Few could have predicted how quickly the cloud market has evolved over the last six years. In a 2011 report, Bain & Company found that companies selling cloud-based products and services were struggling to define how they would make money. Today, the firm estimates that revenues for public and private cloud hardware, software and services amount to $180 billion, or 16% of the $1.1 trillion enterprise IT industry. The market, once driven by small start-ups and mid-size businesses, is now dominated by late adopters, who make up the fastest and largest growing segment of cloud consumers. This is according to the 2017 version of Bain's research, The Changing Faces of the Cloud.
According to Bain, cloud growth has been driven in large part by the changing profile of the cloud buyer, which has significant implications for technology vendors. An earlier Bain survey of 500 North American CIOs and other IT decision makers identifies five clusters of companies with common approaches to cloud computing. They include: 1) transformational; 2) heterogeneous; 3) safety conscious; 4) price-conscious; and 5) slow and steady. Even as their behaviors evolve, these clusters continue to be an accurate and useful way of understanding how customers are adopting the cloud.
"Early adopters that fueled the first waves of cloud adoption are being joined and overtaken by larger and more mainstream customers that, until recently, had taken a wait-and-see approach," said Mark Brinda, a partner in Bain's global Technology Practice. "As a result, executives need to understand the transformation that the cloud market is going through — and make the necessary changes to their offerings and go-to-market and operating models to successfully serve the customers coming off the sidelines."
Cloud ‘Laggards’ Are Getting In The Game
In the past five years, as cloud offerings have matured and the number of customer successes grows, slow-and-steady customers — those that Bain defines as interested in the benefits of cloud computing but very cautious about the risks — have gone from the smallest to the fastest-growing — and potentially largest — segment. In 2011, slow-and-steady customers had less than 1% of their applications, on average, in the cloud. In 2013, that number was at just 4%, but by 2015, this segment hit an inflection point and 16 percent of applications were in the cloud. That number is expected to reach 30 percent by 2018.
While this cluster demonstrates a significantly higher preference for private cloud solutions, they are not waiting for compelling offers from legacy providers to begin migrating. Instead, they are branching out beyond the major cloud providers, such as IBM and Microsoft, and moving to public cloud players and smaller, newer vendors.
"Late adopters have made a major jump in cloud use over the last 12 months. They're entering the cloud market in record numbers and, in a somewhat unexpected move, are using providers few anticipated," said Michael Heric, a Bain partner in the firm's global Technology Practice. "This has created a shake-up among technology providers."
Meanwhile, cloud adoption among Transformational customers, or early adopters, has nearly reached its peak with their share of applications in the cloud estimated to flatten out at around 75 percent in 2018. In 2010, they generated 47 percent of the demand for cloud services. Today, they represent only 26 percent of demand. However, they are increasingly responsible for driving innovation and spreading cloud use across their organizations.
Looking Beyond The Price War
Following conventional wisdom, cloud adoption should have been fueled by price. However, as Bain suggested in 2011, cost-savings have not meaningfully changed the attitudes of most customers toward the cloud. The firm's research shows only about 10 percent of companies buy based on cost. The remaining 90 percent want cloud investments to be cost-neutral but are motivated by non-cost factors, such as uptime, flexibility, scalability, ease-of-use, and security.
"Cloud providers realized that they can't compete on price alone," said Heric. "In response, they've added services that make their platforms more valuable and easier to use, and customers are willing to pay for these features. This shift in thinking has been the main reason for cloud's tremendous growth over these last few years."
The Next Wave Of Cloud Computing
The cloud industry continues to evolve, with several high-profile exits and business model redefinitions of technology providers. Over the coming years, new buyers will increasingly drive demand for cloud services and new competitive battlegrounds replace old market definitions. As their preferences continue to change, Bain identifies three areas of focus for technology providers:
Invest to win big in a focused set of cloud battlegrounds. Traditional cloud market definitions, such as IaaS, PaaS, SaaS or private cloud, are blurring and reconfiguring. New battlegrounds are emerging. Providers first need to define the cloud battlegrounds correctly and pick the critical few where they can win and invest differentially.
Target the customer segments that best fit with your assets and capabilities. Choosing which segments to go after, as well as which customers to target within those segments, will be essential for success.
Reassess your offers, go-to-market model, organization and people, processes, incentives and systems for the next wave of cloud computing. Incumbent technology providers should challenge themselves on whether the changes made to their operating models have been enough. Successful new entrants will increasingly be challenged, requiring them to adapt, even reinvent, their operating models.
Technology providers that recognize these trends early and adapt their offers and operating models most effectively will emerge as the winners.