Managed VPNs
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  • 1. Managed VPNs Enhanced Revenue Opportunities for Service Providers March 2002 255 West Julian Street • Suite 402 • San Jose • California • 95110-2406 • t 408.298.7999 • f 408.298.2073 www.infonetics.com • Silicon Valley, CA • Watford, UK • Boston, MA
  • 2. Copyright © 2002 by Infonetics Research, Inc. Entire contents copyrighted by Infonetics Research, Inc. Unauthorized redistribution, electronic or otherwise, without prior written approval of Infonetics Research, Inc., is prohibited by law. Requests for permission to copy or distribute should be made to Infonetics Research, Inc. ii Copyright © 2002 by Infonetics Research, Inc. All rights reserved. Reproduction is prohibited.
  • 3. Managed VPNs Table of Contents I. VPN Trends and Vertical Market Drivers ...... 5 A. Introduction ..............................................................................................5 B. Benefits of VPNs.......................................................................................6 C. VPN Adoption Strategies........................................................................8 D. Factors Affecting VPN Adoption Strategies.........................................9 E. Vertical Market Drivers...........................................................................11 II. The Managed VPN Service Market Opportunity..................................................... 12 III. The Benefits of Offering Managed VPNs...... 13 A. Differentiation...........................................................................................13 B. Increased Revenue and Profitability .....................................................13 C. Customer Growth and Retention...........................................................14 IV. The Benefits of Outsourcing VPN Services........................................................... 15 A. Reduced Capital and Operational Costs...............................................15 B. Time to Market .........................................................................................16 C. Service Flexibility .....................................................................................16 V. Conclusions.................................................... 17 Copyright © 2002 by Infonetics Research, Inc. All rights reserved. Reproduction is prohibited. iii
  • 4. Infonetics Research, Inc. List of Exhibits I. VPN Trends and Vertical Market Drivers Exhibit 1 Benefits of Implementing VPNs ................................................. 6 Exhibit 2 VPN Deployment Strategy .......................................................... 8 Exhibit 3 Deployment Strategy Drivers ..................................................... 10 II. The Managed VPN Service Market Opportunity Exhibit 4 Worldwide End-User VPN Service Expenditures ................... 12 iv Copyright © 2002 by Infonetics Research, Inc. All rights reserved. Reproduction is prohibited.
  • 5. Managed VPNs I. VPN Trends and Vertical Market Drivers A. Introduction The hoopla and promise of five years ago (when VPNs were new) has been fulfilled, although some naysayers don’t realize it, as they don’t understand the size of the market in which VPNs compete. VPNs are not a niche, they are central to telecommunications, and their growth potential is nearly unlimited. VPNs have become mainstream: q Worldwide, organizations of all sizes are implementing them q Most network product manufacturers have at least one VPN solution q Most service providers investigating managed VPNs q According to our VPN and Firewall Products quarterly worldwide market share and forecast service, manufacturers derived over $1.8 billion in revenues from VPN hardware and software in 2001 The importance of protecting the network does not depend on economic ups and downs, and the heightened sense of awareness of vulnerabilities serves to promote continuing interest in VPN products and services. Organizations of all sizes feel the need for managed VPN services; small companies lack professional expertise, large companies that acquire expertise may see it rapidly outdated as new problems and solutions arise, and medium companies share both difficulties. Service providers who offer customers a fully managed VPN service using CPE- based VPN solutions greatly decrease the perceived complexity of VPNs, and will drive adoption of VPNs at organizations of all sizes. VPNs are being adopted by organizations of all types and sizes, but what drives them to adopt VPNs, and what do some typical customers look like? Copyright © 2002 by Infonetics Research, Inc. All rights reserved. Reproduction is prohibited. 5
  • 6. Infonetics Research, Inc. B. Benefits of VPNs In the 2001 Infonetics Research study User Plans for VPN Products and Services, US/Canada 2001, we interviewed 80 large (more than 1,000 employees), 80 medium (101 to 1,000 employees) and 80 small (20 to 100) organizations planning to deploy VPNs by 2003. This study is excerpted throughout this paper. The chart below looks at customer perception of the benefits of VPNs; the chart shows the percent of respondents rating each benefit a 6 or 7, on a scale of 1 to 7 where 1 is not important and 7 is critical. Exhibit 1 Benefits of Implementing VPNs (Q11, n=240) Increased security 60% Better customer service 49% Ability to quickly add remote access users, sites, or extranet partners 45% Paybacks and Benefits Improve communications with customers, partners, or suppliers 44% Increased bandwidth using VPNs with DSL or cable 43% Increased network uptime 43% Reduction of operation and management costs 42% Dial-up or dedicated connection cost savings 40% Increased geographical coverage 32% Reduction of remote access equipment 28% 0% 20% 40% 60% Percent of Respondents Rating 6 or 7 Increased security is rated a very important VPN benefit by 60% of respondents. Better customer service is a benefit for nearly half of the respondents; extranets, and the services they enable, are made affordable by VPNs. The ability to quickly 6 Copyright © 2002 by Infonetics Research, Inc. All rights reserved. Reproduction is prohibited.
