IT Outsourcing Mega-Deals Slated for the Scrap Heap

IT Outsourcing Mega-Deals Slated for the Scrap Heap

There is a quiet revolution in the technology corridors of some of the world’s largest corporations.

Traditional five-year, outsourcing mega-deals – whereby companies delegate the running of information technology (IT) functions to a third party – look set for extinction.

The reason is a pressing need for more flexible, short-term arrangements from newer, nimbler players promising business benefits as well as lower fixed costs.

Although global spending on IT outsourcing is set to hit $US251.7 billion in 2012, an increase of only 2.1 per cent on the previous year, according to figures released by analyst firm Gartner last week, one outsourcing category is set to take off: the cloud.


Cloud computing refers to third-party computer resources that can be turned on or off and scaled up or down, depending on demand. It is compatible with consumer services – such as Hotmail and iCloud – and many IT services, from applications such as online accounting to basic infrastructure such as the provision of computer servers.

The emerging infrastructure-as-a-service sector alone is set to hit $US5 billion this year, up 48.7 per cent on 2011′s figure of $US3.4 billion.

Applications outsourcing is predicted to hit $US40.7 billion – an increase of 2 per cent on 2011, as organisations look for external help to manage older bespoke programs and off-the-shelf software packages. Data centre outsourcing, which represented 34.5 per cent of the global market in 2011, is expected to decline by 1 per cent in 2012.

Gartner research vice-president Jim Longwood said the cost of cloud-based outsourcing contracts was less predictable than traditional outsourcing deals and IT buyers were having to alter their buying patterns accordingly.

Old style set-and-forget deals where costs and service levels were agreed at the outset by the finance and IT departments, then health-checked every two years, did not suit the demand-based cloud pricing model, Mr Longwood said.
“Cloud based deals require more frequent monitoring,” he said.

“One of the challenges for clients in this area is that costs become more unpredictable. It’s an evolving area so the benchmarking data is not there. Clients need to become better ‘demand managers’ and learn to manage demand up and down.”

Australian companies had become sophisticated IT outsourcing customers over the past 15 years but a rash of new vendors, many promising large savings, meant many first-generation buying mistakes were likely to be repeated, Longwood predicted.

“Infrastructure as a service is a high growth market,” he said.

“It’s very dynamic and there’s the usual issue of a lot of new players. Traditional vendors like HP, CSC and Fujitsu are investing heavily in this area and a lot of non-traditional vendors are entering the space.

“It’s not a high cost of entry so it’s easy for new providers to create infrastructure as a service – to build it and entice [clients] to come.”

IBM Australia cloud engagement and strategy executive Simon Kaye said the IT outsourcing market was becoming increasingly fragmented, as new players fought for a foothold in the cloud space.

Traditional technology behemoths IBM, HP, Fujitsu and CSC held the top four spots in 2011, with just over a quarter of the global outsourcing market between them, according to Gartner.

Their growth rates of 4 to 10 per cent remained in the healthy but steady class, compared with cloud-focused players Rackspace and Amazon, which grew 31.5 and 66.5 per cent respectively for the same period.

Subcontinental vendors, including WiPro, Infosys and Cognizant, also saw above market growth of between 12.3 and 32.2 per cent.

“At least in the last year, 2012 and beyond, we see that concept of the outsourcing mega deal that used to exist with large organisations is largely disappearing,” Kaye said. ”It’s being replaced by a rich tapestry of deals.”

While traditional outsourcing deals were predicated solely on the bottom-line boost of contracting out work once done in-house, buyers of cloud outsourcing services had begun focusing on broader business benefits, Kaye said.

“When it comes to the cloud area and mobility, we’re seeing the CEO and marketing directors taking an interest – it’s not just the CFO and CIO looking to save money.”

The traditional way of measuring performance was about how much downtime was acceptable, whereas today’s customers were more concerned with how well their applications were performing, Kaye added.

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