UPDATED 10:05 EDT / FEBRUARY 07 2013

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Will the Cloud Replace IT Outsourcing?

Networking cablesFor years IT outsourcing was the best option for many companies and the only affordable option for some. Outsourcers swooped in, planted new technology, and pretty much stayed out of the way of the actual business process. In contrast to in-house IT departments, many executives viewed outsourcers the way a theater director might view stage hands. They were silent and efficient, and when the lights come on and the curtain goes up, everything looked new, fresh, and in its proper place.

Today, the stage is a global one, and many businesses operate at a much faster pace than even the magical hands of outsourcers can accommodate. Rapid deployment has an entirely new meaning, and the very core of it is cloud computing. With the cloud, a company can bypass the confusing tech speak of IT managers and avoid the cost, resources, and distractions required to operate in-house hardware completely. With that in mind, some have predicted that the cloud will replace IT outsourcing completely.

The Cloud Revolution

Whether you have your own hefty IT department or rely on outsourcers, the capital expenditure is tremendous. A migration into the cloud offsets much of that initial cost to operational expenditure in the form of monthly, quarterly, or even annual payments. Much of the cloud is subscription-based and is much more manageable for businesses that might not have a large sum of cash on hand. It is not cheap, but it is not as overwhelming as major IT purchases.

Beyond financial concerns, the cloud has also allowed businesses to adapt to changing work environments. Many of today’s professionals work on the road, requiring mobile connectivity. Some may never even see the inside of an office. Conjoined with the cloud revolution is the BYOD (bring your own device) revolution. The cloud provides global connectedness without the major data center resources required even with IT outsourcing.

In light of the many advantages of cloud computing, it might be difficult to imagine that ITO has any chance of competing. Will those service providers simply fade away into obsolescence, or are they poised to adapt and join the cloud revolution?

21st Century Infrastructure

IT infrastructure is changing dramatically, and cloud computing is largely responsible for that change. PricewaterhouseCoopers conducted a survey of 489 organizations and found that 77 percent of firms either are using or have plans to use cloud computing. Sixty-four percent said they believed the cloud would be the best way to manage IT infrastructure within three years. PwC concluded that more than a third of the IT resource base for ITO customers would rely on cloud computing by 2014.

In 2010, Gartner predicted that 20% of businesses would have no IT assets, relying on cloud computing entirely. While adoption of the cloud is gaining steam, it is certainly not happening overnight. This has afforded some IT outsourcers time to adapt. IBM and HP, for example, have been transforming their outsourcing services into cloud services. Tata Communications, known for its traditional outsourcing services, has invested heavily in building a cloud infrastructure in India, Singapore, and beyond. Dell Services, formerly Perot Systems, already offers a plethora of cloud solutions from software-as-a-service (SaaS) to infrastructure-as-a-service (IaaS).

As some outsourcers are slow to adapt, however, “smaller, less established firms,” says PA Consulting Group’s head of U.S. sourcing Doug Plotkin, have a golden opportunity to overtake the larger, slower-moving outsources.

This faster-moving, less restrictive licensing is exactly what many businesses now want. With the cloud they can have the latest technology without paying for extended outsourcing contracts or routinely purchasing new hardware.

“The outsourcing biz as we used to know it is dying on the vine. Clients don’t want to lock in for 10 year contracts,” said Dave Vellante, co-founder and CEO of The Wikibon Project.

CSC is a great example. They are shifting much more toward a managed services approach and some outsources are doing so on a multi-tenant basis so they can leverage common infrastructure and hedge their risks (i.e. spread it over more clients). Short term deals are the norm, and the best CSPs are doing Amazon AWS for the enterprise – i.e pay as you go with better SLA’s,” said Vellante.

Is This the End of Outsourcing?

Outsourcing may stick around for the foreseeable future, but it will probably have a very different face than the traditional outsourcing many IT companies considered their bread and butter. Specialized outsourcers may continue to serve their unique customer bases, while the larger outsourcers will reinvent their service offerings to at least appear more cloud-like, if not completely adopting a cloud model.

Even those companies that prefer the in-house advantages that ITO offered may opt for private clouds, particularly open source private cloud models, such as OpenStack and Apache CloudStack, which offer the ultimate flexibility and freedom to mold to their business needs. Those traditional IT outsourcrs that manage to survive will offer more granular solutions, rather than the old mega-deals that spanned several years and required huge investments.

Nevertheless, most traditional IT outsourcing firms will have to adapt to the cloud in order to survive. “I see them having to shift their model to cloud services. I see the outsourcing business as we’ve known it for the past 15 years as passé,” said Vellante.

It will be a gradual transition, but as more organizations, both public and private, look to replace their aging infrastructure, they will likely look to public and/or private cloud computing as a viable alternative. IT outsourcers must either join the caravan or get out of the way to avoid being trampled.


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