Is the IT services industry at a crossroads?

Much ink has been spilled over the changing IT services industry. Indeed, it is an industry well acquainted with—and perhaps even born out of—change. But the velocity of technological advancement happening today is unprecedented.

Is the industry truly at a crossroads?

The established industry players are dealing with two distinct macro shifts. IT outsourcing provider Infosys calls them “Renew” and “New.” Allow me to explain.

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The demand for traditional, packaged-solution implementations and long-term outsourcing deals that companies have long engaged to “keep the lights on” is either scaling down or facing material headwinds. Such services are under fierce pressure from competitive intensity, pricing declines and maturing contracts that are coming to term. This is the “Renew” part of today’s state of flux, and this trend will not change for the better in the near future.

The rise of the X-as-a-service economy

At the same time, the X-as-a-service economy is on the rise. This is the shift toward the “New.” Digital and as-a-service solutions, including software as a service (SaaS), infrastructure as a service (IaaS) and business process as a service (BPaaS), are growing at a rate of near geometric progression. The most recent ISG Index—the first ISG Index in which ISG tracked, curated and reported on as-a-service volume and spend—shows the global market for as-a-service solutions (including both IaaS and SaaS) grew 45 percent in the second quarter of 2016, and it now accounts for 36 percent of the global sourcing market.

It is worth noting that XaaS spend is spread over a larger number of sources than what we consider traditional IT services providers. This spend is going to cloud providers, SaaS product providers and niche intermediaries that define themselves apart from IT services suppliers. Only a portion of this spend is therefore available to traditional IT service providers.

Furthermore, digital transformation projects and emerging technologies such as Internet-of-Things platforms are still embryonic at best. Not enough money has yet been invested in these capabilities to move the needle on service providers’ financials. But there is no doubt that this market space holds great promise for those who will be able to seize the opportunity.

The combined effect of the “New” and “Renew” forces in the market have resulted in less than sanguine numbers from most IT service providers. Of course, world events such as the Brexit vote, the U.S. presidential election and the reported softness in demand for specific verticals also raise lots of questions.

For the IT services industry, the most important is quite literally a multi-billion-dollar question: Who will successfully capitalize on the changes in the market today and give enterprise buyers what they are looking for?