Why Cloud Won’t Kill IT Outsourcing or Consulting

In a recent interview with CIO magazine, A.T. Kearney’s Arjun Sethi stated that cloud computing will ultimately end traditional IT outsourcing. In Arjun’s opinion, the likes of Xerox, HP and Accenture, as well as Indian outsourcing vendors like Infosys and TCS, are potentially in peril.

At the same time, Arjun believes that Google and Amazon will eat away a significant share of the IT outsourcing market.

[See CIO.com’s recent stories, The End of IT Outsourcing As We Know IT and Cloud Computing: It’s No Y2K Bonanza for IT Consulting Industry. ]

Although radical and eye-catching, this idea is an exaggeration. Indeed, transformation and a shift in the balance of power will occur in the IT outsourcing industry as a result of cloud adoption. However, it is unlikely to eradicate such a viable part of the IT industry.

To better understand this dynamic, it is necessary to examine various components of the technology stack that today fall under the broad category of cloud—physical infrastructure, platforms, and applications.

Outsourcers Get Specialized

At the pure infrastructure level, IT outsourcing vendors make money on hardware maintenance and support, which is estimated by industry analysts to generate more than $95 billion per year. These service offerings compete with on-demand infrastructure/cloud computing providers—Amazon, Rackspace, Terremark, and the like. But, traditional outsourcing vendors are not giving up; instead they are differentiating themselves with specialized infrastructure offerings like IBM’s Smart Business Development and Test Cloud. Even if that market tips towards innovative, pure play IaaS vendors, public infrastructure clouds are estimated to account for only $15-$20 billion in 2014. So, it is unlikely that this $95 billion infrastructure services market would collapse by 80% in just a few years.

Moving up the cloud stack, from pure infrastructure to platform offerings, we see Google, Force.com and Microsoft Azure battling for dominance. In this segment, there is only a marginal overlap in offerings of the traditional outsourcing vendors and platform players.

Perhaps the emergence of cloud platforms will intrude upon the bread and butter of traditional outsourcing—development and integration. However, it is hard to imagine Google building a professional services practice focused on development and integration on top of their platform. On the other hand, arguing that the emergence of cloud platforms will eliminate the need for development and integration is like saying that that outsourcing to India will eliminate all IT jobs in US.

Indeed, cloud platforms abstract away certain low-level tasks that are common in traditional development and integration, by offering standardized, out-of-the-box solutions to problems that would otherwise require custom development. Ultimately, it does not decrease the total need for development and integration. Instead, it offers the opportunity to refocus resources on solving higher level problems and build new types of applications that were previously impractical to consider. This transformation has created an opportunity for new, specialized professional services players like Grid Dynamics or Appirio.

The Myth About Self-Service SaaS

The top level of the cloud stack—applications—is by far the oldest and most established. Only recently branded as cloud, the software as a service (SaaS) concept has been around for a decade, with pioneers like Salesforce.com and NetSuite paving the way to widespread adoption.

How can this dynamic play against traditional outsourcing vendors? Implementation, upgrades, and the hosting and support of enterprise applications like CRM, ERP, HCM etc. are significant revenue sources for IT outsourcing vendors. Some revenue derived from these services will suffer significantly from cloud expansion, particularly those attached to servicing lower levels of the enterprise application stack—middleware and physical application infrastructure. However, demand for implementation, support, and customization will remain.

There is a common misconception that SaaS automatically implies self-service, that any SaaS application is like Salesforce.com, where you sign up for an account on a Web site and you are good to go.

The truth of the matter is that 90% of enterprise applications simply cannot be designed as self-service. Because enterprises compete largely through innovation in business processes, these processes continuously evolve and differ, with no effective way to completely standardize them.

Eventually, all enterprise applications have to wrap around the business process of a particular organization; not the other way around. So, custom implementation, development, and ongoing support of each particular implementation will indefinitely remain an abundant feeding ground for IT outsourcing vendors.

The largest component of “outsourcing”, by far, is professional services. It may take the shape of systems integration, IT managed services, business process outsourcing, or something else. In all of these outsourced services, there is a predominant human component. And, while cloud affects the software delivery model, it does not represent an advance in automation of human labor-based business processes. Cloud may change the availability of on-demand IT services and the location of the infrastructure, but it is not going to make the outsourcing business disappear.

Victoria Livschitz is founder and CEO, and Boris Renski is executive vice president, of Grid Dynamics, a professional services company that is an authority on cloud computing deployments and enterprise systems scalability.

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