Last week saw the launch of Eversheds’ 2015/16 global Cloud Computing survey in collaboration with The Lawyer. Please see below for highlights of the sessions.
Headline results – delivered by Charlotte Walker-Osborn, Global Head of Technology, Media and Telecoms and Paula Barrett, Global Head of Privacy and Information Law
The survey focuses on what is currently driving the uptake of Cloud solutions, the potential barriers to adoption and current M&A trends. Eversheds’ “Spotlight on the Cloud” event brought together industry experts and legal advisors to discuss the evolution of the Cloud over the past 5 years, and what Cloud technology will mean for the future.
The survey was conducted between December 2015 – January 2016, and sought input from 350 Cloud providers, purchasers and industry advisors worldwide. Vodafone’s Cloud Barometer 2015 highlighted that Cloud usage is on the rise, with 89% of enterprises predicted to use some form of Cloud, whether as infrastructure, platform or software as a service, by the end of 2016. In terms of market size, the Cloud Computing market was worth US$56.6 billion in 2014 (Bessemer Venture Partners) - approximately ten times the estimated market size in 2008.
Cloud spend is on the rise - 77% of surveyed purchasers of Cloud expect to increase their level of spend on Cloud during the next 18 months.
Top adopters - three industries are currently at the forefront of adopting cloud solutions; TMT, Professional Services and Financial Services. Of the supplier respondents situated around the world, 32% are currently experiencing greatest demand from the TMT sector (who are likely to be most comfortable with the concept of Cloud), while 17% are seeing greatest demand from Professional Services and 16% from Financial Services.
Key drivers for adoption - scalability and flexibility were cited by purchasers as the main triggers for adopting Cloud solutions.
It is notable that Cloud vendors consider the Financial Services sector to be the third most active purchaser, or indeed the second most active when providers’ top three most active sectors for Cloud purchasing are aggregated. Adoption in this sector has traditionally been slower given the high level of regulation to which financial services companies are subject. However, as explained in the survey, recent guidance produced by the FCA, certainly in the UK, may have led to a surge in interest. Despite this apparent sanctioning of Cloud as a solution with appropriate considerations, there are still large areas of uncertainty and hurdles to overcome, meaning adoption is likely to remain slow-paced.
Interestingly, our survey data also shows that Cloud uptake is fastest in different industries in Europe versus North America. Slightly contrary to the “top adopters” results referred to above which reflected the views of surveyed Cloud companies based in Europe, US Cloud companies are also seeing most demand from the TMT sector, but following this are experiencing most demand from pharmaceuticals and biotechnology companies.
Public, Private or Hybrid?
Although Cloud demand is generally increasing, our data reveals there is still widespread hesitancy around adopting public cloud outside of the US. Some 28% of surveyed Cloud purchasers stated they will never adopt public cloud, while only 7% stated they would adopt public cloud for any/all types of data or services. In contrast, private cloud is viewed as a much safer option – only 4% of surveyed purchasers stated they would never adopt private cloud and 40% are willing to adopt private cloud for any function.
Despite this continued willingness to adopt Cloud solutions, there are still some hurdles to overcome when it comes to negotiating Cloud contracts. Some 27% of surveyed Cloud purchasers have walked away from at least one deal once it got to the contract negotiation stage. A further 10% have nearly walked away from a deal at this stage.
Why do purchasers walk away?
One of the major barriers to completing Cloud deals is concern regarding data, cited by 30% of respondents as a reason to walk away from a potential contract. In a post-Snowden environment, concerns regarding data protection, data privacy and data security are increasingly prevalent. There is a particular sensitivity regarding data residency given the increase in the number of jurisdictions where governments can access data under measures that contain similar rights to the US Patriot Act.
Increasingly, purchasers are looking for accountability from Cloud providers around data, and are seeking to shift some or all of the risk to them. This environment of increased concern relating to data can be tricky to manage due to the increased uncertainty following the recent decision of the European Court of Justice which rendered the Safe Harbor framework for protecting personal data transferred to the US from the EU as invalid. In this climate, these concerns regarding data security and inadequate data security breach reporting provisions are causing purchasers to walk away from Cloud deals. Notably, in the Financial Services sector, purchasers are requesting penetration testing and demanding audit rights from Cloud providers presumably in order to discharge regulatory obligations.
