Cloud services lift IT outsourcing market higher than expected

Companies signed IT and business process outsourcing deals worth a record $9.5 billion in annual contract value, according to the quarterly outsourcing index produced Information Services Group (ISG). Traditional outsourcing contracts were up 5 percent to $5.8 billion, while the fast-growing as-a-service segment leapt 20 percent to $3.7 billion, according to ISG.

“Most conversations we’re having with clients are cloud-led,” says John Keppel, ISG president, for Europe, Middle East and Africa. “Enterprise customers are first seeking to be more cost efficient so that they can redeploy funds into digital and cloud activities.  But we’re also seeing them pivot quickly to broader digital transformation initiatives that are focused on creating a customer-first environment that is intelligent and mobile. This is a very long game and we are in the early stages at this point.”

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Based on third quarter results, ISG is revising its annual forecast upward, from a flat market to anticipated gain in the mid-single-digits for traditional outsourcing and well above 30 percent in the as-a-service market.

In the Asia-Pacific region, as-a-service contract value has surpassed that of traditional IT services deals. That’s due, in part, to the fact that cloud solutions are particularly well-suited to more volatile markets and midsize enterprises, according to Keppel. The rest of the world has yet to reach that inflection point. “There is a notable uptake in interest in the U.K. in particular,” Keppel says. “The Americas are close but we’re not ready to say that as-a-service will consistently outpace traditional sourcing in [there].”

Keppel is quick to point out that the cloud-traditional services story is one of growth rather than cannibalization, noting that the overall market was in the healthy range and has been more than 60 percent of the time in recent years.

There was a 27 percent jump in traditional IT outsourcing deals which generated $4.5 billion in annual contract value for the quarter. Infrastructure-as-service climbed 37 percent to $2.7 billion in annual value, which more than offset an 8 percent drop software-as-service, which came in at $1 billion.

IT outsourcing market demands shifting

However, IT outsourcing market demands are certainly shifting. “With fewer big deals to hunt, service providers must use different skills to capture contracts, becoming more agile and strategic in their approach,” says Keppel. In order to remain competitive, he says, providers must sell multi-tenant solutions and repackage shared assets. They must also continue to automate. “Embedded technology is the goal,” Keppel says. “Just about any physical object can and will be made a smart device. And any service can be made more intuitive and automatic.”

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Both customers and providers must also focus on service integration. “For the foreseeable future, delivery methods will combine multiple internal and external providers across multiple platforms,” says Keppel. “The most important outcome the IT organization can achieve is seamless, agile delivery across all of their platforms, service models and providers.” And that service integration must include so-called “shadow IT” as well. “Shadow IT serves a purpose. Its ability to dodge IT controls and rules makes it attractive,” Keppel says. “Whether you are an IT organization or a service provider, you will learn to accept it—and make it work for the enterprise” 

No single IT vendor has the entire approach locked up, says Keppel. Looking ahead, he expects to see further consolidation in the market, with large outsourcers acquiring for economies of scale and mid-tier providers looking to add vertical expertise.

Perhaps more importantly, IT service providers are increasingly embracing platform models. “Much of the innovation in the services market will come from enterprises that are building new platform-based businesses,” says Keppel. “We believe there is room for multiple winners among leading providers that combine high functionality and fast pace of innovation with a robust partner ecosystem.”