Is infrastructure hardware-as-a-service destined for niche markets?

Major infrastructure hardware vendors such as Hewlett Packard Enterprise Company (HPE) and Dell have launched as-a-service offerings, positioning themselves to take advantage of cloud computing growth. Since launch, these infrastructure hardware-as-a-services (HaaS) offerings have enjoyed strong double-digit growth but still represent a minor portion of overall business for these vendors. For example, today infrastructure HaaS accounts for ~$1B of HPE's $28B (3.6%) and ~$1B of Dell's $38B ISG revenue (2.6%). That may make infrastructure HaaS look less-than-promising, but those numbers still represent about one billion dollars for each company. This article shares a perspective on the true potential of infrastructure HaaS and what vendors can do to accelerate growth. 

Understanding cloud computing requirements by industry

Cloud computing requirements vary widely by industry and hence we believe a targeted, industry specific approach can be an important lever for infrastructure hardware vendors to achieve growth. One key to identifying potential targets is to assess the mix of capital expenditure (capex) and operational expenditure (opex) by industry – and how cloud spending fits in. 

• Public cloud spend as a percentage of total IT spend signifies cloud adoption for a specific industry. This metric varies from 11% in utilities and government sectors to a maximum of 22% in software and internet publishing, reflecting diverse adoption levels across industry sectors. Lower public cloud spend indicates higher potential for infrastructure hardware vendors.
• Capex as a percentage of  total IT spend provides valuable insights into the fit for as-a-service offerings. Each industry allocates its IT budget differently across capex and opex. For instance, telecommunications and utilities allocate a significant portion of their IT spend to capex (42% and 36%), while software publishing focuses less on capex (14% of total IT spend). Lower capex utilization indicates higher propensity to move from traditional hardware to infrastructure HaaS.

We believe a combination of these two metrics can help to identify industries that are more receptive to infrastructure HaaS offerings and empowers vendors to focus resources strategically. Let’s dive into these two key metrics by industry vertical. (Figure 1)

Figure 1: Industry segmentation by Capex and Cloud Spend as a percentage of IT

Industry segmentation and market opportunity

As shown in Figure 1, we grouped industries into four quadrants based on the two metrics described earlier. Quadrant III, consisting of industries with low cloud spend and low capex, emerged as ideal target for infrastructure HaaS. Four primary industries - manufacturing, healthcare, insurance, and state/local government - present viable opportunities to gain a competitive edge with infrastructure HaaS solutions. Hardware vendors can tap into a massive $70B market with an estimated compound annual growth rate (CAGR) of 14% by focusing on these four primary target industries (Figure 2). 

Additionally, few industries adjacent to Quadrant III, such as industrial electronics, construction, chemicals, and consumer products, present another $20B opportunity for infrastructure HaaS. Rest of the industries currently show limited potential for infrastructure HaaS, as they are more inclined to either public cloud or traditional hardware. 

Figure 2: Market opportunity across IaaS, PaaS, Hybrid and Private Cloud ($B) in the four target industries

Critical ingredients for success in infrastructure HaaS

While the potential for infrastructure HaaS is massive, coordinated execution across multiple departments such as product development, sales, marketing, IT, and admin is critical to realize this potential. Based on our experience, vendors must include the following vital ingredients into their operations for success:

• Highly tailored value proposition to address specific use cases in the target industries 
• Value-based pricing to showcase the cost-effectiveness of infrastructure HaaS compared to traditional hardware solutions 
• Well planned land and expand strategy that can grow customer footprint beyond infrastructure HaaS into additional software and services offerings
• Clear incentive structure to foster collaboration across sales and customer success teams thereby driving increased customer adoption and consumption
• Industry-specific channel partners that can facilitate deeper market penetration into the target industries 
• Robust backend capabilities to scale subscription business model, including efficient quoting, invoicing, consumption tracking, and monthly billing 

Don’t wait – Take advantage of infrastructure HaaS before your competition

The infrastructure HaaS market holds significant opportunity for hardware vendors seeking to capitalize on the growing demand for cloud computing. Adopting a targeted, industry-specific approach will enable vendors to focus their resources on highest potential areas and increase the chance of success with infrastructure HaaS offerings.

Are you ready to unlock the potential of infrastructure HaaS? Don’t wait for the market to take off without you. Contact us today to learn how a focused infrastructure HaaS strategy can drive your business forward.