The End of IT Outsourcing As We Know It

Within five years, the traditional IT outsourcing industry will be extinct, argues A.T. Kearney's Arjun Sethi. Most Indian providers will be sidelined or subsumed while the fate of seemingly stalwart U.S. players will hang in the balance. CIO.com talks to Sethi about his bold predictions for the IT outsourcing industry.

By Stephanie Overby
Wed, August 11, 2010

CIO — Most outsourcing analysts and consultants will tell you that the future of the traditional IT services industry is uncertain.

Arjun Sethi doesn't equivocate. "In the next five years, outsourcing as we know it will have disappeared," says the partner and head of the outsourcing practice at consultancy A.T. Kearney. "New players, which have yet to enter the market, will soon rule the industry."

At the heart of Sethi's prediction of a "massive reconfiguration of the outsourcing industry" is the rise of cloud computing. Most existing providers simply won't adapt quickly enough. As a result, Sethi says, Amazon, Google (GOOG) or a vendor we've not yet heard of will become the market leaders. Meanwhile, traditional infrastructure providers like HP (HPQ), Dell (DELL) and Xerox (XRX) may struggle to keep up, and many Indian providers will disappear completely.

CIO.com talked to Sethi about his vision of the next generation of IT outsourcing.

CIO.com: You say that the demise of IT outsourcing is imminent. That's a bold prediction.

Arjun Sethi: We define traditional IT outsourcing as multi-year contracts based on developing and maintaining custom code and running on the backs of legions of programmers and on-site systems integration work. We're on the verge of a massive reconfiguration of the outsourcing industry. We foresee a new model wherein outsourcers will provide standardized software solutions on a per-use basis. For that, they will combine and leverage BPO services with cloud-based technology. This approach will enable customers to outsource entire business processes and just pay for whatever information is accessed or used.

But aren't most of the "traditional" outsourcing players—U.S.-based multinationals and Indian providers—investing heavily in new, cloud-based approaches to IT services?

In the last 24 months, we have watched a variety of companies working on acquiring the complete stack of capabilities required to survive the shift and create a new business model for the outsourcing industry: hardware and connectivity that allows for hosting and network capabilities, standardized software that can be deployed on shared hardware platforms or the cloud, new service capabilities, and the commercial strength to move from a long-term contract model to a flexible, "pay-as-you-drink" approach. These are the preliminary steps toward what will end up being a revolution of the BPO and ITO marketplace.

Yet you say major U.S. outsourcing players like HP, Accenture and Xerox are potentially in peril.

HP, Accenture and Xerox have read the writing on the wall. They have made some investments, but there's a lot more they need to do to make the most of the millions [of dollars] they have already invested in recent acquisitions. We therefore identify them as "fence sitters." IBM (IBM), on the other hand, could be one of the leaders given its focus and investments in cloud-based services.

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