  • 7. Managed VPNs add remote access users, sites, or extranet partners is next on the list at 45%. And not far behind is reduction of operation and management costs at 42%. The benefits that respondents see when evaluating VPNs help explain the rapid growth of the managed VPN service market. Many organizations will outsource their VPN deployments because they are concerned about security and believe service providers who specialize in VPNs and security can do a better job securing connections than they do themselves. Also, end-users are concerned with rolling out sites, users, and partners quickly, and this is easier with managed VPNs than with self-managed VPNs. Copyright © 2002 by Infonetics Research, Inc. All rights reserved. Reproduction is prohibited. 7
  • 8. Infonetics Research, Inc. C. VPN Adoption Strategies We asked respondents to choose which of the following four adoption strategies best describes their approach to implementing VPNs: 1. Self-managed CPE: deploy VPN CPE ourselves and handle all aspects of deploying and managing VPNs internally 2. CPE with some outsourcing: deploy VPN CPE ourselves but outsource some aspects of design, installation, and ongoing management to a third party (VAR, integrator, service provider, etc.) 3. Managed CPE service: deploy VPN CPE as part of a fully-managed CPE-based service, where the service provider is responsible for the ongoing management of the VPN CPE 4. Managed network service: deploy network-based VPNs, for which there is no VPN CPE at our sites and tunnels are initiated and terminated in the service provider’s network Exhibit 2 VPN Deployment Strategy (Q13, n=240) VPN Deployment Strategy CPE with some outsourcing 36% Self- managed CPE 44% Managed CPE service 10% Managed network-based service 10% Self-managed CPE accounts for the largest block of the deployment strategies; most early technology adopters deploy and manage that technology on their 8 Copyright © 2002 by Infonetics Research, Inc. All rights reserved. Reproduction is prohibited.
  • 9. Managed VPNs own, but as VPNs move into the mainstream, outsourcing and managed services become very attractive to the average customer. Deploying CPE with some outsourcing helps organizations inexperienced in the design, integration, or management of VPN solutions. Most managed CPE-based services fall in between CPE with some outsourcing and managed CPE services, and these two categories combined account for nearly half of user plans for VPN services. We expect that users will migrate from self-managed CPE VPNs to CPE VPNs with some outsourcing, and from there to fully managed CPE VPNs; this expectation is reflected in our VPN service revenue forecast. D. Factors Affecting VPN Adoption Strategies In an open-ended question, we asked respondents why they chose each deployment strategy. The chart below shows the percentage of respondents that gave a particular response within each of the four groups. Control, expertise, and cost are the three issues driving most decisions, but they drive decisions in different directions. Copyright © 2002 by Infonetics Research, Inc. All rights reserved. Reproduction is prohibited. 9
  • 10. Infonetics Research, Inc. Many respondents building their own CPE-based VPNs do so to retain all control, but control is also cited as a reason to select managed services. Most telling is that 46% of respondents planning to deploy managed CPE-based services and 29% outsourcing some of their CPE management do so because they don’t have the staff in place to manage VPNs on their own. Exhibit 3 Deployment Strategy Drivers (Q14, n=106, 87, 24, 23) 28% 23% Control 8% 0% 18% 22% Cost 8% Reasons for Choosing Deployment Strategy 17% 16% 29% Staff 46% 13% 11% 5% Security 0% 9% 8% 6% Ease of use 0% 13% 5% 1% Embedded solution 0% 0% 4% 2% Speed of deployment 4% 0% 4% 1% Self-managed CPE Politics/budget 4% 9% CPE with outsourcing 3% Managed CPE Trust/service provider 0% problems 0% Network-based 0% 0% 10% 20% 30% 40% 50% Percent of Respondents 10 Copyright © 2002 by Infonetics Research, Inc. All rights reserved. Reproduction is prohibited.
