Cloud Computing: It's No Y2K Bonanza for IT Consulting Industry

Consulting, systems integration and outsourcing vendors must prepare themselves for life in the cloud, too, says Forrester Research. For traditional IT service providers, cloud is bad news in the short term, but is it really good news in the long term?

The liberating and game-changing effects of cloud computing on today's IT shops cannot be overstated: On the fly, it seems, CIOs and their staffs are reprioritizing application-portfolio strategies, rearchitecting systems roadmaps, rethinking vendor contracts and much more. Prices may have dropped, but strategic IT planning is still as relevant as ever.

CIOs are trying to keep up with the flurry of cloud options now offered to them. (Whether some of those are total bunk or not, is a CIO's job to determine.)

That "everything going to the cloud" mantra is also going to have a significant effect on traditional IT service providers, long accustomed to lucrative on-premise consulting and systems integration work as well as multi-year outsourcing contracts.

That's the crux of a new report from Forrester Research, The Coming Upheaval in Tech Services, by analysts John McCarthy and Pascal Matzke. The report is a tour de force examination of the IT services industry and the tectonic changes ready to erupt.

[ For more on Cloud Computing's alphabet soup, see Cloud Computing's World of Acronyms: Enter at Your Own Risk ]

Those IT services deals have enriched many consultancies and systems integrators over the years; the market exceeded $450 billion in 2010, according to Forrester. The companies in play range from the big boys, such as IBM, Accenture, HP and CSC, to smaller, regional players that provide the needed tech expertise to SMB IT shops.

Yet even with their accumulated know-how, deep pockets and brand prestige, these providers are going to endure a seismic shift, courtesy of the cloud and the fleet of -aaS acronyms infiltrating CIOs' strategic plans.

"The worst economic downturn in 70 years coupled with the technology change of cloud computing and software-as-a-service (SaaS) undermines the future validity of traditional IT services business models," write McCarthy and Matzke. "While many service provider strategists recognize that some form of change is coming, it's unclear how the disruption will play out or what the scale of the impact will be."

Below is a graphic, from the report, that shows the traditional services offered today versus the emerging ones that CIOs and their companies will be seeking during the next several years.

Forrester Research chart

IT service providers will also take a hit in their wallets. "The tough macroeconomic environment coupled with changes in pricing and delivery models will affect what we think of today as the IT services of consulting, systems integration and outsourcing," the Forrester analysts write. "Price erosion and pressure on margins won't end after users renegotiate rates."

For budget-conscious CIOs, the overall message of the report is that there will be a sort of commoditization of those IT service-provider portfolios, which will result in lower IT costs on "as-a-service solutions for infrastructure and software," note McCarthy and Matzke. Margins for those providers will be pinched—in the short-term.

Long term, however, the analysts predict that those margins will return—at an even high percentage, as CIOs come to rely more on the vendors for higher-value cloud services and support.

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