a full customer understanding of cost basis and service pricing structure. Therefore, the challenge for providers is to establish a total cost basis, through a comprehensive assessment of businesses' network/lan assets and processes, to base developing a rigorous transition plan that maximizes desired cost benefits. Quantifying cost factors completely (tangible/direct and intangible/indirect) to reduce the possibility of "hidden" costs arising is at the core of this planning. Intangibles may be the deciding factors pushing managed data services when cost savings are marginal. Providers must offer simplified order and bill models that are easy to understand and are intuitive, such as utility models' pricing per location, port and desktop; pricing tied to predefined deliverables; and class of service/quality of service or pay per-use/per-diem basis. 12 November

5 Prediction: Complexity of next-generation networks will drive adoption of external IT management services. The promise of the convergence of premise data and voice networks has always been to improve functionality and streamline management. The complexity of next-generation networks, specifically IP telephony and IP contact centers, will drive adoption of external IT management services. However, deployments during the past few years (and there are very few large deployments) have shown that required system complexity requires many enterprises to take a look outside their organization for ongoing operational services and management capabilities. Niche MSPs, such as NUVO in Toronto, Canada, have shown strong growth in their managed LAN services by providing innovative and effective management solutions for IP telephony and IP contact center deployments. On the other side, lack of market standard offerings and fear of failure with relatively immature IT services are restricting growth of managed LAN IT services. Between 1999 and 2003, Gartner estimates that about 400 companies created new remote network monitoring and management services for IT management offerings in the United States alone. Although this trend was fueled primarily by pure-play MSPs through 2001, over the past 18 months the newest entrants to this market segment are carriers (telecommunications), value-added resellers, SIs and IT outsourcers. These market players are dusting off old, failed remote network monitoring and management services offerings at companies such as Unisys, NCR and IBM, integrating newer commercial off-the-shelf management software, and relaunching these services as a new value-added service. The problem is that packaging and pricing for these services are confusing end users so much that it is difficult for enterprises to adequately gauge relative value in a structured bid process. The managed services market is relatively immature; it consists of startup companies and SIs that do not yet have a profitable return on their network and systems management investments. MSPs are also testing new business models where IT management is a utility service. A relationship with an MSP that cannot perform, execute or scale, or is disruptive or damaging to the business, is a critical decision factor in the minds of IS managers when selecting managed LAN solutions. Providers of managed LAN services that can address and allay these reservations will certainly reduce the cycle time to market and negotiate managed services to the marketplace. In 2004, at least 25 percent of large organizations deploying IP telephony and IP contact center infrastructure will contract for managed LAN services (0.8 probability). 12 November

6 Unclear bundling and service-level agreements will be the leading inhibitor to the adoption of managed LAN services in 2004 (0.9 probability). A relationship with an MSP that cannot perform, execute or scale, and is disruptive or damaging to the business, is foremost on the minds of IS managers that are considering outsourcing their management responsibility. Enterprises should attempt to negotiate meaningful service-level penalties and rewards, or to renegotiate a "dysfunctional" MSP relationship to provide the same arrangement. Also, IS organizations that want to contract for managed services should mitigate risk by properly negotiating a "prenuptial" agreement prior to the formal start of the relationship. These "back-out" plans should define MSP responsibilities in providing the required planning information and operational support during a transition. The back-out plan addresses the key points of technical and process integration, MSP communication and coordination responsibilities, phased implementation of the alternative service, and ownership and disposition of system and application information collected by the MSP in all of its forms. Acronym Key CPE IP MAN MPLS MSP NSM OSS SI VPN customer premise equipment Internet Protocol metropolitan-area network multiprotocol label switching managed service provider network and systems management operations support system systems integrator virtual private network Bottom Line: Managed services in North America are the key data service trend going forward; they will extend well into LAN environments for the management and operation of premise data and voice infrastructure. Because managed services are a "utilitylike" service, they are better scaled to go down market in the small and midsize business sectors. Managed services offer the provider a clear path to margin and revenue growth and wider market reach, both vertically and horizontally. Managed services, including network/multiprotocol label switching (MPLS)- based Internet Protocol virtual private network, will be at the core of all major providers' product lines by the end of 2004, whether offered individually or through strategic partnerships. Specifically, providers must create solutions that are focused on the end-user business-specific requirements for different vertical markets, risk aversion strategies and security traffic integration requirements. 12 November