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Why cloud won't kill IT outsourcing or consulting

Boris Renski and Victoria Livschitz | Nov. 8, 2010
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.

FRAMINGHAM, 5 NOVEMBER 2010 - 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.

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 per cent 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.

 

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