Here's how data center gear, on-premises software could be trendy

Sure, the globe is going cloud, but in countries with slowing economies there will be a happy balance between buyers who want cost savings and vendors desperate to sell legacy enterprise tech.
Written by Larry Dignan, Contributor

On-premise software and hardware could be appealing to business tech buyers in international markets with slowing economies and vendors just looking to close deals.

That takeaway, which flips on its head the concept that workloads are going en masse to the cloud globally, surfaced this week in a Forrester Research report on IT spending for 2016. Forrester projected moderate growth in IT spending with gains of 4.5 percent in 2016. The biggest reason growth is moderate at best is economic turmoil in Europe, Brazil, China and the Middle East.

As noted by Steve Ranger in his take on the Forrester report, software and the cloud are the belles of the IT spending ball. Hardware is a backwater.


So why would any CIO be thinking on-prem applications? There is an exception where hardware and on-prem software won't be a backwater. In the U.S., CIOs will swarm to cloud and projects that boost revenue and customer growth. In slowing economies, CIOs should consider going old-school, said Forrester.

The research firm noted:

Salesforce, NetSuite, and other SaaS vendors of BT technologies still have two-thirds of their clients in the US, and their international presence is mostly confined to the UK, Australia, Scandinavia, and maybe the Netherlands, Switzerland, or Germany. But IBM, Infor, Oracle, SAP, and other traditional application vendors do offer on-premises or hosted versions of most BT software products. Demand is weak in the US for these products, so vendors often sell them on a heavily discounted basis. In addition, with revenue growth hard to achieve in Canada, Japan, most European countries, and many emerging markets, IT technologies that help cut operating costs will remain very much in demand. Here, too, the vendors of these software products will be willing to cut deals to move product.

Ditto for hardware. Vendors will struggle to sell traditional data center gear, and Forrester noted that international customers can strike a good hybrid balance to cut costs. "The right balance is likely to be a hybrid: Use owned infrastructure for steady-state workloads, but use cloud for peak loads and special projects. With costs of infrastructure hardware and software going down and the potential for big rises in the cost of cloud platform services, a decision to own rather than rent infrastructure is looking increasingly rational," said Forrester.

The long-term trend is going to be that workloads move to the cloud, but global economic hiccups may delay that transition. Not all analysts will buy into this on-prem hardware and software concept Forrester floated. For instance, Bernstein analyst noted that workloads are going to move to the public cloud as on-premises infrastructure hits end of life.

Bernstein analyst Carlos Kirjner made the all-too-familiar case that the enterprise incumbents are screwed by the cloud providers over time. Kirjner said:

It is highly likely that there is a significant deflationary factor associated with migration of compute, communication, and storage loads to the cloud ($1 of cloud spend probably corresponds to $2-$3 dollars of total IT spend), as enterprise customers will pay only for what they use, as they use it (there are multiple studies showing that asset utilization in data centers can be as low as 30%, suggesting a potential of a deflationary factor greater than 3x). This would imply that the $50 billion spend in public cloud in fact corresponds to more than $150 billion of IT spend, a whopping 15% of the total addressable market. It follows easily that anyone in the business of manufacturing and selling servers, storage, routers, switches, middleware, and related integration services for enterprise, government, or educational institutions datacenters will likely see massive headwinds over the next several years. One must have one's head stuck in a very remote place to ignore this trend and claim that everything is alright for incumbents.

Kirjner did note that it remains to be seen whether this cloud deflation hits enterprise application vendors--the same ones who would be selling on-prem software to international customers in Forrester's scenario. But Kirjner did say that AWS move into email and calendar probably indicates that the cloud provider is moving up the stack at some point.

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