It's been often remarked that the Chinese symbol for "crisis" is comprised of two other characters representing danger and opportunity. The coronavirus pandemic has perhaps been the most dangerous global crisis since the Cold War, but for many economic sectors, it's created great opportunity. The MSP & cloud service provider market is one such sector, which according to Steven Hall of ISG has grown an astounding 50% over the last 4 quarters. Much of this is due to the crisis spawned by COVID-19, which accelerated adoption of both cloud and automation services, leading to enterprise digital transformation initiatives being expedited across the board.
As publisher of the ISG Index, the standard for marketplace intelligence on the global IT services industry, Steven is uniquely positioned to not only assess the current state of automation, but also peer over the horizon and see where things are heading. In this episode we learn what Steven sees as the five major areas of automation MSP's must focus on to optimize their cost structures; why the number of bots deployed doesn't necessarily translate to fewer FTE's but still provides high value; and the many ways he sees automation affecting the business of MSP's.
Guy Nadivi: Welcome everyone. My name is Guy Nadivi and I'm the host of Intelligent Automation Radio. Our guest on today's episode is Steven Hall, President of ISG, a leading global technology research and advisory firm that is committed to helping organizations achieve operational excellence and faster growth. Steven is an industry expert on cloud, automation, and outsourcing, with a focus on innovation that drives significant cost savings. He's advised such firms as United Airlines, Symantec ,and Motorola. And, with a resume like that, we knew Steven was a thought leader we needed to bring on to the podcast. Today, we're going to tap into his considerable insights, particularly as they pertain to how MSPs can deliver digital transformation more effectively. Steven, welcome to Intelligent Automation Radio.
Steven Hall: Well, thank you, Guy. I'm looking forward to it and thanks for having me on.
Guy Nadivi: Steven, you started your career on the technical side, eventually rising to Vice President of Application Development at Citigroup. What led you to move over to the analyst side?
Steven Hall: Let me tell you, Guy, it's been an interesting journey for me. I really started off as a software developer. I even did quite a bit of work with the Department of Defense and some of our top secret satellite communications programs and everything else. But I'd say I really grew up as a software developer at MCI. And, at MCI, I really started using global software development techniques and really started doing large scale software development. So, after MCI, I went in. I worked with a couple e-business firms, so I worked with Cambridge Technology Partners, worked with a company, Covansys, that was eventually acquired by CSC, that then went on to become DXC.
And, through those experiences, I really started not only understanding global software development, but really became sort of this e-business digital expert. I was running our e-business practice at Covansys. I was doing lots of different things to really help clients take advantage of, you know, e-business at the time, but... But, certainly, you know, everything web in the early 2000s, if you will.
So, that led to a job as head of software development at Diners Club, which was acquired by Citi, where I was leading up their development organization. And, in 2005, I really started writing a book called Managing Global Development Risk that was really focused on how to do large scale software development, and that really led to ISG, or TPI at the time, and they said, "Wow. This... This guy seems to know what he's talking about. We're trying to build a strategy organization. We're trying to build an ADM organization. Why don't we bring him in and see where he goes?".
So, they made an offer. I guess you could say it was an offer I couldn't refuse. And, from there, you know, I joined as a senior consultant. 16 years later, I'm now president of our European operations. I'm head of digital. I run our technology group. And, it's just been an incredible ride.
Guy Nadivi: Your company, ISG, recently published a report entitled Managed Services And As A Service Market Insights, which found that COVID-19 has accelerated digital transformation and the migration to the cloud much more than anyone anticipated. Which IT managed service providers did your report find had the most noteworthy growth?
Steven Hall: Yeah. Let me break that question down in a couple ways, Guy, and let me start by giving a little bit of background on ISG just to sort of put the question in context. So, as you said in your opening, ISG is a technology research and advisory firm, but we are really formed through a series of acquisitions to include TPI, Compass, and Alsbridge as sort of the big three. But those big three acquisitions really gave ISG deep insights into the outsourcing market and essentially the as-a-service market.
