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Research Duquesne Advisory delivers in-depth analyses of Information and Communications Technologies, their implementations and their markets. Research is based on critical observation of the market by the analysts and their on-going contacts with the vendor community, together with hands-on, practical experience in consulting engagements.

Will the Cloud turn Orange?


Orange Business Services is making the move to cloud computing services. In this research report, Duquesne Group applies its "B2B Cloud Assessment Grid" to evaluate the company's competitive position and to understand what this might mean for customers.


Will the Cloud turn Orange?
Worldwide, telecom operators are redefining their businesses to seize new growth opportunities and expand beyond their traditional, largely commoditised voice and data networking markets. While their core businesses still require huge investments, be it in the fiber-based very high speed internet access or in mobile telephony, all significant operators are developing strategies aimed at expanding their value-added services revenues.

IT services have long been a target for telco operators, albeit with variable success, and they naturally look at cloud computing as a key diversification opportunity, playing to their financial and technical strengths. Telcos such as ATT, BT, DT and Verizon are staking out positions, as is France Telecom.

Orange Business Services moves into the Cloud

In Val-de-Reuil, France Telecom is currently building a very large, next generation “mega-data center”, scheduled to be operational in 2011. This major investment is in line with its intention - stated in December 2009 by Orange Business Services (OBS), the group’s enterprise services branch - to play an expanded, major role as a global data center operator and cloud services provider on a worldwide basis. The announcement, presented to a number of large clients in conjunction with key suppliers Cisco and EMC, builds on the group’s own experience as a large IT and data center operator, both for its own use and for third parties. (In fact, Val-de-Reuil will handle both internal and client processing). The company believes it can leverage its own experience in data center optimisation and rationalisation (and notably its extensive usage of virtualisation technologies), as well as IT operations and management. The announcement was backed with commitments and billion-euro level investments, notably in two very large ”data center campuses” including Val-de-Reuil.

We believe that this strategy is based on a few key assumptions:
- For OBS, financial strength is a big advantage, because size matters and large economies of scale are possible with data centers. France Telecom wants to leverage its own size and ability to invest heavily in very large facilities.
- OBS assumes that an operator, especially a very big one, is well-positioned to offer integrated (bundled) network and computing services to corporate clients (both large and SMB), possibly commanding a premium price.
- OBS considers that, with the emergence of cloud computing, the time is finally right for a major move into IT services.

Duquesne Group is somewhat cautious concerning the first point. While large scale investment capability is definitely required in many segments of the cloud, it is by no means sufficient and misguided investments in this space may, and will in some cases, prove disastrous.

As for the operator positioning, we agree that the cloud appears as a relatively natural diversification option for telcos, but competition will come from a variety of players and telcos may have less of an edge than often stated by … telco specialists. It is also not yet clear whether the bundling of network services with IT hosting services will allow any kind of “premium pricing”.

On last point we entirely agree. In IT services for OBS … it’s now or never.

Of course, a serious assessment of a provider's strategy and its potential value for customers calls for more in-depth analysis. Duquesne has developed a cloud services competitiveness assessment model, which we apply to the cloud strategy of Orange Business Services hereafter. To provide the context, we first outline briefly what we see as the key characteristics of the cloud market.

The Cloud – A Space in Transition

Although already a very significant market, “the Cloud” remains a “space in transition”. Rather than a homogeneous market, it encompasses a number of very different segments – indeed, even segmentation criteria are multiple, and continue to evolve. While technical classifications continue to be a subject of discussions among experts, they are insufficient to understand the nature and behavior of the cloud markets.

Duquesne believes significant segmentation criteria today include:
- the public addressed (consumer, SMB, large enterprise vertical sectors, various public sectors)
- the “basic cloud services” provided (Software-as-a-Service or SaaS, Infrastructure-as-a-Service or Iaas, Platform-as-a-Service or PaaS ...)
- the degree of criticality of cloud-based services for the Client (mission critical application hosting, collaborative applications provision, ...)
- the geographical “reach” required by clients
- the cloud infrastructure ownership status (private, hybrid or public cloud, for example).

The cloud services market is still at an early stage of development. This inevitably results in a fragmented market with a proliferation of different offerings from a number of very different players. “Pure plays” such as Amazon and Google were the pioneers and remain the best known cloud players. Numerous telco operators are moving into the cloud space with different competitive approaches and, just as importantly, also competing with large IT firms (e.g. IBM or Microsoft). This burgeoning market will also see smaller, agile players strive on niche, high value-added opportunities (e.g. technical or high-performance computing).

