"ODM companies are rapidly changing their business model, as they are directly targeting hyperscale customers. These companies are expanding their business scope to also include enterprises in the near term," said Naveen Mishra, research director at Gartner.

"Direct engagement with hyperscale data centers (DCs) is the biggest contributor to ODM growth. These customers are willing to consider innovative DC infrastructure designs that can offer better scalability and can drastically reduce the total cost of ownership of servers (including power and cooling expense) compared with mainstream servers offered by traditional server OEMs."

Growth in Web-based business models is driving hyperscale investment. Gartner estimates that the hyperscale segment will contribute 82 percent of the direct ODM server revenue in 2014. Rather than choosing mainstream OEM servers, these customers prefer ODM-supplied servers due to their lower cost, and innovative and efficient design, along with the ability to customize the systems.

"ODMs have strong credentials of technical knowledge and capabilities in designing customized

server solutions for varying customer needs," said Mr. Mishra. "Current ODM success is primarily restricted to server technology,” Naveen Mishra added.

“However, OEMs need to recognize that this can eventually impact other technologies, especially storage. ODMs are already shipping storage (primarily internal), along with custom-built servers. Open stack storage solutions are slowly gaining traction with ODMs, which can disrupt the established external controller-based storage vendors."

In the short term, ODMs are focusing on targeting the hyperscale segment; however, they are also contemplating penetrating into the enterprise market. The challenge for ODMs is to transition their custom-built products for these enterprises.

Increasing awareness among enterprises regarding Open Compute Project (OCP) can potentially enable enterprise decisions to partner with ODMs, as these engagements will be backed by the OCP community. ODMs should continue their short-term focus on large DCs. North America, Western Europe and the Asia/Pacific are the top three markets, with 82 percent of all DC sites.

With the need to scale to hundreds of thousands of servers, some Web services companies and

traditional enterprises have sought more cost-effective procurement through sourcing directly from ODM companies, cutting out traditional OEMs from the supply chain.

ODMs have the scalability and business model that allows them to provide lower-cost platforms. ODMs can drive cost-efficiency by virtue of their presence in areas in China and Taiwan, which helps them procure resources at a lower average selling price. With ODMs gaining success and economies of scale, their pricing structure will become more aggressive.