Nearshore Americas

Equaterra Survey: Outsourcing Buyers are Ready for Change

How much does cloud computing really affect the outsourcing industry?

EquaTerra recently released the results of its Global Pulse survey – a quarterly poll we conduct on trends in the global business and IT services markets. As it regularly does in the fourth quarter edition, EquaTerra polled leading services providers and its advisors on what they project are the most impactful trends in the business and IT services marketplace in the coming year.

Respondents ranked how legitimately “hot” (defined as truly having a business impact on buyer organizations) they felt a predefined list of market trends will be in 2011, with a rank of one representing cold or little market impact and five representing hot or having a major market impact. Read more for the results.

Not surprisingly cloud computing is at the top of the list. It is followed by expectations for ongoing and increased globalization of the business and IT services market. At the bottom of the list is offshore captive shared services centers.

Top 2011 Business and IT Services Market Trends

Cloud Computing

It is not news that cloud computing is a hot topic for 2011. One of several more interesting discussions is the effect that the growth of cloud computing will have on traditional outsourcing.

Without getting into the nuances of cloud computing, at its most basic level it is similar to other forms of outsourcing. Buyer organizations contract with third-party providers to deliver computing services (infrastructure and platform as a service), software applications (software as a service) and in some cases additional supporting business services (business process as a service or platform business process outsourcing). This is, practically speaking, a form of outsourcing.

One difference is that buyers are more typically adopting the provider’s platform and systems instead of transferring their own systems, operations and staff to the provider (i.e., outsourcing “lift and shift”). This is a critical differentiator and a major gating factor to rapid cloud adoption by buyers with large legacy operating environment investments and sunk costs. Related to this point is the fact – or at least aspiration – that the software environment and business processes delivered via the cloud will be (ideally) more standardized and hence easier and cheaper to deploy and manage; able to deliver industry and process best practices; and more profitable for service providers (i.e., closer to a software margin than a legacy outsourcing margin).

Cloud Computing in Lieu of Outsourcing

Let’s now discuss the third top trend identified in the EquaTerra poll, the use of cloud computing in lieu of outsourcing. What we are really talking about is in lieu of traditional lift and shift, highly customized outsourcing often involving asset and staff transfers, delivered by legacy service providers. So, cloud computing in lieu of traditional outsourcing – that often did not live up to expectations – is a good thing for buyers but potentially a bad thing for legacy providers that cannot evolve, embrace and co-opt cloud computing.

Current State of the Outsourcing Market

The timing of the rise of cloud computing is largely based on advances in the underlying enabling information technologies and networks. It is also timely and fortuitous given the current state of the traditional outsourcing market characterized as follows.

  • Outsourcing deal flow disruption has been common in the market since the second half of 2008. Buyers remain hesitant to pull the trigger on new efforts and instead seek other alternatives, such as internal process improvement, to address business challenges and remain risk averse to potential project failures.
  • Despite an economic environment focused on cutting costs, outsourcing is not always the top business tool employed in cost cutting efforts; “going without” or layoffs are proving preferable to many organizations.
  • Outsourcing deals are getting smaller but not less complicated, and buyers are getting more aggressive in how they engage service providers.
  • More savvy outsourcing buyers are approaching the market and providers in a more calculated and incremental manner.
  • Growth is occurring via smaller deals in less traditional functional and process areas, collectively signaling a healthy market, but one that may not benefit traditional providers as much as niche players or new market entrants. Often growth is not as visible as in the past when many “mega” outsourcing deals were closed and drew accolades.

Many outsourcing buyers are ready for a change. Automation and IT virtualization are enabling an increasing number of buyers to achieve typical outsourcing goals (e.g., cost reduction and process improvement) without having to go through full-blown outsourcing. New service market entrants and repackaged legacy providers leveraging cloud infrastructure, software and business process services are creating a broader landscape of options from which buyers can choose.

Other changes factor into this market shift. The business and IT services market has matured over the past five years. Much of the low hanging fruit (e.g., bloated IT organizations, legacy homegrown IT environments and excessive cost models) has been picked through existing outsourcing efforts or via aggressive cost-cutting efforts that have occurred over the past two years. Quick and big wins via outsourcing are fewer and farther between. Buyers and providers are smarter, more experienced and less likely to enter into larger and more risky deals. Evolutionary (not revolutionary) innovations like cloud computing are changing the nature of what constitutes outsourcing.

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Back to basics

Outsourcing buyers or service providers with legacy mindsets and operating models will find current market changes threatening and a long-term negative indicator. Similarly, if the outsourcing market is viewed through the lens of traditional deals, models and providers, it is in decline. However, setting nomenclature aside, if emphasis is placed on the means by which buyers can tap into bundles of hardware, software and expertise (outsourcing at its core), the market is stronger than ever. It is also  more confusing and fragmented for the next few years, thanks to cloud computing.

Stan Lepeak is Managing Director of Global Research for EquaTerra, a management consultancy that helps clients achieve sustainable value in their IT and business processes.

Tarun George

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