Duquesne believes the cloud market will remain fragmented and continue to evolve for at least the next five years, creating opportunities for a variety of potential new entrants. Cloud computing acceptance is expanding in the marketplace, but, the cloud represents such a cultural change that its full development will span over a long period. Operators, and other players in the cloud, will need to define and permanently evolve their cloud strategies carefully; more importantly, they will need flawless execution.

Preliminary cloud evaluation: Orange Business Services

In order to help users evaluate offerings, and to enable vendors to check their plans for completeness and relevance, Duquesne Group has developed a B2B oriented Cloud Assessment Grid. The five key issues rage from strategy characteristics to business execution, with the ultimate focus being on client management. The three middle categories look at how strategy is translated into a proper offering via upstream marketing, service delivery, and downstream marketing.

What follows is our preliminary evaluation of the OBS cloud initiative using this tool.

1. STRATEGY

Investment capability

Cloud computing will clearly be capital-intensive. One of its well-known economic fundamentals is to leverage the economies of scale associated with large data centers, especially with mutualised infrastructure. In addition, the cloud approach, with its ability to provision resources on-demand, requires the supplier to build capacity in advance. While user clients avoid capital expenses (CAPEX), the cloud operator must significantly invest in such CAPEX budgets.

Massive investments by players such as Amazon, Google or Microsoft have reinforced a perception that the cloud is a playground for very large players only. Nevertheless, some caveats are in order. Not all segments will be mass-markets, hence opportunities for smaller, yet significant, investments and investors. Also, scale economies do not automatically imply that gigantic centralised data centers (sometimes called in a misleading analogy “digital power plants”) are the sole answer, from an infrastructure point of view. Such an approach assumes – more or less- that bandwidth is infinite and cheap, even on long distances. Very large facilities may also engender some negative scale effects.

Despite these caveats, investment capability is a competitive issue. France Telecom clearly has the investment capability (and large scale long term investment management skills) that it may need to finance its move into cloud services. It is a very large integrated operator, present in 32 countries with around 180,000 staff. In 2009, it had 46 billion Euros of revenue, providing an organic cash flow of over 8 billion. In the same year, it invested 5.3 billion (11.5% of revenues). Over the last few years it has also steadily reduced its load of debt: the ratio of financial debt to equity at end 2009 was around 1.3, as compared to 1.92 in 2005. Despite the credit crisis in Europe, its ratings remain solid. In addition to good operational business performance, France Telecom has a well earned reputation for very solid financial management.

However, most of their competitors in the cloud “mass-segments” will have similar, or even greater, financial strength. Duquesne believes that success or failure in this space will be more dependent on a player's ability to pick the right investments, rather than on its sheer capacity to spend.

Nonetheless, we believe that the group has the necessary investment capability and the skills to manage big long term investments for cloud services. It is at least on a competitive par with other players.

Not surprisingly, our assessment on this point is: Strong.

Strategic congruence

It is well-known that successful diversification is much easier when the expansion target space is strongly related to existing activities, for example, expanding into a new market segment with existing products, or introducing new products to an already established client base. This is what we call “congruence”. Strategists, however, often tend to seriously overestimate both the strength of congruence when planning diversification and the resulting “synergies.

However, the sole fact that markets are complementary to each other (e.g., network provision, IT infrastructure provision and application solution provision) is not sufficient to create substantial synergies, nor does it guarantee that the skills in one domain will translate into the next one. Several issues need to be addressed. For example, offering IT and application services on top of network solutions will be more “natural”, from a sales standpoint, in SMBs where the decision maker and purchaser may often be the same for both application and network services, than in large enterprises where decision processes and organisational structures involve different teams and budgets.

Orange Business Services is already a data center service provider, and most potential clients are current clients for at least some network services. It is true that many technical skills can be shared among both businesses.

The new scope of OBS’ data center services (including cloud services and most likely SaaS-like offerings as well) means much higher criticality to the client’s business, and will require much more intimacy with the client’s business processes and issues. Providing Software as a Service (SaaS) - beyond « vanilla » applications such as basic mail services or standard collaboration software - requires a much deeper understanding of the user's business than network provision.

