Cloud may take a while to be the rainmaker for IT firms

Cloud-based businesses of IT services providers may take longer to show growth and profitability than initially anticipated, analysts have said.

While the evolution of cloud as a technology is not in dispute, they said the acceleration led by the Covid-19 outbreak on cloud services providers and IT firms is uncertain for now.

In fact, cloud-related revenues for companies like Infosys and TCS are only expected to grow gradually by financial year 2022 rather than in the second half of the ongoing fiscal year, they said.

Hyperscale cloud providers like Amazon Web Services have downgraded their cloud business prospects to a ‘mixed bag’ status and no cloud provider has reported a growth spurt in the nine months ended September 30.

This means IT firms, which are cloud partners of these companies, will take longer to bag cloud-based large deals, said Sudheer Guntupalli and Hardik Sangani of ICICI Securities.

“Rather than reporting a major spurt, incremental sales booked by AWS and Microsoft ICS, post-Covid-19 (results) was weak. This does not reconcile with the hype around cloud being the backbone for the business continuity during the lockdown,” they said.

In a note last month, industry consultant Gartner said that cloud ‘scaled up’ during Covid-19 and ‘scaled down’ subsequently.

Gartner expects “accelerated penetration” of cloud technology through calendar year 2022 rather than this year.

Guntupalli and Sangani of ICICI said, “We anticipate a similar roll-forward of expectations from IT firms as well, with a lag. Accordingly, consensus anticipation of a material improvement in their growth/profitability needs a reality check.”

According to experts, cloud technology has effectively captured the market for development of new platforms and applications. However, cloud providers are looking to tap the larger opportunity, of clients seeking to convert their legacy IT infrastructure to the cloud.

For that, they would need the help of Indian IT services firms, though this would be a long drawn out process, said Peter Bendor-Samuel, CEO at Everest Group.

“This (conversion) is a much more difficult thing to accomplish as Legacy IT is well entrenched and both expensive and risky to move. We saw an increase in activity during Covid-19 of legacy conversion, but this died down as firms faced the significant challenges of expense and risk,” he said.

Cloud migration will, however, be the most sought-after market for IT services providers in the next five years, he said.

“The last frontier for Cloud is the Legacy estates and Big Tech is putting a wall of money behind this attack. It is these incentives that the services firms are excited about and are frantically aligning their go-to-market with Big Tech to capture and utilize, to drive what looks to be huge amounts of cloud conversion business,” Bendor-Samuel pointed out.

According to Pareekh Jain, the founder of Pareekh Consulting, currently up to 20% of IT workloads were on the cloud and this might increase to 80% in the next five years.

“It became a C-suite priority to make enterprises resilient and able to work virtually, but yes, it will take time. Enterprises’ IT budgets are not increasing, so they will have to generate savings from their legacy operations to invest in cloud. It will be a gradual four- to five-year process,” he said, adding that all large IT services providers have been doubling down on their cloud strategy.