Cloud is starting to disrupt the outsourcing industry, in a very profound way. That's the conclusion of a new study from Information Services Group (ISG), which closely tracks and provides advice to the outsourcing industry. The question is: will organizations begin to prefer more granular, cloud-delivered services over larger outsourcing arrangements?
The percentage of ISG’s advised contracts with cloud in scope has grown steadily, the firm reports -- from 9% in 2010 to 20% in 2011 to almost 27% so far this year. The number of purely cloud-related contracts also grew over the past year, rising from 109 to 223, for an escalation of 120%.
Half of the outsourcing service providers studied claimed that one-fourth of their pipeline of opportunities now included cloud,-based services ISG adds. The service providers also expect cloud services to grow faster than traditional IT outsourcing, especially in the US market.
"We're seeing more and more company incorporate infrastructure as a service into their IT outsourcing deals,” says Stanton Jones, emerging technology analyst at ISG. He adds that IT outsourcing (ITO) and business process outsourcing (BPO) are seeing two distinct types of cloud engagements – and two levels of disruption. ITO is being driven by Infrastructure as a Service engagements, in which companies look to providers for computing processing capacity, storage, or middleware. BPO, on the other hand, is being driven by Software as a Service offerings. And it's with BPO where the most intense disruptions are likely, he adds.
Enterprises, in fact, are expressing high levels of interest in outsourcing their CRM, HR, and email functions to SaaS providers, says Jones. This, in turn, is creating new relationships outside the IT department. “Executives are saying, 'I now have the ability to go out and get my own system, like a Workday or a Salesforce or an Oracle Fusion.' As those move forward, the traditional sourcing arrangement really gets blown up. Because you may have had a provider in there that was managing the HR infrastructure, and you may have had another provider in there managing the applications of both the run and the customization. Now Workday can come in and displace that whole thing. Those environments and those providers are no longer needed, because its available from the public cloud. That’s where we see the most significant disruption happening."
The direction and control of outsourcing is shifting as well – away from IT departments and to functional business units, especially SaaS-based HR and CRM. "Is handing your HR system to Workday outsourcing?" Jones asks. "In some ways it is. When a company moves from a Tier-1 ERP on-premises to Workday, the infrastructure is leaving the data center.”
As a result, he continues, “the SaaS model is only going to accelerate and blow up the way we think about IT internally,and how were going to manage it, how were going to source it, a new set if providers that can actually come in and do this work And the idea of bundling that with standard services is very appealing. HR is a good example because that’s we're seeing a huge amount of demand right now."
This also calls for new skillsets, Jones adds. “When you start to move up the stack with a Software as a Service model, you’re not going to customize it, you’re going to configure it. So in the past the internal IT organization or a sourced organization was managing what we call that application development and management environment, running the application and customizing it. That goes away, because you cannot customize that SaaS solution. But you can configure it, and the configuration can be extraordinarily complex, and very very deep. That requires a new kind of person, more of a business analyst type.”
On the ITO side, however, it will be some time before pure-play cloud providers such as Amazon or RackSpace will displace traditional outsourcing providers, Jones adds. And using cloud services for IT infrastructure isn’t true outsourcing anyway. "We see enterprises using Amazon, but it's very focused on specific workloads or specific applications – greenfield opportunities," says Jones. "But I would not consider it an apples-to-apples comparison to a traditional IT outsourcing deal. The whole construct with Amazon and other public cloud solutions is self service. You provision your own servers, and you have to manage those servers. Some part of it is outsourcing, because the infrastructure is no longer there. But you still have to manage that solution.”
Still, many providers will even be leveraging cloud services – such as Amazon or RackSpace – themselves in client engagements. And all likely are to become cloud-like themselves, Jones says. “We actually see the traditional providers trying to change their services to become more cloud-like, which typically means more standardized and more transparent.” Stanton cautions that the cloud teams within outsourcing vendors tend to still work separately from their mainstream businesses, so new cloud offerings may even be cannibalizing, or at odds with existing traditional services.
