Will Cloud computing kill the traditional outsourcing industry?

September 30, 2010

Arjun Sethi and Olivier Aries have recently written a thought provoking article for Bloomberg where they predicted that outsourcing as we know will come to an end due to cloud computing. According to the pair, the rise of cloud computing and technology giants like Amazon and Google will grab market share from smaller or midsized players in both the USA and India. Moreover, mid-tier Indian outsourcers who do not have the size or the capabilities to enter the cloud computing arena will either be sidelined or acquired by larger and more aggressive players for their client bases, low cost operations and process expertise. Furthermore, the pair believe that traditional outsourcing has reached a limit in the amount of savings it can achieve.

Does this scenario sound to far fetched? Not if you look at the recent Darwinian history of the IT and Internet industries. For example: Desktops have given way to laptops while web portals AOL, MSN and Yahoo! are increasingly giving way to social media networking type of sites like Facebook, Linkedin and Twitter and software that was once distributed by disk is now available as applications over the web – for less than what a “slice of pizza costs.”

Will Cloud computing kill the traditional outsourcing industry
However, a recent article in CIO Magazine by Stephanie Overby noted that the traditional, asset-heavy IT outsourcing deals will not go extinct overnight. Her reasoning is simple: Remember all of those predictions about the death of the mainframe computer? In fact, the mainframe and the mainframe market is still humming along. Nevertheless, she pointed out that the clock is ticking for groups like Accenture now that there is an alternative to having customers sign multimillion dollar long-term contracts that involve dealing with customized software, legacy software and on-site systems integration work. 

Moreover, Stephanie quoted a Gartner prediction that by 2012, 20% of all businesses will own virtually no IT assets. That statistic in and of itself will be a game changer for outsourcing vendors – no matter if they are traditional onshore and offshore IT service providers or consultants to system integrators to niche vendors.

Hence, who will be the winners in the near future? Sethi and Aries predict that Amazon and Google will become the future leaders in outsourcing as they already own enormous data centers and provide services to major MNCs like Eli Lilly and Pfizer. The pair predict that the these firms will also gain new capabilities by acquiring Indian or other global outsourcers while they point out that Amazon has already announced a partnership with Capgemini and Google has a similar one with Computer Sciences. Moreover, Amazon and Google are already household names for the new generation of managers who are now rising in US corporate ranks.

Sethi and Aries also predict that software giants like Microsoft, Oracle and SAP could also be winners as they already have the knowledge needed to take advantage of cloud computing based opportunities along with captive client portfolios. Meanwhile, the pair predict that while Accenture, HP and Xerox have the technical and financial resources to expand or shift their capabilities, it remains to be seen whether or not they will be able to do this seamlessly. Nevertheless, the pair also noted that the recent Dell/Perot Systems, HP/EDS and Xerox/Affiliated Computer Services acquisitions show that they see the writing on the wall.  

Hence, we want to ask you our readers what you think: Will cloud computing and firms like Amazon and Google really kill the traditional outsourcing industry and the old model of outsourcing as we know it or will it just evolve into something different? What are your predictions for who will be the winners and who will be the losers?


3 Responses to “Will Cloud computing kill the traditional outsourcing industry?”

  1. Brad on September 30th, 2010 10:38 am

    Every vendor will be the winner in the short term with the cloud since automation of IT is the area of improvement in the cloud. IT ops is the area where costs are being wrung out.

    Longer run, ease of integration will allow more specialist firms to arise in industry verticals. Most SaaS firms are generalists in a functional or vertical industry (http://cloudtaxonomy.opencrowd.com/taxonomy/software-as-a-service/) , but specialization will be the last wave of innovation in the cloud.

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  3. Sundar on October 4th, 2010 1:45 am

    In my view Outsourcing and Cloud Computing are not interconnected in terms of cloud computing eliminating/killing outsourcing. Here is why I think so…

    In terms of IT outsourcing, there are typically two segments. Application Development/Support/Testing and IT Infrastructure maintenance. Lets not deal with consulting as it is not relevant to this discussion.

    The application development/support/testing contracts / projects will any way have to be done either in house or by using a third party. So, the outsourcing of this segment cannot be stopped unless the low cost markets suddenly stop learning Cloud technologies and tools and become irrelevant in terms of technology. Earlier the outsourcing of Mainframe technology work in this segment was significant, subsequently came the era of n tier architecture and lately SOA and the outsourced partners have constantly upgraded and have met the IT needs of the organizations…

    However, traditional IT Infrastructure outsourcing projects / work is the segment that will bear the brunt directly. Today large the needs of maintaining large IT infrastructure for organizations are addressed by the outsourcing partners and in the cloud world they would not get such assignments because the infrastructure will be owned by the likes of Amazon / Google and managed /administered by them. Even in that case Amazon/Google might choose to outsource the management of their data centers to partners….something like third party run warehouses for retailers. So, in this context again the outsourcing deals might turn to large chunks with few players having the scale and know how to manage the data centers. Probably this could trigger a consolidation in the Remote IT infrastructure Management (RIM) space.

    Just to reiterate, outsourcing should not be looked up only in the context of low cost markets executing piece of work, but should be viewed in the larger perspective where a specialized IT partner is delivering on the IT needs [Application development/support/maintenance and RIM] for an organization whose core competence is not IT.

    Given the arguments, in my view, “outsourcing” as a concept will not be killed by Cloud computing in the application development/support/testing space, however it could trigger a consolidation in the RIM space.

    – Sundar Viswanathan

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