Cloud turning outsourcing 'upside down'

Traditional IT outsourcing will be impacted by cloud computing shift but unlikely to become obsolete over the next few years, notes Gartner analyst.
Written by Vivian Yeo, Contributor

Cloud computing is set for a bright future and will turn traditional outsourcing "upside down", but the latter is not likely to disappear for "many years yet", according to an industry analyst.

Rolf Jester, Gartner's Distinguished Analyst and Asia-Pacific vice president for IT services, pointed out that cloud is not yet a major threat to outsourcing because deals that have been struck or are being negotiated, will remain valid for five to 10 years and are delivering value to businesses.

"People aren't going to change just because something new comes along," Jester said in a phone interview with ZDNet Asia, noting that from a buyer's point of view, there are still concerns over security and privacy of data in cloud computing.

In a traditional outsourcing contract, a company typically signs a multiyear mega deal with an IT services vendor which will manage specific functions for the company. Such large contracts, however, are dwindling, according to a previous Gartner report.

Gartner has predicted that by 2012, utility and cloud-based services will account for at least 50 percent of all new demand for managed IT infrastructure services. Jester explained: "The keyword is new demand...a major IT user [such as] a bank or government department is not going to throw out the outsourcing contract that it already has. Neither is it going to throw out its in-house systems."

That said, the analyst noted that the cloud or utility model will turn outsourcing "upside down" because unlike in the traditional model, where an outsourcer visits the customer IT environment to understand the infrastructure and negotiates the functions to manage, the cloud service provider lays out its capabilities and services from which the client has the option to pick and determine how much to buy.

"Does that mean traditional outsourcing becomes obsolete? Certainly in the long term, yes, but the long term is not necessarily tomorrow," Jester said.

Cloud as future outsourcing leaders
His views contrast with that expressed by two A.T. Kearney consultants, who wrote last month in Bloomberg Businessweek that outsourcing "as we know it" will disappear in the next five years. A.T. Kearney defines the traditional outsourcing model as one that involves long-term contracts, customized software, legacy software and on-site systems integration work.

The writers, Arjun Sethi and Oliver Aries, proposed that Amazon and Google will be the clear-cut winners and "future leaders in outsourcing", while software bigwigs such as Microsoft, Oracle and SAP are "possible winners". Mid-tier Indian outsourcers are predicted as "losers" where even larger players, such as Infosys and Wipro, risk losing their competitive advantage, the consultants said.

Jester, however, argued that competition in evolving outsourcing realm will take place amongst four different classes of services providers: traditional IT players, telcos, Web-based companies such as Amazon Web Services, and business services companies such as Accenture as well as accounting or human resource management software companies.

The Gartner analyst said it remains to be seen if the likes of Amazon will emerge as the forerunners in the new outsourcing age as it will depend on whether customers can trust them as enterprise-class services providers and able to provide and meet the service level agreements to support mission-critical applications.

He believes there is potential for partnerships to be formed among players in competing provider categories, painting a "very fluid picture" in the industry over the next few years.

"What will undoubtedly emerge from that are not necessarily single-providers but a value chain of providers," Jester said, adding that brokers may even surface to provide aggregate services of various cloud providers.

Traditional outsourcers prep for cloud
IT services providers are also actively reinventing themselves for the cloud revolution, banking on partnerships and customer understanding to emerge victorious.

Rohit Gandhi, Mahindra Satyam's Asia-Pacific head, said in an e-mail that the company and its parent Tech Mahindra are "evaluating the market very seriously" and have dedicated teams to work on cloud-related offerings.

"There is still a lot of debate on the topic of public versus private clouds and enterprise customers have a lot of complex questions to be answered before they walk the full route," Gandhi noted.

"It is early to say whether size is a liability and whether tier-one players like Mahindra Satyam will lose their competitiveness because of emergence of new players in the cloud," he said, adding that the Indian player has identified innovation, talent, brand and balance sheet as the four critical success factors to succeed in the new outsourcing era.

He noted that Mahindra Satyam views the likes of Amazon and Google as "key partners" in the public cloud space and is already in discussion with some of these cloud vendors "to work as value-added service providers to their stacks".

Wipro's senior vice president Sanjay Gupta also noted the importance of partnerships.

"Wipro has maintained a vendor-agnostic cloud strategy...by systems integrating best-of-breed solutions to add maximum value to clients," Gupta said, adding that the company has "built a very strong partner ecosystem over the last couple of years" and continues to do so at the global level.

At the same time, enterprises place significant value on unbiased and impartial advice and execution from their systems integrators, he told ZDNet Asia. "Wipro is working toward becoming the unbiased advisor to the enterprise in the migration to cloud."

The executive, however, disagreed that traditional outsourcing services will eventually become obsolete.

"Businesses with different kinds of requirements will maintain a steady balance between traditional IT and cloud-based IT," said Gupta.

"Large enterprises which requirements are very complex and unique, and require a significant amount of customization in applications, will continue to operate in a customized sourcing model comprising in-house and outsourcing to partners. Similarly, critical business applications will not move to [the] cloud in the near term as enterprises are reluctant to move their critical data to a public cloud."

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