We have already often witnessed FT overestimating its ability and “legitimacy” (i.e., customer acceptance) to offer business-level solutions or offerings to clients. OBS may find it necessary to import much more skills and resources from the outside to develop this business. The development of a strong solutions ecosystem will also be important (see below).

In brief, we believe on the technical level that there is good strategic congruence with the existing enterprise networking business. However, customer acceptance of OBS (or any operator for that matter) as a natural supplier of cloud IT services is more of a challenge. It will probably be more easily achieved in the public and SMB sectors than in large corporates. While this could evolve over time, we do not at present see the strategic congruence of the cloud as translating into an overall competitive advantage for OBS.

Our assessment, therefore, at this time is: Neutral

Company culture

As noted earlier, even when an initiative makes sense in terms of strategic congruence, diversification success or failure often involves issues of company culture.

An interesting positive example of the importance of this issue is Amazon. While it has become a giant, Amazon retained its initiative oriented, start-up culture. It invented cloud computing almost by accident, stumbling into it as a by-product of a discontinued project. Subsequently, the culture of Amazon also proved to be well adapted to selling to the start-up companies that made ECS a success.

The classic example is the struggle of almost all the IT vendors, with an industrial hardware culture, to move into value added services. The only complete success is IBM, leveraging the Price acquisition.

Many operators have tried to move into the IT services space (BT is a good example) but company culture has often been a problem. OBS is also working in the context of a very specific group culture. The transformation of FT from a French public service monopoly into an international player in a very competitive market is still a “work in progress”.

Overall Duquesne believes that while the issue of company culture involves some important risks for the OBS cloud initiative, it can be dealt with, given time and sustained management attention.

Our assessment on this point is: potentially Problematic.

Access to technologies

Accessing various technologies at a competitive cost is essential for any cloud services provider.

Operators like OBS do have the advantage that they already master the basic network technology set. In addition, new, fast-growing technology application fields such as mobility and M2M will definitely drive the development of new cloud-based services. Operators like OBS, which are already strongly involved in mobility and M2M technologies, will be well-positioned here to benefit from growth.

Concerning the cloud data center, reliance on third-party technology has a potential for creating a competitive disadvantage, both from a cost standpoint (e.g. high license costs), and from the agility point of view if one has to rely on third-parties for product innovation or feature development. On the positive side, however, the provider can choose “best of breed”.

Indeed, we believe OBS will be able to alleviate such risks thanks to its size and ability to negotiate, its capacity to be involved early in its suppliers innovation cycle, and its own expertise and development capacities.

Overall, OBS will need to define its technology access strategy, mixing focused development, open source leverage, and proper partnerships.

Our assessment on this point is: neutral.

Cost structure

The cloud market attracts interest from a variety of players, many with very deep pockets. Duquesne expects price wars to be fierce, and players with high fixed costs will find it difficult to compete. In addition, aggressive investment strategies from a number of players may result in transient, localised over-capacity despite a very strong overall demand. Players who bear significant sales, general and administrative costs (SG&A) may not be able to pass them onto their clients in this market, unless they can offer specific, distinctive value-added services that are particularly relevant to customers, and perceived as such by these customers.

Concerning OBS, on the one hand, as part of France Telecom, we could expect it to bear significant sales, general and administrative costs (SG&A) that it may not be able to pass onto its clients in this market. On the other hand, the allocation of SG&A is a corporate management decision.

Our assessment on this issue is: a potential - but manageable – handicap.

2. UPSTREAM MARKETING

Strategic focus

Players in cloud services must play to their own strengths and decide where to focus with which offering and what value proposition.

In addition to responding to the needs and expectations of a particular segment, providers need to take into account its “maturity” in terms of the well known “technology adoption cycle” and, in particular, the differences between the early stages of market adoption and the often difficult transition to acceptance by the larger mainstream market.

Typically, “early adopters” and “corporate visionaries” in early markets are sensitive to technology and the vision of what a technology or technology based service such as the cloud can do. The much bigger mainstream markets will have different more pragmatic requirements and expectations.

Amazon broke through in the early market by selling on demand resources both to start-ups and to divisions of large corporations for particular projects. This is quite different from selling, for example, cloud solutions to SMB’s or selective cloud based outsourcing to large groups.

AT&T is an interesting example of moving from the early to the mainstream market. It started early in the IaaS and web-hosting competition with Amazon. As it has begun to move into the mainstream market, it has invested heavily in SMB solutions as well as in applications in vertical sectors such as health care, with its “AT&T Healthcare Community Online”.

