Cloud Services Continue to Shake Up IT Outsourcing Industry

Cloud Services Continue to Shake Up IT Outsourcing Industry

The number of cloud-related contracts signed in the third quarter of this year was up 120 percent over the same period in 2011, according to the quarterly TPI Index produced by International Services Group (ISG).

Half of the service providers surveyed by ISG said that a quarter of the engagements in their pipeline included cloud computing services and all of them expected cloud services to grow faster than traditional IT outsourcing particularly in the Americas.

However, Software-as-a-Service (SaaS) and Infrastructure-as-a-Service (IaaS) are taking very different trajectories, says ISG’s emerging technology analyst Stanton Jones. “SaaS is more narrow, and we’re seeing units outside of central IT lead the drive to evaluate and purchase,” Jones says. “IaaS is broader and is IT-led. We do not see as much growth here because IT functions are preferring to play it safe and stick with more modernized and standardized infrastructures.”

But software in the cloud could take a bite out of both IT infrastructure and applications outsourcing. “Emerging IaaS providers will not take over a full-scope infrastructure sourcing deal from a traditional IT service provider,” says Jones. “Emerging SaaS providers however can take over an entire functional stack like HR, displacing the incumbent hosting provider and the application development and maintenance provider because the SaaS provider provides the hosting and the application run, and the need to heavily customize goes away in favor of configuration.” And traditional vendors that turn their on-premise software into services, too, can displace traditional IT service providers.

While early SaaS cloud adopters have found that cloud options are not always cheaper, they’re drawn by speed of implementation, access to features, and mobile capabilities, says Jones. What’s more, they don’t have to go to IT to get it done. “They get to drive the bus for the first time,” says Jones.

Leading the way is human resources. “A large percentage of our HR outsourcing clients are taking a long look at SaaS,” says Jones. Just behind them in cloud contracting activity is IT, most often looking at communication and collaboration tools and cloud-based IT service management, Jones says.

Enterprise-wide adoption of cloud solutions, however, is hit or miss. “Units outside of IT want to move these projects forward, but when they get to the real work of building a business case and negotiations, the projects can bog down because they are focused on features, not the impact to IT, legal, finance and procurement,” says Jones.

As for IaaS, some business units are buying into the public cloud on a small, workload basis, but corporate IT still prefers dedicated services — private clouds either hosted themselves or in their provider’s data centers. “In our new scope and renegotiation deals, we’re working with clients and providers to make sure they have the option to move workloads to the provider’s shared IaaS platform in the future, but that percentage is still very slow,” says Jones.

Emerging SaaS and IaaS providers are growing the fastest, says Jones, but their customer base is small. Mid-market hosting companies are getting invited to bid on more deals but they have less experience managing large, multi-sources environments, according to Jones. “We think these players will continue to grow very quickly because (as discussed above) they can take share from incumbents around specific enterprise horizontals (CRM, HR, and email). Traditional software vendors have a chance to take infrastructure away from traditional service providers for specific application towers. However, they’ll only be cannibalizing their own revenue streams.”

Traditional Western IT providers are expanding into cloud services, but may have difficulty integrating their acquisitions in this area, says Jones. Indian IT service providers’ application transformation work is the perfect “gateway to cloud,” Jones says. However, their historical resistance to investing in assets means they will have to rely on partnership if they want to play in the cloud space.

Source: CIO
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