Cloud service providers challenge traditional IT outsourcing

Global IT services spending should reach more than $251 billion dollars this year, up 2.1% from 2011, according to Gartner's latest IT outsourcing forecast. Adjusting for currency changes, that's actually around a 4.1% increase in spending--about the same level of growth as the year prior, according to Gartner research director Brian Britz.

But the fastest growing segment of outsourcing--cloud computing services--is expected to nearly double from $3.4 billion in 2011 to $5 billion this year. Even more notable--infrastructure-as-a-service (IaaS) will contribute 38% of the increment outsourcing growth in 2012, compared to 8% in 2011. "This is reflective of how difficult the current market is for established IT outsourcing services--like data center outsourcing--and the providers of those services," Britz says. "There is definitely some displacement or substitution of cloud for what might have otherwise been delivered through more traditional outsourcing models taking place."

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Indeed data center outsourcing, which represented 34.5% of the market in 2011, is set to decline 1% in 2012, according to Gartner. It could be a tipping point for traditional infrastructure offerings as various data center processing systems will gradually be replaced by new delivery models through 2016. In four years, Gartner predicts data center outsourcing will slip to 28% of the market while infrastructure utility services (such as utility hosting and standard application infrastructure blocks like IU4SAP) will grow to 10% of the market, and IaaS will expand to 6% of the market.

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"The big question facing IT leaders in thinking about an overall sourcing strategy is to what degree do they look to fragment their spending across multiple providers for these different delivery models, or do they pursue a bundled solution," says Britz. "We see evidence for both approaches in the market today."

But, says Britz, enterprises may accelerate their overall outsourcing spending in support of their cloud efforts, which could take some of the sting out for traditional IT outsourcers. "We see more organizations evaluating and choosing to contract for IT outsourcing services to manage their [private and public] services," Britz says. "This will help to moderately balance the cannibalizing aspect of cloud on ITO through the next couple of years."

[Related: 10 Disaster Preparedness Questions to Ask Your Cloud Services Providers]

Applications outsourcing is also expected to grow around 2% to $40.7 billion this year, according to Gartner, driven largely by legacy application support and off-the-shelf package implementations. But IT leaders, straining under their legacy portfolio and facing tight budgets, are shifting to a software-as-a-service (SaaS) bias going forward.

Enterprise IT is continuing its move away from the staff augmentation model of outsourcing to fully embrace multi-year outsourcing contracts with outcome-based service-level agreements, which should keep the IT outsourcing sector growing through 2016, according to Gartner. Currently, the average enterprise outsources about 20% of its overall headcount. And that proportion should grow as enterprises remain reluctant to hire full-time staff. According to Gartner's first quarter Business Roundtable CEO Index, 58% of corporate leaders say U.S. employment would remain steady or lower (compared with the previous year when half of the executives thought it would grow).

The Gartner report does not indicate what percentage of the $250 billion outsourcing market will be delivered from what can be described as "offshore" or "nearshore" locations. Britz says it wouldn't make sense to do so now that offshore components are so ingrained in IT services delivery models.

"Global delivery models have largely reached mainstream application for most ITO providers, both for applications outsourcing and infrastructure outsourcing," says Britz. "More than a third of infrastructure outsourcing deals and more than half of applications outsourcing deals utilize offshore or nearshore delivery as part of the overall labor required to deliver the services."

Stephanie Overby is regular contributor to CIO.com's IT Outsourcing section.

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This story, "Cloud service providers challenge traditional IT outsourcing" was originally published by CIO.

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