So, if you think about outsourcing and deal advisory, ISG does... You know, we do about 60% of the advise deals in the market. That gives us great data, great insights from all of those... From all of that data in those advise deals. We also have data exchange programs with almost 70+ other service providers that give us a sense of what's really happening in the market. So, for 75 consecutive quarters now, we've taken all this data. We've run through this deep process that we call ISG Index and we give readouts to the market, Wall Street analysts, major service providers, clients, et cetera, at the G-2000 level to really give a state of the market.
So, with that sort of background, we were able to take a look and really have a deep understanding of how COVID impacted the market. Now, first of all, I can say COVID absolutely accelerated the as-a-service adoption, which includes software as a service and the cloud. So, prior to COVID, you know, sort of what we call the quarterly ACV or quarterly annual contract value was about eight billion per quarter. So, that was about eight billion of new deals coming to the market for cloud or as-a-service. So, you multiply that out, it's about a $30 billion market on an annual contract basis.
What we saw during COVID is just over the last quarters, four quarters really, that now stands at 12 billion of the ACV per quarter. So, when we report at the... Let's see. We'll report mid-October. You'll see close to 12 billion of ACV just on the cloud providers. Absolutely stunning growth. And, that as-a-service space is really growing at 24, 25 percent compounded annual growth rate over really the last five years, so you can really see it kind of taking... Taking par. That compares to sort of the managed service providers that are really only growing at about three percent.
So, what does that mean? That means really big changes for the managed service providers as all of them really shift their offerings to support cloud-based services. And, I don't want to call out any winners or losers, but what you can clearly see in that space is there's this acceleration from traditional sort of managed services offerings to really cloud-based managed cloud providing offerings, SaaS solutions, and everything that's sort of app modernization if you will, as software really starts eating the world and everybody's on board to really start moving apps to the cloud.
Guy Nadivi: That's really stunning growth. Steven, how do you think that growth among IT MSPs will impact demand for automation services, particularly delivered as part of an on demand infrastructure?
Steven Hall: Well, I think that's the key question, Guy, and I think that's really what we're seeing in the market, is this acceleration of both cloud and automation, and they really go hand in hand. In many ways, automation is the next level of innovation in both IT and BPO. I'd even venture to say that all of the BPO and ITO MSPs have integrated automation into all of their solutions, but there's really different flavors. So, today when we think of automation, I think the market traditionally thinks of Automation Anywhere, Blue Prism, UiPath, Microsoft Power Automate. But those tools, I think, only capture the... You know, the beginning levels of automation, what's really occurring in call centers, IT service desk management, et cetera. And, other companies such as IPsoft or Amelia are really fundamentally changing the concept of AI and automation.
And, on the other extreme, you've got APIs and micro services that are really providing better interactions between programs, between systems, to really eliminate the need to even automate tasks by applying intelligence at really the network edge. But you got, I guess, a third, maybe a fourth aspect of it. You've got the platforms such as Salesforce, ServiceNow, Workday, SAP, et cetera, that have really all embedded cognitive analytics within their applications, so not only do they automate but they also predict user behavior. That's being integrated at scale by the MSPs as well.
And then, the fifth... So, you got five major factors going on here, are the major hyper scalers have really embedded automation into the entire continuous integration and continuous deployment, so your CID... CICD value streams, which is really accelerating the continuous development cycles. So, all of these... Really, these five major areas are all incorporated by the MSPs in their journey not only to automate but to further optimize their cost structures.
I think we'll continue to see this at scale and every process that you can imagine out there is going to have, you know, obviously a software aspect to it. It's going to have data services and cognitive intelligence that it's getting from multiple external sources. And, it's going to have a high level of automation and really data insights as it tries to provide, you know, I would say more telling insights to our clients.
