The Emergence of the Hybrid Cloud Ecosystem (HCE)

Digital transformation initiatives have been driving massive changes in the infrastructure supporting companies’ software and hardware operations. Over the last 20 years, there has been a massive migration from traditional “on-prem” systems to combinations of pure cloud deployment, managed service providers, and hybrid solutions.Each of the players in this story has its own unique objectives that are currently playing out in the competitive landscape. The “hyperscale” cloud providers like Google, AWS, and Microsoft would like nothing more than to have exclusivity over their customer’s data location. Managed Service Providers (MSPs) want to keep computers in a cage in their installations, and enterprises still have a desire to leverage their on-site data centers and not rip them out. They all want to be part of the digital transformation economy.In addition to the intense competitive pressures between these major players, the digital transformation economy is also driving more and more ecosystem players into space, providing unique niche capabilities to better serve customers. This, in turn, is driving the need for a more robust ecosystem partner model in the space. An ecosystem is a network of partners who work together to define, build, and execute market-creating solutions. According to an Accenture Study Cornerstone for Future Growth: Ecosystems. “Companies that are embracing digital transformation and an ecosystem-based business model are growing 50% faster than those who have not.”With everyone looking to the cloud, it's relevant to point out that the digital transformation economy still needs hardware. Software is the enabler for enterprises to go digital, yet it needs to run somewhere. Enterprises are trying to figure out where their data and applications will reside, and there are many options to consider. The hybrid cloud is the current thinking and forecast, and as we shall see, the multi-cloud structure is quickly becoming part of this idea. In the Harvard Business Review “Six Rules for Effective Forecasting,” one of the rules is to look back twice as far as you look forward and peer far enough into the past to identify patterns. Let’s look back 30 years in the exponentially changing technology industry and three hardware business models to discover patterns and forecast a view of the next 15 years that is driving the evolution to a hybrid cloud ecosystem.

Three hardware business models:

1. On-Prem Computing (IHV) - “Home Base”
2. On-premise hardware, rather than at a remote facility such as a server farm or cloud. Enterprises buy their hardware/software and build/manage their own data centers.
3. Managed Service Providers (MSP) - “Rental Space”
4. A managed service provider (MSP) is a company that remotely manages a customer's IT infrastructure and/or end-user systems, typically on a proactive basis and under a subscription model.
5. Cloud Service Providers (CSP) - “Virtual Space”
6. A cloud service provider is a third-party company offering a cloud-based platform, infrastructure, application, or storage services., Companies typically have to pay only for the number of cloud services they use, as business demands require.

Each of these hardware models is an independent business model and these businesses compete with each other. The ecosystem market is driving the need for collaboration to reduce time to market. Enterprise customers are now trying to figure out where to continue investing and determine where their hardware assets will reside. They currently have their data spread around the globe from headquarters locations, sales offices, managed service providers, and hyperscalers. This begs the question: “Where in the world is the data?”

1.On-Prem Computing - “Home Base”

Figure: An early 90’s data center (image source)

Enterprises have large data centers established on-prem with security and staff in place. However, the data centers expand, become obsolete, and need regular tech refresh. The Cloud provides an alternative to on-prem data centers, and enterprises face new choices as well as challenges for managing their businesses as they move to an ecosystem model.In the late 80’s and early 90’s, enterprises built their home bases with their assets. At that time, the large computer companies (IBM, DEC, HP, and SUN) were growing by 40%. Customers were buying a computer, disc storage, tape devices, printers, and high-speed modems to build on-premise systems. These environments required full-time operations staff and application development teams. As businesses grew over the next ten years and network connectivity became more ubiquitous, the ability to build interconnected data centers became more prevalent. The cost for maintaining large distributed data centers became more expensive, and complete IT refresh cycles were, on average, three years. Systems had to be regularly upgraded, swapped out, and updated. As you can imagine, this is a very costly model for companies to maintain. It required companies to hire large, full-time teams to manage sophisticated hardware, networking, operating systems, and software that were not their core competencies.The advent of cloud computing has completely changed the economics of these on-premise technology models. Hyperscale providers take responsibility for all of the complexities of managing servers, disc capacity, networking, operating systems, speeds and feeds, upgrades, and optimizations. With cloud, customers are essentially buying a service level agreement, and the complexity, staffing, expertise, and problems are all “behind the curtain.”At the same time, many enterprises have continued to have significant investments in on-premise data centers for a variety of reasons. Enterprises are concerned about the security risks of cloud computing, some still have under-appreciated assets on the books, so the economics aren’t yet attractive. And some have just been slow to make the transition.