In fact, health care solutions are often “network intensive” and frequently involve specific security and compliance requirements. Verizon in particular has moved into this space.

Another peer competitor: T-Systems which runs SAP on a cloud basis (storage, bandwidth, processing on demand) for corporates that include its parent Deutsche Telekom, Philips, Shell, Linde and others.

In the case of OBS, the overall target is the mainstream enterprise and business space. However, further refinement in segmentation will be required, with public administrations, large enterprises, and SMBs constituting distinct market segments, notwithstanding further “verticalisation”.

A “one-size-fits-all” offering will not work; neither will a single marketing approach. For example, security will be key for all segments, but particularly critical for SMBs, where OBS' image may help in this respect. Large organisations will require appropriate technical services, as well as proper SLAs. Generally speaking, the mainstream market values solutions more than technologies.

In addition, specific segments may have requirements that impact the locations of data centers. Public authorities in many countries may see local infrastructures as an element of sovereignty, and therefore favour suppliers with local presence. In the private sector, pursuing “global customers” will usually require data center presence in several international locations. While OBS hopes to deliver cloud services as much as possible from its “mega-data centers” based in France, it will need (and expects to have) data center capacity elsewhere in the world.

Overall, quality of strategic marketing, segmentation, and offer relevance will be paramount. While from our observation of the OBS company culture, we have some reservations on this issue, we do not feel that it represents – as of yet – a major competitive disadvantage. We also believe that for OBS to achieve strategic focus is “do-able”.

Our current assessment therefore is: Neutral.

Pricing

As discussed above, the cloud is and will remain a highly competitive market. OBS will have more freedom of manoeuvre in this space than in pure telecommunications, since cloud services are presently beyond the reach of telecom regulators. However, one of the main “levers” available to OBS will be the pricing of “bundled” network services, and the regulator may want to get involved.

On hosting services, OBS will be disadvantaged if forced to bear the high structural costs of its parent company; however, it is likely to be competitive on packaged offerings. One temptation to be avoided will be “premium charging” for such packages. This type of pricing may work with some SMBs but probably at the expense of market share. It is unlikely to be accepted at all in large organisations... unless of course such a package truly creates additional value for the customer.

In our opinion, pricing is a key decision point for OBS. It will need to strike the right (probably difficult) balance between margin generation and market alignment.

Our current assessment therefore is: potentially problematic.

Ecosystem management

This is probably one of the biggest challenges for all the players. The complexity and fragmentation of “the cloud” will require any large player to build a strong “ecosystem” around its own offerings, but the fight for revenue and margin sharing will be fierce. Potential partners, irrespective of size, will also prefer solutions that minimize their dependency on the “ecosystem leader”: openness, as well as simplicity of integration, will be key, along with reasonable profit-sharing rules.

OBS clearly has a major opportunity to establish an attractive ecosystem around its offering. For example, smaller software editors may find OBS an attractive partner for cloud based SaaS delivery. Nonetheless, FT's observed propensity to ultimately compete with its former partners and to pre-empt most of the margins may worry many potential partners. Duquesne believes that OBS needs to send the proper messages to its ecosystem, and to establish a clear, credible value sharing model.

Due to the importance and the difficulty of this issue, our current and preliminary assessment is: potentially problematic.

3. SERVICE DELIVERY

Quality, reliability and availability

The level of service delivered to a customer of cloud services is defined in large part in terms of reliability and availability.

In their networking businesses, operators tend to focus on the consumer market and are geared to serve very large markets through highly automated and standardised processes with service levels that are often not sufficient for business operations. Operators have of course identified the need for higher service levels for corporate customers, hence the creation of dedicated structures to address these markets. Duquesne however believes that further progress is still needed by large, non-specialised telco operators to address the expectations of large user organisations.

As a telco operator, OBS does have an important potential advantage over public cloud “pure players” who depend on the public internet. In some markets, OBS could offer a completely integrated service, from the cloud data center to the user, leveraging its existing professional IP networking offer. Such an offering would address many of the concerns about the quality of service, including issues of network availability and latency. In other geographical markets, OBS might choose to forge a close partnership with a local peer to offer the same sort of service.

Reliability and availability will depend in large part on the management of the entire systems and network infrastructure. Even though systems and network management have traditionally been implemented with different technologies in the teleco and IT spaces, France Telecom’s capabilities in these domains are outstanding. These capabilities are backed by the strength of FT's R&D arm, the former CNET (“Centre National d'Etudes des Télécommunications”). On this point, FT remains ahead of most of its telco competitors, at least in Europe.