Guy Nadivi: I understand your ISG Index only measures commercial outsourcing contracts with annual contract value, or ACV, of $5 million or more, which is generally the realm of enterprise budgets. However, there's possibly a huge and largely untapped market among midsize and SMB organizations who want to get in on the digital transformation train and leverage automation, AI, and other technologies, to competitive advantage in their space. Steven, do you think this growth spurt at the top of the MSP market will trickle down so that we'll see more MSPs beginning to offer automation and AI services to midsize and SMB organizations?
Steven Hall: I think you nailed it, Guy. I think we'll absolutely see the SMB market grow here. We've already seen a really significant growth in the deals, the number of deals really, under that 10 million ACV range. That market is really ready to explode and driving out all sorts of new capabilities as we go forward. So, with that, I would expect to continue to see growth in that side of the market. But, you know, I think more importantly, it's clear to see that the entire market is growing and will continue to grow and accelerate at pace. I mean, I think every company now is a digital or a software company, so the need for robust software engineering principles is really going to continue to rise.
When I look at the market, especially on the automation side, we talk a lot about low code, no code solutions, which is really democratizing software development. But just as important is the development of mission critical systems that are all software driven now. So, if we combine that with automation and we think about the big things that are happening, I think there's tremendous growth for MSPs. So, think about digital twins, autonomous vehicles, smart cities, smart industries. They're all driven by IOT and analytics. All are complex software problems that are leading to really a worldwide shortage of software engineers.
So, in many ways, I think the SMBs will continue to lead the way as they innovate in high tech industries but also in more traditional industries. I think they'll benefit from AI, cognitive, automation, and even modern organization structures to really accelerate their own journey. So, you know, digital in many ways has been the great equalizer. If you don't need physical assets then there's really little to impede growth at the SMB level and it won't be long before, you know, SMBs are knocking on the door of three billion, five billion, 10 billion a year.
Guy Nadivi: Another leading analyst is telling its customers who purchase outsourcing services that they should expect their MSP vendor to start automating their service offerings and begin sharing back to the client the benefits of automation in the form of reduced charges. If an MSP doesn't do that, this analyst is essentially telling sourcing executives to go find another MSP that does. How much pressure of this nature are you seeing organizations place on their MSPs?
Steven Hall: Yeah. This is interesting because I think MSPs are always looking to provide value for clients, including automating services. You know, in general, I really don't agree with some of my colleagues in the analyst space that believe rates should continuously be lower as tasks are automated. And, it's a common conversation in the market. So, if you go out, you deploy, you know, a bunch of bots, you should be able to lower the costs. I just think from doing this for so many years there's so many variables when operating large scale organizations to really rely solely on the automation, and as we've recently seen, the number of deployed bots really doesn't necessarily equate to fewer FTEs but really the ability to deploy people to higher value activities.
So, I think the broader trend that I see is really outcome based. I'll say just outcome based consulting in general and outcome based managed services. And, once we move to that and you really start aligning those to business challenges and business problems, I think we're going to continue to see less and less of the price point, you know, being directly associated with automation.
Guy Nadivi: I've read that one of the concerns holding back some MSPs from moving more aggressively with automation and AI is their fear of cannibalizing their revenue base. In other words, because automation and AI are proving cost effective, it forces MSPs who roll out these technologies to charge less for their offerings at the expense of labor based services. How are you seeing fear of cannibalization shaping MSP decisions about automation and AI?
Steven Hall: I think, Guy... I would really put this in the bucket of pre-COVID and post-COVID. Pre-COVID, I would have agreed with a lot of, again, my analyst colleagues there that really talk about the cannibalization issue. And, though I don't think it was intentional, I do think some MSPs were concerned about what it would mean to their head count and their labor based services and could they offset that, especially if you take that with the prior question... The more I automate, the more clients wanted rebates or wanted cost reductions. Could the model really work?
