Enabling the new enterprise IT stack for the clouds Third Wave – Diginomica

Two decades after cloud computing first came into our vernacular, more than 70% of companies have migrated at least some workloads into the public cloud. This is much more than a lift-and-shift of the same applications as before in many cases the workloads are running on entirely new, cloud-native platforms.

This mainstream adoption and the acceleration of digital across all aspects of a business has completely reinvented the enterprise IT stack and given rise to a whole different ecosystem of consultancies. These cloud-savvy consultancies offer everything from experience design to digital engineering services alongside the more traditional data management, security, implementation and integration services. They are becoming the glue holding the new enterprise stack together.

Here is a quick snapshot of how the cloud has evolved over the last 20+ years, and how we see the Third Wave progressing.

Many of the same characteristics that have made cloud computing so pervasive remain true in the third wave namely the access, speed, agility, performance and innovation it enables. After all, waves do tend to build on each other. However, some things have evolved.

It's a hybrid mix. While the trend toward public cloud is still accelerating, it's easy to forget that 98% of businesses still rely on on-premise IT infrastructures. Not every legacy application can - or should - be pushed to the cloud, so there will always be at least some that remain on-premise. When you consider that IBM mainframes are still used by 44 of the top 50 banks and all top 10 insurers worldwide, it's clear that a hybrid approach that can accommodate on-prem assets will be a reality for many years to come.

It's multi-cloud and multi-app. Business demands a mix of large platforms, dozens of apps, and hundreds of tools. According to the Netskope 2021 Cloud and Threat report, app adoption increased 22% during the first six months of 2021, and the average company with 500 - 2,000 users now uses 805 distinct apps and cloud services, and has to manage the API-led integration associated with this best-of-breed portfolio. On the infrastructure side, when even the mighty Amazon Web Services (AWS) can suffer an hours-long outage that took down a wide swath of the internet as it did earlier this month, it's a reminder that a multi-cloud approach often makes sense.

It's data intensive.More than any other factor, the Third Wave is about connection and creating seamless digital experiences. In their 2019 book,Connected Strategy: Building Continuous Customer Relationships for Competitive Advantage, authors Christian Terwiesch and Nicolaj Siggelkow identified four connected customer experiences that firms can create: 1) "response-to-desire" journeys, 2) curated offerings, 3) coach behaviors, and 4) automatic execution. Each of these experiences can help turn episodic interactions into continuous relationships - and not coincidentally, revenue.

But you can't create those connections without a Third Wave enterprise IT stack, and it's not easy to keep those connections working reliably and consistently without a rock-solid service ecosystem supporting it.

As in each prior wave, there is a set of go-to Third Wave platforms that act as a foundation for many organization's IT and business operations. Some, like Salesforce, ServiceNow, AWS, Google and Microsoft, are household names that have grown their platforms and market share substantially over the last 10 years. According to Synergy Research, AWS, Microsoft Azure, Google Cloud, Alibaba and IBM comprise 80% of the public cloud market.

However, there are hundreds of smaller players and emerging platforms vying for success, including names like Okta, Cloudflare, Commerce Tools, Snowflake, Twilio, DataDog, DataBricks, and UIPath just to name a few.

These new firms are driving a tremendous amount of innovation in the space, helping companies automate, connect, secure and manage all those digital interactions that are so critical in the Third Wave. Many of these tools have made it far easier than in the past to interconnect and work together, however, those connections don't build and evolve themselves. After all, the cloud never stands still. It's constantly evolving.

Customers and vendors alike are looking for help navigating the growing complexity and interconnectedness of the Third Wave, to drive usage and deliver value on an ongoing basis. Suddenly technology services look less and less like a cost center, and more and more like the engine of customer success.

The new Enterprise IT Stack for the cloud's Third Wave depends on a vibrant service ecosystem. Gartner predicts that 85% of large organizations will engage external service providers to migrate applications to the cloud (up from 43% in 2019). And that's just to get started. There's also a growing need to manage those cloud-based solutions.

Are there a growing number of firms looking to compete for that budget, especially with valuations nudging upward? You bet there are.

But not all Third Wave cloud consultancies are equal. Nor will all grow fast enough to capitalize on the unprecedented opportunities of this next wave.

Giant ecosystems like Salesforce have 1,700 service providers, and all the emerging players in that new IT stack are working hard to build out their own set of trusted providers. Growth and diversification matters as much in services as it does in software. Customers sometimes need industry giants like Accenture, Deloitte, and Wipro, and other times they need the flexibility to work with smart boutiques who are agile, fast and know platforms or domains inside and out.

At Tercera, we focus exclusively on these Third Wave ecosystems, and our goal is to identify and help grow the top services players for these emerging platforms. Here's our view of what distinguishes the services winners in the Third Wave.

We look for firms that not only specialize in the platforms, but bring something unique to the space. Some of our portfolio companies have a deep vertical specialty, others have unique IP/accelerators, or a unique methodology.

A consultancy with broad but shallow experience across many industries isn't nearly as valuable as a firm with deep expertise serving large financial services companies.

Look at Salesforce's acquisition of Vlocity in 2020 for $1.3 billion (approximately 8x forward looking revenue), and Wipro's acquisition of Capco for $1.45 billion.

Focus matters.

Winning Third Wave cloud consultancies will offer a lifecycle of services that help their customers conceive, construct and utilize digital processes with ongoing insight and support across the entire journey. Tech firms need some design and strategy chops (or amazing partners). Strategy firms need deep technical skills. Firms that help deliver real business outcomes, not just individual projects are the ones that will be seen as a strategic partner, not just a one-and-done service provider.

Central to all of this is talent especially in today's market. The best services firms must develop new techniques to find the best talent, train a diverse team and motivate them in different ways than the past. This will require an investment in culture, in developing people (stop calling them heads or resources!), and new tools to facilitate virtual collaboration, communication and connectivity across the organization and with customers.

I've spent the majority of my career building and investing in cloud and professional services and a lot has changed. But a lot has stayed the same. Here's what I can tell you:

The vendors that are driving innovation in the space today will evolve, and they will require a diverse service ecosystem. The number of services firms serving this space is going to grow substantially over the next few years as cloud continues, but there will always be the stand-outs - the firms that attract the best talent and the most interesting customers. If you think you're one of those firms, we'd love to hear from you!

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Enabling the new enterprise IT stack for the clouds Third Wave - Diginomica