Top 5 Montevideo Area Beaches

IT outsourcing (ITO) vendors provide everything from application development and testing to remote management of customers’ data centers. As those customers adopt cloud computing (highly virtualized compute, storage and network capacity provided over the Internet) ITO vendors face both strategic threats and opportunities, according to a survey of 489 business executives conducted by PricewaterhouseCoopers (PwC) this spring.

New cloud competitors include IAAS (infrastructure as a service) vendors such as Rackspace, who sell server, network and storage capacity on an “as needed” basis, as well as vendors such as Dell and HP looking to move beyond product sales to higher-margin services.

Existing ITO players can tout their strong reputations and customer relationships, their familiarity with customers’ applications and business needs, and their proven skills at complex deployments. But a new environment like cloud makes it easier for new competitors. The survey showed that even among current ITO customers, 45 percent said new providers would be better at managing their private clouds than their ITO vendors, a figure they say will rise to 52 percent in three years.

The survey suggests that to compete, ITO vendors must:

• Develop skills and tools to help customers decide what parts of their IT infrastructure to migrate to the cloud, and how to migrate them.
• Identify “sweet spots” of cloud opportunity such as analytics.
• Find ways to match the low costs and agility of “pure play” cloud vendors, and
• Focus their marketing and delivery efforts not on the public cloud (provided over the Internet) but private clouds (virtualized environments within the customer’s firewall reserved for their own use.)

Key Findings

Close to two-thirds of all respondents said that in three years, some type of cloud would be the best way to manage their IT infrastructure. The percentage favoring a traditional data center managed internally or by a service provider (such as an ITO vendor) fell by more than half when respondents were asked to project out three years (see chart). Their top choice: A private cloud managed by a service provider.

Private clouds were overwhelmingly preferred over public clouds, largely due to security concerns. Interestingly, cost was only the third most important reason to move to the cloud, at 20%, behind innovation such as “faster delivery of IT solutions for business requirements (23%) and “access superior technical skills to satisfy new requirements (22%.)

Companies moving from hardware and software into higher-margin services are clearly positioning themselves to take on established outsourcing players. However, both the hardware/software vendors and incumbent ITOs face pressure from newer providers. Only 48 percent of ITO customers said ITO providers were the best source of managed private cloud computing services today, and even fewer—38 percent—said those ITO providers would be best in three years. (Current ITO customers had a somewhat more positive view.)

Recipe for Success

One opportunity for ITO vendors comes from the fact that only 18 percent of respondents said that half of more of their workloads are ready for the cloud.  That means customers will need help in deciding which applications and other resources are best suited to the cloud, and migrating the data and applications. That’s a role ITOs such as Tata Consultancy Services, among others, are already playing.

Another is rewriting database dependent applications that otherwise cannot take full advantage of a highly virtualized cloud environment. That while require, the report said, expertise in new, cloud-friendly databases such as Hadoop and Big Table and possibly help from companies such as SAP, Oracle, IBM and Microsoft that wrote those packages that need rewriting.

Yet another, according to the report, is analytics, whose workloads are well-suited to taking advantage of the computing power available in the cloud.

A final word of hope: ITO vendors should have some time to adapt. Respondents currently have an average of 31 percent of IT resources in a private or public cloud, a figure they predict will rise to only 34 percent in three years. With the perceived complexity of moving to the cloud, the excessive hype, a lack of cloud standards and a shortage of cloud skills, “it is not hard to see a long adoption cycle ahead for cloud computing,” says Dhiraj Pathak of PwC’s cloud services practice.

While the report didn’t address this, I can imagine intriguing ways an outsourcing vendor could combine its ITO and business process outsourcing skills with a deep understanding of its customer’s business needs. One example: Providing an on-demand “packaged” business service with everything from customer relations to management of the IT infrastructure, priced on a per-transaction basis through an agreement with a back-end IaaS supplier. I can also imagine a lot of ways to get it wrong through sloppy execution.

If you’re a customer, what do you want from your outsourcer when it comes to the cloud?