I think post-COVID, it's different. I think given the talent crunch and inflationary pressures on margins and labor inflation in general, I don't think MSPs are concerned about cannibalizing their core. I think in most cases, they're really adopting automation faster than even their clients or other businesses are requesting. And, though I think you'll see a significantly increase in the rate of automation, just to really help them do the mundane tasks as they really work through the talent crunch.
So, I think this is one of those things where it's sort of been overcome by events as we look at sort of this global talent shortage, the rise of engineering, the rise of cloud, the rise of analytics, all sort of playing at the same time, which is really taking a lot of... Putting a lot of pressure on the degree of automation but at the same time also taking the pressure off the need to cannibalize their own business.
Guy Nadivi: What's your prognosis for MSPs who don't make automation and AI a major part of their service offerings going forward?
Steven Hall: You know, I think they have to make the switch. But it's not really about automation for automation's sake. You know, the more APIs, micro services, and data services we consume, the more critical it'll be to automate the processing and insights from this huge amount of data. I also think that as we go into this territory just like edge computing, it's going to accelerate based on proximity and complexity. So, you're going to probably see some that don't get it, just like we've seen it in other categories. But I think you'll see the vast majority are already on the automation train. They're already thinking cloud, as-a-service economy, data driven systems, and we're seeing just a huge increase in the value of those firms as they move forward. So, you know, the ones that don't, I think you're right. It's troubling. But I don't think that's going to be a concern given all the technologies and capabilities that are being implemented.
Guy Nadivi: Steven, for the MSP executives listening in today, what are the biggest must have pieces of advice you'd like them to take away from our discussion with regards to making automation a core component of their services offering?
Steven Hall: Yeah. I would say, you know, executives in this space are really tech savvy and most really understand the challenges facing them. You know, automation has been around for several years. It'll continue to shape the tech landscape. But I think I would give three pieces of advice to the execs. Number one, really understand the business problem. Cloud, automation, as-a-service, cognitive, et cetera, have to be aligned with the business challenge. Automation is the tool in solving that broader business challenge and that's really where it needs to fit in. Number two, I would say apply the right technology to the problem. Ideally, seek a general purpose solution given the broad range of clients that are typically supported within an MSP environment and don't try to be all things to all people and chase every technology trend in automation or cognitive space.
So, I think if... If... You know, if I'm an MSP, I don't want to necessarily have a practice that's just focused on Blue Prism implementations or just focused on UiPath implementations or just focused on Microsoft. You really got to say automation fits within this holistic view and here's the types of technologies, but more importantly, the types of problems that we're trying to solve with it.
And, number three, I think is interesting to me and I was asked this question at NASSCOM several years ago about cognitive and... And, I think... You know, my best advice would be cognitive is really going to be integrated into all of our solutions. Again, data analytics, data insights, are a must in today's world and cognitive AI is also just becoming a must. So, really start thinking about solutions and not a specific product or cognitive AI. And, clients are going to expect it in everything. So, whether it's a SaaS solution, a cloud solution, we absolutely have to be able to predict, understand, drive user behavior, et cetera, through our... Through AI as we go forward.
Guy Nadivi: All right. Looks like that's all the time we have for on this episode of Intelligent Automation Radio. Steven, you've not only given our MSP listeners quite a bit to think about but their customers as well. Automation and AI are clearly disrupting the MSP market and that ultimately will have ramifications for just about everyone in the IT world. Thank you so much for joining us today and sharing your thoughts with us.
Steven Hall: Well, Guy, thank you so much again for having me. You've got a great podcast. I listen to a lot of your episodes, so I love your view on it. And, for your customers and your listeners, you know, I also encourage them to listen to Imagine Your Future, where we take many of these topics and explore a little further, especially at the executive level, where we have a lot of execs really kind of come in, talk to the audience about what it means to embrace and implement some of these technologies going forward. So, thank you so much again for having me.
Guy Nadivi: Steven Hall, President of ISG, a leading global technology research and advisory firm. Thank you for listening, everyone. And remember, don't hesitate. Automate.