On this issue our overall assessment is: potentially a strong point.

Provisioning and Billing

On-demand provisioning of resources, with the related billing, is fundamental to the cloud model.
Provisioning is a domain where operators such as OBS have extensive expertise and experience. Nevertheless, the provisioning of IT resources on-line and on demand in the virtualised cloud environment is different from, and more complex than, the provisioning of network services.

In addition, mastering the technical aspects of provisioning will not be enough. Beyond the specific challenges of cloud provisioning, the major challenge will be on responsiveness: the cloud requires instant reactivity, well beyond the practices of the telco market.

Billing is also a traditional domain of strength for telco operators – at least, it is perceived as such internally. However, in this area we believe they will encounter significant challenges. Telco billing is famous for the number of mistakes generated – it actually justified the development of the “telecom expense management” services business. Indeed, accuracy and reliability will be a major demand from cloud services customers, who will also require clarity and predictability.

The complexity of “cloud billing” will make it a different discipline, with an additional need to evolve billing mechanisms and practices as the market develops and business models change. “Quality billing”, enabling clients to properly manage their cloud related spending, will be a key expectation.

On the issue of provisioning and billing, we believe on the whole that operators such as OBS do have a foundation for creating some competitive advantage, although success is not automatically granted.

Our overall assessment therefore is: potentially a strong point.

Services and support

Support and services represent a key “customer touch point” with the supplier. They are very much part of the product and a major part of the “customer experience”.

Cloud customers will have varying service requirements, depending on their market segment as well as on the nature of the cloud offer. The needs of the mainstream market will not be the same as Amazon's early adopters. In many domains, “pure” technical (technology-oriented) expertise will not suffice, and knowledge of the clients' technology usages will be required.

Operators have painfully learned how to support clients in the internet access and mobile markets. They will have to take this experience one step further. In addition, both basic and added-value services can generate significant revenue, if the quality is right. That depends on skills, processes, resources and so forth. But investment will be needed.

OBS has a reasonable track record on support and it may be able to turn this into a competitive edge. Duquesne believes that OBS, like many telcos, will - at least initially - be overall weaker in services as compared to non telco players such as IBM GS, HP/EDS or other IT-originated service providers.
Our current assessment therefore is: potentially problematic.

Interfaces and openness

Duquesne believes most successful “new entrant” cloud players will embrace open interfaces rather than play the proprietary strategy – an approach that succeeded for some early players. . Proprietary interfaces may appear as a lock-in opportunity; however, they may also work as a barrier to adoption. Customers seeking flexibility will be reluctant to accept such constraints.

Open interfaces also offer an additional advantage for a player such as OBS targeting the mainstream market. Large companies who take business continuity seriously may want to do business with two different cloud providers. Open interfaces facilitate this continuity approach.

This issue is more about avoiding disadvantage than gaining advantage. OBS may of course be tempted by the “proprietary route” - a strategy that France Telecom has practised in the past, reinventing some wheels to “differentiate” from competitors. In the cloud market, that would be a mistake. On balance, we believe that OBS is sufficiently in tune with the needs of mainstream businesses to avoid the proprietary trap.

Our current assessment therefore is: neutral, which in this context means avoidance of competitive disadvantage.

Perceived Security

Security is the main objection raised everywhere against cloud computing. This has more to do with misconceptions than with reality. Indeed, professionally operated cloud infrastructures will often prove more secure than many in-house facilities, where skills, as well as manpower, may be scarce.

Operators such as OBS also have a potential advantage if they are able to offer (as discussed above) a completely integrated service, from the data center to the user. In such cases, OBS and its peers will be able to propose complete end-to-end security, with the indispensable condition that it is completely transparent and auditable. OBS may also be able to leverage France Telecom’s R&D capabilities. While single supplier “end-to-end” security addresses only parts of the entire security issue and does not represent the only satisfactory option, from a marketing standpoint, it is likely to have strong appeal for a large part of the market, for example, SMB’s.

In any case, the main issue will be perception. This is a domain where OBS should be among the most credible players, provided its technical skills are leveraged through proper communication.

Our overall assessment therefore is: potentially a strong point.