  • 11. Managed VPNs E. Vertical Market Drivers The demand for VPNs is horizontal; anyone with a desire to build out remote access, connect sites together, or connect to their business partners is a potential VPN customer. There are a few industries that represent unique opportunities for VPN service providers for a variety of reasons. Managed VPN services are a natural for retail organizations, which are usually highly distributed and typically have little IT expertise. They are cost-conscious, and many are looking to leverage broadband Internet connections to build site- to-site networks between retail outlets and headquarters. The healthcare market is ripe with opportunity for VPN service providers. Hospitals need to connect to each other, to insurance companies, to pharmacies, and to their doctors, and all connections have strong privacy requirements; VPNs are a natural solution for securely sharing information. Healthcare organizations are typically cost-conscious, which increases the appeal of VPNs, and the complexity of their deployments usually means outsourcing or managed services. Regulations also enter the picture in the healthcare market. The Health Insurance Portability and Accountability Act (HIPAA) is federal legislation intended to simplify the administration of health care plans and their associated claim and payment processes. Health care organizations will need to be fully compliant with this legislation by April 2003. HIPAA mandates no specific technical practices for privacy or security, but there are areas that most likely will require a technical solution and must be addressed. Finance has been a tough market for VPN service providers, but the potential opportunity is large; companies from large international banks to boutique VCs are investigating VPN services. Most financial organizations have strong security requirements, and the Gramm-Leach-Bliley Act of 1999 (GLBA) has increased awareness of security issues among financial organizations. GLBA required that financial institutions have a comprehensive written information security program in place by July 1, 2001, with implementation to follow. Each institution must consider a variety factors and design an information security program appropriate for their organization’s size and complexity. Financial organizations tend to be highly distributed, and the data that flows across their networks is critical. VPNs deployed with PKI could satisfy even the strongest security requirements. Copyright © 2002 by Infonetics Research, Inc. All rights reserved. Reproduction is prohibited. 11
  • 12. Infonetics Research, Inc. II. The Managed VPN Service Market Opportunity The market potential for VPN services is huge, and managed CPE-based VPN service expenditures are leading the charge. Worldwide expenditures for managed CPE-based VPN services will grow 382% between 2001 and 2005, and represent the largest VPN service opportunity. Service revenues for unmanaged services (which include IP bandwidth and some design, installation services) begin to decline after 2004, and are already losing momentum. Network-based services grow strongly, but are dependent on huge infrastructure investments by carriers in network-based IPSec and MPLS hardware. VPNs represent the future for remote access, WAN, and extranet connectivity for organizations of all types and sizes across the globe. Exhibit 4 Worldwide End-User VPN Service Expenditures $18,048 $20,000 Expenditures (US$M) $15,000 $9,434 $3,742 $13,536 $10,000 $5,131 $5,000 sed ba E- ge d $1,817 CP a ed an ed $0 m ag Un as an -b 2001 2002 2003 2004 2005 M rk two Ne Year 12 Copyright © 2002 by Infonetics Research, Inc. All rights reserved. Reproduction is prohibited.
