Are cloud-based managed services set to take off in 2016?

Dana Brants, Swift, predicts the managed services “megatrend”

Over the last few years, technology infrastructures have become increasingly complex and expensive to manage. At the same time, IT budgets have been cut, leading to companies finding it hard to provide and maintain IT infrastructures. Dana Brants, head of services at Swift, looks at what companies can do under the circumstances.

Due to costs, training and hiring new talent are no longer seen as an option to meet the ever-increasing demands. Companies are now looking to third parties to manage their IT infrastructures, and managed services providers (MSPs) are meeting this demand.

Managed services, or managed operations, is the practice of day-to-day technology being managed by third parties on behalf of the customer, typically under a subscription model. This enables companies to eliminate the onerous tasks that provide little business value and free-up IT operations to play a more integrated role in core business activities. The client will often remain fully accountable for the overall management and control of the infrastructure.

Within managed services there are five main areas of activity:

1. Monitoring notification: MSPs will assist a customer to operate its own technology. They do this by keeping a proactive eye on the performance of the applications in the infrastructure and notifying the customer when the technology is not performing optimally.
2. Operations: MSPs manage technology operations on behalf of the customer.
3. Optimisation: MSPs will monitor networks on a real-time basis and optimise IT performance when they identify any problems.
4. Transformation: MSPs can also transform environments in order to enable their clients to move to the next generation of technology. The provider will then manage it for the client. This is a high growth area.
5. Managed everything as a service (XaaS): XaaS refers to services that are delivered over the internet, rather than provided locally or onsite. In a Managed XaaS, the MSP takes responsibility for operations, system changes, etc.

Statistics from the Technology Services Industry Association (TSIA) show a shift towards a different model of IT operations. One of their studies, the TSIA Service 50, compared the performance of the top 50 technology companies. The results showed that since 2011, technology companies lost more than $118bn in product revenue, while seeing a substantial growth in service revenues. By the end of 2014, all services revenues (which grew by 2% that year) were greater than product revenues. Of those, managed services revenues grew by 39% on average.

There are a number of drivers that have led to the rapid growth in managed services, namely:

1. The continuing rise in the technical complexity of technology solutions
2. The network dependency of applications and infrastructures
3. The mobile workforce environment

For many organisations, operating expenses are “out of control” and gaining funding for IT requirements, such as training and new talent, is extremely difficult, according to George Humphrey, senior director of managed services research at TSIA. Humphrey also believes that managed services are “the way of the future” for many organisations, as they will no longer be able to carry the risk of operational complexity on their own shoulders.

Swift regularly carries out detailed cost-benefit analyses of managed services for financial institutions, comparing the total cost of ownership (TCO) for financial institutions managing the full Swift environment themselves or through a managed service. Institutions using a managed service saw the biggest gains, as they were saving on release upgrades, housekeeping, monitoring, and troubleshooting. In comparison, institutions that were not using a managed service, had to cover all of these costs in addition to message management, hardware, operating system and network costs.

The analysis shows that institutions that have taken on a MSP have greatly reduced the burden on IT departments. This has freed them up to focus on their core business, and on areas that may generate competitive advantage while benefitting from predictable costs, an optimised infrastructure and enhanced operations.

In a separate study, 451 Research estimated the managed cloud market will grow from $17bn in 2014 to $43bn by 2018, and managed cloud services will account for 36.3% of the total cloud market revenues in 2018. The company also found that managed services revenue was growing 60% faster than infrastructure-only revenue. This begs the question: will 2016 be the coming-of-age for cloud-based managed services?

Cloud-based services such as XaaS are seen as the enabler for the “megatrend” of the future, i.e. managed XaaS. They will allow MSPs to deliver managed services through their cloud-based platform (i.e. infrastructure located in the cloud) rather than managing (either locally or remotely) infrastructure which is physically located within customer premises.

Examples of XaaS include Software-as-a-Service (SaaS), Infrastructure-as-a-Service (IaaS) and Platform-as-a-Service (PaaS).

The key difference between traditional XaaS and managed XaaS is that in the latter model the operational responsibility is vested in the MSP rather than the customer. Of course, such a transfer of responsibility is a big step for any financial institution to take.

Within the financial services industry, there was an initial reluctance from firms to hand over responsibility of any activity to a third party. Initial outsourcing offerings tended to focus on outsourcing the entire IT operations, which alarmed many within the industry.

The reluctance stemmed from the fact that technology performs tasks that are critical to performance; system outages or data breaches can result in serious damage to a firm’s reputation. Financial institutions also have to take into account questions over security and regulatory compliance when deciding whether to hire a MSP to look after their IT infrastructures or continue managing everything themselves.

In order to instil confidence in managed services, MSPs became more intimately engaged with clients to gain a better understanding of the individual business lines that are served by technology infrastructure. The move towards standardisation of service level agreements and documentation has also helped to give confidence to financial firms when deciding to opt for a MSP.

As discussed above, cloud-based managed services will be the “megatrend” of the future. Service automation and machine-to-machine intelligence platforms will also emerge, which will enable event correlation and remediation to be automated, thus removing as much of the error-prone manual operations as possible.

Such advances show why managed services have been described as a “locomotive that has left the station and cannot be turned around”. Their popularity will be driven further by the desire of financial institutions to refocus on their core business activities, and to move to a model of predictable costs and scalable resources. In doing so, they will be able to reap the benefits of the increasingly complex IT environment, without shouldering the burden of that complexity in their operations teams.