Is cloud usurping IT outsourcing?

Survey shows IT budgets rising, but no corresponding gains in outsourcing. What's going on?
Written by Joe McKendrick, Contributing Writer on

A new survey finds that for the second year in a row, IT outsourcing has fallen as a percentage of corporate IT budgets. Are enterprises pulling more initiatives in-house? Or is early signs that cloud, Software as a Service and APIs are starting to disrupt the industry?

Buildings Newport Pavonia-Cloud NJ Photo by Alyssa McKendrick

The survey, released by Computer Economics, finds that IT organizations are putting new-found resources into internal operations at a pace that is greater than their spending with IT service providers. IT outsourcing budgets are not necessarily shrinking so much as IT budgets are rising. Spending on outsourcing is averaging 10.2 percent of total IT spending this year, a slight decline from 10.6 percent in 2013 and a more significant drop from the 11.9 percent peak in 2012. Overall, IT operating budgets are rising 2.4 percent at the median this year.

This is the second year in a row that IT outsourcing budgets have shrunken as a percentage of the total IT budget, the researchers report. Services on the decline include outsourced help desk, desktop support, and application maintenance functions. Functions flatlining include including data center, application development, database administration, network operations, and disaster recovery outsourcing. Services on the rise include IT security work and web operations.

Is IT outsourcing -- handing over functions and operations to service firms -- on the wane because of cloud?  Are cloud, SaaS and APIs enabling access to more granular services? Both business and IT managers seeking to plug in ready-made processes or services will find what they need out in the cloud, ready to roll within hours or minutes.

The study for one, classified use of SaaS as a form of application hosting outsourcing, which is on a steep upward trajectory.

I asked John Longwell, vice president of research at Computer Economics, whether the survey is evidence that cloud is starting to disrupt the outsourcing industry. Yes and no, he replied. "We are seeing a significant uptake in adoption of SaaS," he points out. "Our Outsourcing Statistics study is showing that 80 percent of IT organizations today are using hosted applications, up from 70 percent a year ago, and we think this is still early stage in terms of penetration."

At the same time, Longwell adds, "we are seeing a decline in application development outsourcing this year along with a restraint in IT spending on capital projects. That could be influenced by the growth of SaaS, but it is impossible to say whether this is a long-term secular trend or just a cyclical response to the economic environment."

Longwell adds, however, that "over the long term, the use of cloud services will certainly have an impact on the demand for more traditional outsourcing services as well as on in-house operations. At the moment, we are seeing IT organizations doing some hiring and increasing spending on operations. IT spending is rising faster than spending on outsourcing, and we think it is a response to rising confidence in the sustainability of the recovery rather than a strategic shift away from use of outsourcing services."

Editorial standards