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Cloud-based contracts make up a third of IT outsourcing contracts in 2016

Traditional outsourcing contracts reduce in number and are being replaced by cloud-based services

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Outsourcing

The number of traditional IT outsourcing contracts signed in the UK reduced by a third as organisations across Europe, the Middle East and Africa (Emea) increase their use of cloud-based services.

The latest figures from Information Services Group (ISG), gleaned from analysis of contracts with over €4m, found that a quarter of total spending on IT and business process outsourcing contracts was on cloud-based services, or as-a-service contracts as they are often known.

ISG research found overall outsourcing spending was up 2% in 2016, compared with 2015 at €11.8bn.

However, it revealed that the amount of money spent on traditional outsourcing was at its lowest level since 2009. This was offset by record spending on as-a-service contracts, which increased 33% in value to reach €3bn.

These contracts include software as a service (SaaS), infrastructure as a service (IaaS) and platform as a service (PaaS). Traditional IT outsourcing includes a supplier taking over responsibility for an IT service and bringing its own people in to do it, or developing and supporting software.

In the UK, traditional outsourcing spending fell 10% and the number of contract awards declined by a third. ISG said this was partly due to the uncertain political and economic climate following the European Union (EU) referendum result, which led to a drop in the value of the British pound as the ISG index converts all currencies to US dollars.

The financial services sector in the UK, which is traditionally the biggest outsourcer, reduced spending which was reflected in the overall decline.

Despite the overall increase in Emea spending in 2016, the €3bn spent in the final quarter was 19% lower as the same period in 2015. “This was largely due to a decline in traditional sourcing, which was down 32 %,” said ISG.

However, as-a-service contact value was a record for a quarter at €900m, almost a third of the total spent.

Globally, total spending increased by 9% to almost €30bn, with as-a-service contracts up 38% compared with 2015.

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John Keppel, president at ISG, welcomed the emergence of as-a-service contracting. “Although growth in the use of these new technologies and services has been slow to take off in Emea, we expect to see the impetus around these systems build in the region as public cloud providers expand their datacentre footprint across Europe,” he said.

“In turn, it is likely that traditional sourcing will feel an impact as spending moves from basic operational projects to business-led digital initiatives, and we anticipate double-digit combined market growth in 2017.”

Evidence of cloud services replacing traditional outsourcing is clear in Centrica’s recent move to Microsoft Office 365.

When Fujitsu took the desktop services contract at Centrica from T-Systems in 2011, it was a clear sign to the sector that suppliers providing commoditised services required scale to be able to compete. The contract, which saw Fujitsu use its size and economies of scale to price T-Systems out, was evidence that commoditisation desktop services might mean the big suppliers will start replacing more niche players.

More than five years later and that work is being switched to the cloud with Microsoft Office 365, with Fujitsu now playing a peripheral role wrapping services around Office 365.

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