Compliance

Compliance is unlikely to be a differentiating issue, because - for a given set of customers with regulatory requirements - non-compliance will mean elimination. Indeed, regulatory constraints may keep some competitors (but only the weakest) away from the most “compliance-intensive” segments.

The protection of data privacy – and the ability to prove it - will be a major requirement in many markets. In Europe, conformity will be necessary with the “Directive on the protection of personal data” and with the applicable laws and regulations within each country. In some cases, data protection legislation may translate into data location requirements.

The Payment Card Industry Data Security Standards (PCI DSS) are key for e-commerce because they apply to all merchants processing cards. There has been much debate, but complete PCI compliance does not appear presently possible in a “public cloud”. An e-commerce application may be hosted in a cloud, but the payment will need, for example, a compliant payments partner not in the cloud.

Sarbanes-Oxley (SOX) compliance may be an issue. A provider that wants to do business with companies subject to SOX will need to obtain an SAS 70 Type 2 certification. In US healthcare, the provider needs to be able to warrant to customers that they are in an HIPAA compliant environment.

In some cases, specific non regulatory requirements may apply. Banks may require that the internal inspection department perform checks on the provider's services and possibly infrastructure. Auditability and traceability offered by suppliers may, in this case, become discriminating.

Concerning OBS, we of course expect that it will comply with all applicable regulatory requirements in the markets that are targeted, without any particular competitive impact.

Our assessment of OBS on this issue is therefore: neutral, which in this context means avoidance of competitive disadvantage.

4. DOWNSTREAM MARKETING

Compelling messages

With some notable exceptions, technology companies often find it difficult to craft compelling marketing messages. Many are engineering driven, with a tendency to favor functions and features rather than value to customers. Technical fads and fashions are also a factor. The promise of “the next big thing” is an everlasting and ever changing story in ITC industries. More prosaically, a very frequent source of difficulty is insufficient marketing work upstream, in particular in terms of strategic focus and the value proposition for each target segment. As discussed, the expectations of large corporate groups are generally very different from those of, for example, an SMB.

The “Technology Adoption Cycle” mentioned earlier is key to effective messaging. Most of the messages heard in the cloud space today are still technological and visionary, and correspond to the early market pioneered by Amazon.

Duquesne believes that OBS, like most big operators entering the cloud space, is targeting the mainstream business market. Unlike the early market, these customers are more pragmatic than visionary. Operators will need to formulate value propositions and craft messages that involve aspects that are important for mainstream customers, such as solutions, service levels, ease of integration, security, quality of support services, and even brand names. They will also need to provide proof. Like many technology companies, operators – including OBS – tend here to be somewhat weak.

More generally, OBS and the other telco cloud players will have to establish an image as reliable IT service providers. As discussed earlier, we expect this to be easier to do in the “utility-like” part of the business but more difficult when it comes to higher-margin, more complex value-added business solution services. Most operators do not yet have a widely established “legitimacy” to position themselves in this space.

Our current assessment, therefore, is potentially problematic.

Effective communications

However good the messages, they need to be delivered effectively to the potential customers.

The B2B technology market is very different from consumer markets due to what is sometimes called the “market infrastructure”, the whole set of channels and influencers who come into play between the company and the customer. The infrastructure may be quite different depending on the segment and its maturity. In addition, the “intermediate” messages are not necessarily the same as the final message to the prospect or customer.

While we do not perceive France Telecom in general as having particularly strong communication skills, it does have the financial wherewithal to spend and invest substantially. The effect of massive “communications firepower” should never be underestimated.

For this reason, our assessment is: potentially a positive point, assuming of course good messages.

5. CLIENT MANAGEMENT

Competiveness in the mainstream B2B market for cloud services will require intimate knowledge of customers and their IT “usages” as well as the ability to manage the “total customer experience”. The “hidden agenda” is of course account control.

Although operators understand the telecommunication needs of business customers and have established strong sales organisations, they usually have more limited knowledge of the IT applications and organisations, hence much lower “intimacy”. They also usually lag integrators such as Accenture, HP/EDS or IBM GS in terms of access to, and attention from, the top management.

Duquesne believes that the portfolio of cloud based services will progressively enlarge from “plain vanilla” infrastructure (IaaS) and hosting to also include services and solutions that are closer to business needs, often in the form of SaaS. This evolution will require operators such as OBS to acquire progressively stronger “customer intimacy”.

We believe OBS has made progress in understanding and adapting to the needs and behavior of their corporate clients. However, this has not yet translated into massive recognition by clients.