2.Managed Service Providers (MSPs) - “Rental Space”

Figure: An offsite IT facility (image source)

Recently, enterprises have also rented systems in locations from MSPs for back-up and recovery, off-site archival, and non-critical applications. MSP’s put computers in company-specific cages for security with restricted access and separation from other enterprises using the same location. Enterprise customers also outsourced business functions to managed service providers to control costs.In the late 1990s, enterprise companies built out their home base large proprietary data centers that were composed of different information technology vendors. Companies built dedicated systems to run their business applications, and the technology environment sprawled. The cost of operating, maintaining, upgrading, refreshing, and deploying apps was becoming a business issue. Then businesses began “outsourcing” business functions to companies that would provide these services and guarantee service level agreements. Specialized technology outsourcers called “hosters” would take “your mess for less” and deliver services back to the customer as a service price. Customers would have their computers in a cage at these firms. They did not have to bear the capital cost and had secure access to the systems. Customers bought off-site storage space to extend their home base and stored specific assets there to use when needed.This pattern has ultimately morphed into XaaS (Everything as a service) business model. That took the pain of managing the data centers and applications off the plate of the enterprise customers so they could focus on business outcomes and not just “keeping up with the latest technologies.”

3.Cloud Service Providers (CSP) - “Virtual Space”

Figure: Cloud service provider on-demand facility (image source)

Information used to be locked up in data centers and MSP locations. Today, more and more data is ubiquitously available and accessible via the internet - “the virtual space.” As customers have moved more of their capabilities onto a specific cloud service provider, each provider wants to “lock-in” their customers without alternatives to go to other cloud providers. Once the cloud service provider has customer data, they prefer exclusivity, taking away the choice from a customer. In the early 2000s, the Cloud Service Provider model emerged. Started by Google in 1998, the information access paradigm shifted. Then DropBox (2005), AWS (2006), Box (2007), and Google Cloud Platform (2008) built offerings based on the premise that data centers do not have to be owned but accessed with internet connectivity. Dropbox and Box provided secondary and personalized storage at a very low cost. AWS followed suit with infrastructure platforms delivered as a service at a low cost. Enterprise customers were slow at first to adopt because of security and performance concerns. When Microsoft entered the Cloud Service Provider market with Azure in 2010, it strengthened the confidence that enterprise applications can run in the public cloud. The first suite of Microsoft applications on Azure was Microsoft Exchange 365. The email had become a critical application for enterprises in the digital transformation age and the care and maintenance of Microsoft Exchange services was at a very high IT cost. Microsoft began offering the Microsoft Office Suite as a Service on Azure. With this offering, the end-user experience was better and the cost was less for enterprises. But no large enterprise customers had moved their mission-critical ERP to the public cloud until 2011 when SAP released on AWS. It was the first implementation of SAP ERP on a public cloud platform. Five years later, SAP on Azure in 2016 became the first example of a multi-partner ecosystem on the public cloud platform. It was a multi-partner offer sold by Microsoft but built and delivered by SAP, Cisco, NetApp, VMWare, Accenture, and Equinix. This set the stage for the cloud enterprise application model leveraging multiple ecosystem partners to deliver an overall “whole solution” to end customers.As cloud service providers continued to grow, technology advances made it easier to scale-up and scale-out their data center architectures. However, enterprise customers had to adopt one cloud service provider and stay with them. Customers want flexibility, so they don’t like being “locked-in” to only one provider. This has given rise to a new phenomenon in the market where customers and providers are building capabilities to allow customers to deploy “multi-cloud” solutions that work across the three main public cloud providers (AWS, Azure, and Google.)

