Analysis

Is the cloud driving IT outsourcing or blurring the outlook?

Karl Flinders

Cloud computing is an increasingly significant segment of the IT outsourcing sector, but has a tipping point really been reached or are we one large data breach away from an about-turn?

The cloud currently represents only a fraction of the IT outsourcing sector and a minuscule slice of the overall business process and IT services market. But according to Gartner’s latest figures, for 2012 cloud will be the fastest growing segment in a global market worth over $250bn. This is 2.1% higher than the same period last year.

At $5bn, cloud computing outsourcing is relatively insignificant compared to the application outsourcing market of $40.7bn, and datacentre outsourcing sales worth about $87bn. But the cloud outsourcing market grew 48% compared to application outsourcing, which increased 2%, and datacentre outsourcing spending that declined 1%.

Spending on overall IT outsourcing in Western Europe is expected to fall 1.9% as economic turmoil continues to blight the region, according to Gartner. Furthermore, research on the first half of 2012, carried out by the Information Services Group (ISG), revealed that spending was down 26% compared with last year, its lowest point in five years.  The amount spent on outsourcing in the UK was down 12% to €5.7bn, found ISG.

But can the cloud genuinely spur the overall outsourcing sector or will the commercial models offering pay-as-you-go services distort the outsourcing spending figures? The removal of upfront capital payments, in favour of subscriptions or true utility services, will mean the figures will fall.

This is true across the IT sector according to TechMarketView (TMV). The analyst firm predicts that the UK IT industry will decline in real terms until at least 2016, and there is a real risk of the sector reaching a decade of downturn. TMV said the take-up of technologies designed to reduce costs, such as cloud computing, as well as continued economic slowdown, are combining to reduce market growth in terms of revenue.

"It’s not just the financial crisis which is constraining growth. It is also the inexorable march of disruptive technology trends, such as the consumerisation of enterprise IT, BYOD [bring-your-own-device], mobile internet, social media, big data, offshoring and, of course, cloud computing,” said TMV. “The key characteristic they have in common is they are all designed to reduce the cost of computing – in other words, they are all deflationary.”

The cloud is disrupting the outsourcing sector in ways other than changing revenue figures. Robert Morgan, director at sourcing broker Burnt-Oak Partners, says the important customer/supplier relationship is broken with the cloud: “If people are prepared to go through the pain and energy of going onto the cloud, they can then switch suppliers easily.”

He says the process of moving to the cloud whether public or private will usually require support from an IT services firm, because the skills to do this have been outsourced.

Morgan says cloud computing is proving very successful in corporate IT departments for things like testing and storage but believes the more commoditised services found in the public cloud are unlikely to have a major impact on the outsourcing industry.

“I see cloud services growing a fair amount but there will come a point when it slows,” he said.

Morgan says the cloud is still over-hyped and will not reach the heights predicted by many. Public clouds still lack the security guarantees and data protection levels that companies desire, he says. To this end, it is private clouds that are being used, “which defeats the object of cloud,” adds Morgan.

While the cloud might be benefitting small businesses and corporates for certain IT functions, Peter Brudenall, a lawyer at Lawrence Graham, says he has not seen a change in the number of outsourcing contracts involving cloud computing: ”There is a lot of intent but I cannot say I am seeing more contracts involving the cloud at large businesses.”

Like Morgan he says there are still major security and data protection issues for large corporates to contend with. “There are still a lot of large companies that are sceptical about it. The benefits of the cloud are relatively obvious but big businesses are concerned about some of the risks," he said.

“We are one big data breach away from big businesses moving away from the cloud.”


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