Whatever the cloud service provided, however, effective client management will require optimising the “total customer experience” of doing business with the provider, at all of the “touch points”: sales, provisioning, technical support, security services, business solution services, billing…

Once again, this requires intimacy with the different “usages” of the cloud by the client. Developers utilising PaaS services will have different expectations than end-users of SaaS. All will be very demanding, as the promise of the cloud for users is immediate delivery with no hassles. With sales arguments also including increased business performance, agility, and responsiveness, client managers will expect top quality services and support. Unlike early adopters, the mainstream market will be less “autonomous”. Organising support and service to ensure client satisfaction will be critical, but it will also enable suppliers to build intimacy with customer usages over time. Leading cloud services suppliers will deliver integrated support and service across their eco-system, rather than limit it to their own, direct part of the solution.

Properly structuring and running the provider organisation that – at all of the “touch points” - will accompany clients throughout their cloud “experience” will be a key success factor.

Our assessment is: mixed, in other words, potentially a strong asset – or a major failure point.

How does it add up for Orange Business Services?

OBS has all the technical ingredients to develop a cloud services business. The financial, technical and R&D capabilities of the company, combined with its international reach as a major international telco operator, favorably position the company to address this market.

There are of course challenges. Organisational issues such as corporate culture can be problematic for any operator moving into IT services, and they will require sustained management attention. In terms of upstream and downstream marketing, tight strategic focus is critical, leveraging both OBS strengths and its eco-system, in order to build clear value propositions and compelling messages for each segment.

A big issue is customer IT usage intimacy, which will inevitably take time to build. Meanwhile, OBS will be at a disadvantage in terms of experience with non-telco IT “use cases” compared to IT players such as IBM GS, large integrators or even vertically integrated software editors such as Oracle.

Nevertheless, operators do have strengths beyond financial muscle and the sheer control of the network. In particular, they have unparalleled experience in industrialising customer support. OBS is well positioned here, as is the consumer internet and mobile arm of the group. Building on this experience, OBS can develop competitive edge if it succeeds at setting up the proper support and service offering and involves ecosystem partners in their delivery.

In this fast changing market, execution will be just as important as the original “profile” and assets of a given player. OBS will need to focus on execution and services quality, while building “usage intimacy” with customers, in order to establish itself as a true IT services provider – which is what the whole “cloud' is about, finally. This will take time and, beyond investments and communication, it will require perseverance and consistency.

Bottom Line: A User Perspective

The cloud is – and will remain for some time – a space in transition. The current excitement in the market results in almost anything being dubbed “cloud-oriented”. The stakes are high, however, since the cloud model (simply defined as on-demand, pay as you go delivery of IT resources and services) will develop into a main IT service delivery mode.

Small and some medium-sized businesses will benefit from the lowering of some technology “barriers to entry”: the drastic reduction of CAPEX requirements, the potential access to skills and solutions previously only accessible to larger organisations, will turn into true competitive advantage for them. Such businesses will find offerings such as those of OBS attractive – notably the notion of one-stop shopping, but also the technical credibility of OBS on issues such as security.

Larger organisations, where OBS is already an extensively “referenced” supplier (but mainly for telecom services), will be able to leverage a very competitive cloud market. In a broad and diversified spectrum of cloud offerings, OBS will bring an interesting option but face tough competition. Users should focus on selecting their supplier(s) on their capacity to create value while offering competitive prices. All large customers are likely to have to resist OBS' propensity to charge premium prices for services. Customers should be prepared for a thorough negotiation on these aspects. However, from a customer standpoint overall, OBS' entry into cloud services will be a welcome addition to the competitive landscape, likely to help elevate standards and contribute to the maturation of this market.

Finally, users must understand that all vendors' cloud offerings are still in the making. They should carefully check the reality behind often exaggerated marketing messages, and avoid attempting to identify “the” potential winners: the market will continue to evolve, players with different profiles, sizes, and “IT origins” will coexist and compete. Some suppliers will merge, others will disappear, withdraw, or sell their cloud business. Having no possibility to either predict or influence these shifts, users must keep an eye on potential vendor lock-in. Openness will be a key requirement, enabling portability of cloud-based operations and vendor independence.

Note: “Orange Business Services” is the official name of the enterprise services branch of France Telecom. In this research report, we have sometimes used “OBS” for the sake of brevity.

Monday, June 28th 2010
Duquesne Advisory
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