While data and security are clearly key issues to be resolved in order to reach broad agreement to move forward, our survey reveals a clear mismatch between the reasons why purchasers walk away from deals and why providers think their potential customers abandon deals. Our surveyed cohort of Cloud providers clearly outlined two reasons why Cloud deals collapse during negotiations – pricing and, though harder to define, political, cultural and regulatory restrictions. In contrast, Cloud purchasers rarely mentioned these factors.
The survey data suggests that Cloud providers are potentially missing a trick. Rather than compromising on price (certainly where price isn’t going to be the distinguishing factor to win the sale), providers could minimise deal breakdowns by being more accommodating on contractual terms relating to data residency, security breach reporting and subcontracting as well as considering key areas of concern for customers such as service commitments and liability.
Despite a further five years of familiarity with Cloud solutions, it appears that a large number of Cloud deals still have the potential to break down at the contract negotiation stage. Eversheds believe that through early engagement these issues can be solved in order to find the right balance between the interests of the Cloud service provider and customer.
Current market insights – Olivier Wolf, TMT Sector Head, EY Transaction Advisory
We were joined by Olivier Wolf from EY – a leading advisor to the Cloud Computing and managed hosting industry in Europe. Olivier’s session focused on key trends and the future outlook for suppliers.
Despite the increasing market familiarity with Cloud solutions, Cloud still only represents a small proportion of IT spend, with “on premise” models still far more common.
The drivers behind the increasing uptake of Cloud are, broadly: growing data needs; increase in the number of small tech start-ups that can implement a Cloud solution without relying on legacy systems; and growing content volumes. Price also remains an important factor driving uptake as the infrastructure layer of Cloud solutions continues to get cheaper. As a result of these drivers, Cloud consumption is forecast to grow at 40% per annum.
In addition to responding to this forecasted growth in activity, suppliers are looking to expand their IT/Cloud offering by increasing the number of data centres they operate, and the number of jurisdictions in which data centres are located. Data sovereignty and low latency are the key reasons cited for Cloud providers expanding their data centre footprint in Europe.
The future outlook for Cloud suppliers could be a multi-layered service offering, with the level of service provided on top of the infrastructure used as a key differentiator. At the first level, Cloud infrastructure ‘giants’ will continue to roll out internationally, expanding their data centre footprint in order to offer a multi-jurisdictional but generic service. At the next level, “Cloud-builders” could build on the infrastructure provided by the Cloud giants, reselling the basic solution, but differentiating themselves on the basis of specialised/personalised service delivery. This model involves two layers of contractual complexity and it therefore remains to be seen how readily it will be accepted by customers. Lastly, the traditional players in the IT market will continue to shift their business models to capitalise on advantages that Cloud can offer.
Current market insights – Alistair McAulay, Director of Disruptive IT, PA Consulting
We were also joined by Alastair McAulay who has over 25 years of professional IT experience, and is currently a Director in PA Consulting’s IT Transformation service. Alastair advises major global companies and large government departments seeking to transform their businesses or requiring a significant change in the way that IT services are provided and managed to support future ambitions. Alastair’s session focused on observations based on what his clients are thinking and doing at the moment.
Alastair first came across Cloud when it was called utility computing back in 2003 when the Department of Trade and Industry asked him to evaluate whether it was something that SME’s should be encouraged to adopt.
Following a slightly reticent start to Cloud uptake, it is now seen as mandatory for organisations to consider Cloud as part of their corporate/IT strategy. There are increasingly raised expectations for IT departments around what they can or should be able to deliver. IT systems need to be much more dynamic and the ability to scale and flex is likely to be key to service delivery for a customer. Cloud can help to increase the dynamism of the more agile elements of a commoditised IT system, however, it should be noted that old legacy platforms will continue to be present and therefore a hybrid Cloud offering (insourced, outsourced, public cloud) is likely to continue to be the favoured option.
Despite understandable concerns regarding data, Cloud is now seen as a safer solution than it was. As the uptake of Cloud continues, Cloud providers now have a public track record for credibility and accountability, and in some circumstances can reduce IT security risks. In future, it may be the case that data concerns are seen as more of a collective responsibility, as it is in everyone’s interest to avoid data breaches. Suppliers are continuing to try and position themselves to gain a competitive market position, and there is a need for providers to understand their clients’ business strategy. Cloud providers are also taking a commercial approach to data sovereignty, and locating themselves in specific jurisdictions dependent on the nature of the customers they wish to do business with.
Given the different consumption models, and the different types of Cloud, it is likely that the future – at least for the next 5 years – will see a variety of approaches to the adoption of Cloud with a complex ecosystem of providers.