  • 13. Managed VPNs III. The Benefits of Offering Managed VPNs Customers of all sizes and types are evaluating and deploying managed VPN services, which means that service providers who don’t offer managed VPNs are at a distinct disadvantage moving forward. A. Differentiation Managed VPN services help service providers begin to differentiate themselves from the crowded service provider market. They provide a service offering beyond generic access, which is a first step, and are an excellent compliment to hosting offerings, and most hosting providers have avoided the issue of secure access to hosted business applications (a natural fit for VPNs). Security is one of the hottest topics in IT today, and most end-users are investigating the security implications of any product or service they buy. It is increasingly common for end-users to select their service providers for any type of service based on their security reputation, and service providers should build a strong security reputation however they can. Adding VPN services to the menu shows a commitment to security that is very important today, and may help service providers gain or retain customers in all areas of your business. B. Increased Revenue and Profitability It hardly needs to be said that adding VPNs will increase service provider revenues; what is important is how much the potential increase is. In our study User Plans for VPN Products and Services, US/Canada 2001, we forecast that the worldwide managed CPE-based VPN service opportunity will total over $7 billion in 2002, and will grow to over $18 billion by 2005. Service providers who don’t offer managed VPNs will miss out on this dollar opportunity, and will ultimately begin to look like dinosaurs in the IP services world. Many customers deploy VPNs initially to save money, but they end up having to greatly increase the number and bandwidth of their Internet connections to Copyright © 2002 by Infonetics Research, Inc. All rights reserved. Reproduction is prohibited. 13
  • 14. Infonetics Research, Inc. support the growth of VPNs. VPNs also drive purchases of all types of broadband services, including DSL, cable, and wireless—customers deploying VPNs will buy broadband Internet connections for remote users and sites, including those that weren’t connected before the VPN was installed. Finally, VPNs themselves are higher-margin services than traditional WAN and remote access services, and there are fewer established competitors in the managed VPN space. VPNs also create a platform for selling additional high- margin services. Since VPNs are IP-based, providers can layer IP voice and video services on top of them. The natural relationship between VPNs and security means that many managed VPN service customers will look for the provider to help them with managed security, from the relatively mundane (managed firewalls) to complex security monitoring and event correlation services. VPNs also enable providers to begin offering high-margin extranet services. The possibilities are nearly limitless. C. Customer Growth and Retention Most large organizations already have networks in place (WANs, remote access networks, extranets), but for many small and medium organizations, networking beyond the LAN using traditional technologies is out of reach cost-wise. VPNs make remote access, WANs, and extranet connectivity affordable to organizations of all sizes, opening up new customer segments for many service providers. When end-users purchase a managed service, it tends to create a strong dependency on the service provider. This dependency means that customers are likely to stick around for more than just the term of their contract, and will likely look to service providers to provide a variety of other managed services. 14 Copyright © 2002 by Infonetics Research, Inc. All rights reserved. Reproduction is prohibited.
  • 15. Managed VPNs IV. The Benefits of Outsourcing VPN Services End-users are adopting VPNs and moving to managed services in increasing numbers, but not every service provider is ready to start offering VPNs. They require VPN and security experts, training in new technologies (such as IPSec and digital certificates), VPN support infrastructure, and VPN management tools. Luckily, service providers have alternatives to building their own managed VPN services; some product manufacturers and service providers will take over the burden of deploying and managing VPNs. A. Reduced Capital and Operational Costs Most service providers are feeling the CAPEX crunch, but need to find ways to build out new high-margin services. Partnering to deliver managed VPN services obviates the need to lay out a lot of cash to get the services up and running. While CPE-based solutions don’t require the type of network infrastructure investment that network-based services do, there is still considerable up-front and recurring cost to get services up and running. Customers fund the purchase of the CPE itself, but most CPE manufacturers charge for their carrier-class service management tools, and typically service providers invest in some off-the- shelf management tools as well. For VPN services to run smoothly, most service providers managing their own services have designed and built complex NOCs, and paid to have their staff trained in a variety of VPN and security tools, which can be quite expensive. VPN technology itself is only part of the full service; most VPN services include some type of firewall, as well as authentication and possibly PKI. This means that service providers will need to invest in tools to deploy and managed firewalls and authentication/PKI to enable their services. Along with decreased CAPEX comes decreased OPEX. Outsourcing managed VPNs means that the partner handles the burden of the OPEX related to VPN services. They provide ongoing management of the VPN devices themselves, as Copyright © 2002 by Infonetics Research, Inc. All rights reserved. Reproduction is prohibited. 15
  • 16. Infonetics Research, Inc. well as the ancillary tools that enable VPNs (such as firewalls, authentication, and PKI). B. Time to Market The managed VPN service market is developing rapidly, but there are no clear market leaders. The opportunity to enter the managed VPN service market and gain share rapidly is now, and not every provider who wants to enter it can afford a lengthy infrastructure build-out. Partnering with a product manufacturer or service provider to deliver managed VPN services enables service providers to deliver VPNs rapidly. These potential partners have service infrastructure in place, including operations centers for managing services, relationships for CPE devices, trained management and customer service staff, installation teams, and sales and marketing tools. There is some variation in how quickly these partners can get your services up and running, however, so make sure to question potential partners at length, and talk to their existing partners to validate their claims. C. Service Flexibility VPN product manufacturers constantly release new features, products, and technologies that are typically designed to enable new revenue streams for service providers, but most service providers managing their own VPN service infrastructure don’t have the time to manage their existing services, much less roll out new ones. Product manufacturers and service providers who offer outsourced VPN services build their infrastructure in a way that allows them to quickly deploy new features and services. The benefit to their partners is flexibility in service offerings. If the customer demands a new service or feature, they can typically roll it out in days or weeks, instead of months, because of their sole focus on managing VPN services. Service flexibility is key to customer retention, and any service provider looking to roll out managed VPNs should seriously consider how quickly they can get new features and services up and running. 16 Copyright © 2002 by Infonetics Research, Inc. All rights reserved. Reproduction is prohibited.
