Colt must clarify its cloud services positioning

Ian Brown, Senior Analyst, IT Services

Like many of its peers in the telecoms industry, European network provider Colt is building up its IT services portfolio, of which cloud is an integral part. Network operators such as Colt own two key assets for the delivery of cloud computing: networks and data centers. They also have a key motivation for turning to the cloud: declining revenues in their legacy communications businesses.

Colt’s differentiator as a cloud provider is its expertise in cloud orchestration – more specifically, the automation behind its infrastructure-as-a-service (IaaS) cloud and portal. However, this will not be enough to convince enterprises to integrate Colt’s cloud into their hybrid IT environments. Colt needs to partner with SIs and ISVs and develop a solutions focus if it is to deliver real business value to its target enterprise customers and provide more than just another standalone cloud.

Colt has used its IT expertise to expand from network services into IT services

Colt has built up a reasonably sized European IT services business over the past several years. With annual revenues of around €600m ($800m) in FY12, Colt Enterprise Services (CES), which includes everything from unified communications and collaboration to applications hosting and management, is on a par with other tier-2 European IT services vendors.

However, the traditional IT managed services side of the business is small and Colt is looking to its cloud offerings to drive the “mid-to-high” single-digit percentage growth needed to compensate for declining revenues from legacy voice services.

Cloud is a good fit for network operators such as Colt, as they are able to provide an end-to-end service with one contract or relationship for the delivery of the cloud service and network connections. Moreover, most telecoms providers have made considerable investments in their network infrastructure and data centers, and these are assets they can leverage through cloud. Not surprisingly, one of CES’s core business principles is to leverage Colt’s assets (in fiber, data centers, and skills).

Another of Colt’s core principles is to automate services wherever it can to keep costs down. Colt’s margins are tight and it does not want to increase its offshore headcount as it increases IT services revenues (as SIs have). Automation also improves quality of service and speed of delivery. Colt has consequently made significant investments to develop an orchestration layer to automate the provisioning and management of its Agile Infrastructure Services IaaS platform.

Colt is not alone in focusing on the cloud orchestration layer. Many SIs aspire to be “cloud service integrators,” managing their customers’ use of either private or public clouds rather than investing in hosted virtual private clouds of their own. Consequently, the orchestration layer with its automated provisioning and configuration behind the portal is becoming a significant area of investment for SIs.

Where Colt differs from the SI cloud integrator model, however, is that it has a different motivation for developing orchestration. It is both a means to keep costs in check and a way to ensure that its own IaaS platform is as agnostic as possible toward the underlying cloud technology stack. Colt wants to develop a modular cloud architecture capable of supporting multiple technology stacks to enable customer choice within its own platform. It is adamant that it does not want to be a cloud broker. It also wants to deliver the platform.

Network providers such as Colt need to decide where and how they can deliver the most benefit to their customers

Colt presented an overview of the orchestration layer of its Agile Infrastructure Services IaaS platform at its recent European analyst day. While the results of Colt’s orchestration investments look impressive, we think there is a danger that Colt’s message overemphasizes the automation and technological capabilities of its cloud services at the expense of its business benefits.

Its approach to marketing cloud highlights a dilemma that many network providers face as they attempt to move into IT services via the cloud: how do they differentiate and position themselves as IT services providers? Are they platform providers or should they deliver higher value services akin to those of traditional systems integrators?

In our experience, while the sort of mid-market customers that Colt is targeting might be CIOs, they do not invest in IT services for purely technological reasons. Usually, they buy services to extricate themselves from the complexity and cost of managing yet more technology.

For Colt’s mid-market target customers (500 to 10,000 seats), cost reduction is usually a major driver. Assuming competing IaaS services are in the same ballpark on price, factors such as quality of service, ease of use, and trust in the provider come into play. So how should Colt convey its capabilities to the market?

Colt’s intention at its analyst day was to influence the influencers (i.e., industry analysts), but clearly it needs to have a different story to tell its customers and prospects. It does not have a vertical market focus – network providers rarely do. However, it is 65% owned by global financial services firm Fidelity, and much of its core customer base consists of financial services companies.

Even so, we think Colt needs to develop more of a vertical focus for its CES business. It needs to pick two or three verticals in addition to financial services, develop partnerships with ISVs in those sectors, and deliver services around processes that are either ready for automation or ripe for modernization. In this way, it can infiltrate its portal, orchestration technology, and automation expertise into organizations to manage and control in-house and third-party clouds. Colt may not want to be a cloud broker, but it has the tools to become a good multi-cloud orchestrator.

The other, and perhaps easier, route to expanding CES’s customer base is to partner with SIs that lack Colt’s European assets and infrastructure expertise. Colt has already white-labeled IT services to a UK public sector outsourcer. We believe it could gain additional traction by partnering with SIs that maintain a deliberately “asset-light” strategy.

Many SIs are considering such strategies in the light of the large capital investments and start-up charges needed to support enterprise cloud architecture. “Asset-rich” infrastructure providers such as Colt could be very complementary partners to SIs and BPO providers that focus on business requirements rather than IT.

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