Forecast: The Shift to Hybrid Cloud Ecosystem

In the book The Wealth of Networks, Yochai Benkler talks about the advent of the Network Economy. “The rise of effective, large-scale cooperative efforts-peer production of information, knowledge, and culture is driving the network economy not just for technology but for every other industry and culture.” Looking at the past, we discover three patterns that set the stage for upcoming changes in the technology industry.

Three Patterns Emerged:

1. Data processing, access, and storage continue to evolve from single locations to multi-locations at a price/performance curve that creates innovation.
2. New business ventures focusing on customer needs like secure data access anytime and anywhere are the fastest growing industry segment.
3. Connectivity and access to information has created the opportunity for tangential business ventures that disrupt the status quo.

The three patterns pave the path for three new trends in the technology industry.

Three Upcoming Trends:

1. Shift from “The Network is the Computer” to “The Network is the Ecosystem”: In 1984, John Gage of Sun Microsystems coined the phrase “The Network is the Computer.” The ubiquitous connectivity of the Internet and the exponential development in technology has enabled digitally connected ecosystems to become a reality.
2. From Data Focused to Customer Focused: Focus is not where data is but is how customers can access and use the data to drive the digital transformation economy.
3. Zero Sum Game to Abundance: By connecting and collaborating, we create more opportunities and growth rather than competing for market share with differentiated value propositions.

On-Prem providers are moving from “Data Centers” to “Data Stacks”. MSPs are shifting from “your mess for less” to “Software as a Service”. Cloud Service Providers are shifting from Proprietary Data Centers to “Market Places and Multi-Cloud Connectivity.”

Figure: IHVs, MSPs, and CSPs come together to form a Hybrid Cloud Ecosystem

In a recent 2018 Harvard Business Review Article, “In the Ecosystem Economy: What is your Strategy?”Michael G. Jacobides writes “Ecosystem Businesses Are Changing the Rules of Strategy” and “Competing is increasingly about identifying new ways to connect and collaborate rather than simply offering alternative value propositions.”The ecosystem business model strategy is the foundation of the hybrid cloud ecosystem. This is a business model that requires companies to come together to collaborate and deliver joint multi-partner solutions. Individual companies cannot deliver this alone.A great example of this strategy is HPE’s recent launch of their Greenlake offering which is a program that integrates on-prem offers as a service, channel partners for mid-market expansion (CDW), connection into MSPs (Equinix), and extension into Google Cloud which connects multi-partners for joint sales and solutions to create a hybrid cloud ecosystem.Another terrific example is how Equinix has formed partnerships with IHVs (HPE, IBM, etc.) and connections to leading cloud providers (AWS, Azure, and GCP) plus key ISVs (SAP, Microsoft, and Oracle) and channel partners to align and execute a multi-partner ecosystem to create a hybrid ecosystem cloud.What you might notice about these two examples is that they are both coming from different places to get to their own version of hybrid cloud offering. HPE is a tradition hardware provider; Equinix is an MSP. Both companies are transforming their business models and leading the market in the design and adoption of a hybrid cloud ecosystem.My forecast - we expect to see more of these kinds of matchups where IHVs, MSPs, and CSPs come together to form a Hybrid Cloud Ecosystem, giving rise to the network ecosystem economy as the lines between these hardware business models dissolve. All these shifts are being driven by customer needs in the digital transformation economy. Forward-looking enterprises are adjusting and embracing the advent of the Hybrid Cloud Ecosystem to stay competitive.Further Reading: Three C’s Driving Shift to EcosystemsModern Partnering Enterprise ArchitectureEcosystem Cloud - The Next Frontier