  • 17. Managed VPNs V. Conclusions The VPN market is here and growing fast. Service providers who want to capitalize on the opportunity should roll out VPN services quickly, before the market consolidates. Service providers should focus on market segments where the drivers to adopt VPNs are particularly strong, such as healthcare, finance, and retail. Fully managed CPE-based VPNs are the best way for most service providers to tap into the VPN service revenue opportunity, because they add margin and increase customer retention; worldwide expenditures for managed CPE-based VPN services will grow 382% between 2001 and 2005. Access to VPN expertise is scarce, and many service providers have had a difficult time building out their own infrastructure to support managed CPE- based VPN services, so it makes sense to consider outsourcing the management of VPN services to a third party. Good partners will help service providers get to market quickly, greatly reduce the costs of building and operating services, and provide a high level of service flexibility, all of which make for happy customers. Copyright © 2002 by Infonetics Research, Inc. All rights reserved. Reproduction is prohibited. 17
  • 18. About Infonetics Research Infonetics Research is an international market research and consulting firm covering the data networking and telecommunications industries. We offer a complete, objective view of the market through in-depth analysis of end-user and service provider buying plans and product manufacturer market share and market size. By accurately assessing the state of the data networking and telecommunications markets, we help companies develop effective marketing messages, strategic positioning, successful products and services, and shorter product development cycles. Our analysts are experts in their fields and are highly respected throughout the industry. They: • Provide consulting to established and startup service providers, manufacturers, and the investment community • Lead our market share and forecast services, and are core members of a team that authors in-depth demand-side studies, white papers, and articles for trade publications • Develop content for, chair, and speak at industry events throughout the year, including N+I, SuperComm, VPNcon, Optical Networking Summit, Scalable Next-Generation Internet Data Centers, DSL World Forum, and SUPERnet • Are quoted frequently in vendor press releases and in trade publications: over 700 unique quotes in more than 80 publications from around the world in the past 12 months, including abcNEWS.com, BCR, CBS Marketwatch, CNet, Forbes, InfoWeek, InfoWorld, Inter@ctive Week, InternetWeek, Investor’s Business Daily, MSN CNBC, Network Magazine, NetworkWorld, PC Week, San Jose Mercury News, tele.com, Telecommunications International, Telephony, and The Wall Street Journal Our research team has experience in all areas of the research process, including survey research methodology, sampling, advanced statistics, forecasting techniques, data analysis, and advanced use of statistical and survey-related software tools. Our technical writers have experience presenting complex data and analysis clearly. Coverage Areas • Network Technology Adoption • VPNs and Security • Service Provider Networks • E-Business Infrastructure and Hosting • Intelligent Optical Networks • WAN, Internet, and New Metro Access • Network Management Services • Worldwide supply-side market share, market size, and forecasts • Multiclient demand-side research in the US/Canada and Europe • Service provider databases for US/Canada, Europe, and Asia • Custom market research and consulting Contact Western North America Eastern North America Europe/ROW Larry Howard, Vice Pres. Paul Ruggeri, Sales Director Gautam Sabharwal, Account Mgr. (408) 298.7999 x225 (401) 826.2160 +44 (0) 19.2343.8276 larry@infonetics.com paul@infonetics.com gautam@infonetics.com For more information on our services, individual studies, methodology, and analysts, please refer to the Infonetics Research Corporate Profile or visit www.infonetics.com.