Business process outsourcing’s (BPO) star appears to be rising, based on the latest TPI Index produced by Information Services Group (ISG). IT outsourcing, in contrast, seems stuck in a holding pattern.
According to the index charting outsourcing activity in 2012’s second quarter, the total contract value (TCV) for IT outsourcing was down 6 percent when compared to the year-earlier quarter and down 5 percent from Q1. ISG also noted a decline of 6 percent in IT outsourcing’s TCV vs. the first half of 2012.
What’s more, TCV for IT outsourcing has remained fairly flat since the second quarter of 2008.
TCV for BPO, in contrast, was up 7 percent over the year-earlier quarter and up 32 percent from Q1. While TCV for 2012’s first half was down 13 percent vs. the first half of 2011, ISG said the business processing outsourcing market still showed signs of strength, beating the half-year average for total contract value seen in recent years.
Though the ISG analysts didn’t delve into this difference too deeply during a recent call, we don’t think it’s a stretch to wonder whether the growing popularity of cloud computing is dampening clients’ enthusiasm for traditional IT outsourcing deals.
Cloud’s Impact on Outsourcing
The cloud is a variant of outsourcing, after all. Instead of entrusting applications and their associated IT assets to a traditional outsourcing provider, companies can choose to run their applications on a set of shared cloud resources. Clients can put development resources (middleware-as-a-service), a full-fledged development platform (platform-as-a-service) or applications (software-as-a-service) in the cloud.
Leveraging the cloud is generally a more flexible arrangement for clients in a number of ways, not the least of which is the relative ease of switching cloud partners vs. ending traditional outsourcing agreements. As we wrote earlier, clients’ desire for more flexibility is driving several trends, among them growth in smaller outsourcing contracts.
While clients are showing more willingness to outsource their IT assets, many are probably more reluctant to outsource their business processes – which may help account for BPO’s stronger growth when compared to IT outsourcing.
Cloud services are growing at a healthy rate. For instance, Gartner recently forecast global SaaS revenue will reach $14.5 billion this year, a 17.9 percent increase over 2011 revenue of $12.3 billion.
PricewaterhouseCoopers noted a move toward cloud– albeit a gradual one — in a recent survey. PwC found that while 45 percent of respondents today employ a service provider to manage a traditional data center, that number will drop to 27 percent in three years’ time. The number of internally-managed traditional data centers also will decline, from 27 percent to 16 percent.
Finding Opportunity in the Cloud
Three different variants of cloud — public cloud, internally-managed private cloud and private cloud managed by a service provider — will all see increases, PwC found. The biggest boost will come in the category of private cloud managed by a service provider, from 12 percent today to 31 percent in three years.
This could create opportunities for service providers, as outsourcing clients will need help in navigating what will for most companies be a mix of traditional IT infrastructure, private cloud and public cloud. Jai Sudharsan, IT Outsourcing Services Leader for PwC, suggests service providers will have to find the right balance between aggressively pushing the cloud to win new business and resisting a move to the cloud to protect their traditional infrastructure business.
Sudharsan also suggests outsourcing clients can maximize cloud benefits by including clear cloud-related performance expectations in their contracts. Another good piece of advice, from Chris Ford, an attorney with Morrison & Foerster, is for outsourcing clients to check current contracts to see if they include service evolution clauses, which can compel providers to upgrade their services to keep pace with technology advances such as cloud computing.