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XaaS models are reshaping the future of outsourcing

The outsourcing sector is suffering reputational damage after some high-profile failures, just as companies are turning to the "as-a-service" model instead. Can the two approaches co-exist?

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Traditional IT outsourcing has played a vital role in empowering enterprises to embrace innovative technologies and make use of skilled external talents.

However, the seemingly unstoppable rise of “anything-as-a-service” (XaaS) cloud models, which has already transformed how many businesses operate, is in the process of upending the IT outsourcing environment.

From easy scalability, improved cost management and almost unlimited flexibility, it’s not hard to see the attraction of XaaS delivery systems.

“With the growth of ‘as-a-service’ cloud models, there has been a shift in the management of IT operations and infrastructure. This, in turn, has led to altered cost structures and fundamental changes in the competitor environment,” says Andrew McCreath, director of enterprise field development at datacentre company Equinix.

For example, the appeal of a software-as-a-service (SaaS) payroll solution that can reduce capital expenditure and optimise operating costs is likely to be greater than the attraction of a traditional payroll system for many businesses.

The continuing development of cloud services, which allow for increased automation and agility, will bring whole swathes of infrastructure management to a more “click-and-play” environment, reducing the need for traditional outsourced support.

“With access to cloud service providers and the many services they offer, the need for IT outsourcing teams as they currently stand, is certainly diminishing,” says McCreath.

But he believes this is a positive development as outsourcers will stop performing low-value tasks and move up the technology stack to “help organisations innovate, apply their creativity, and leverage cross-enterprise experience from multiple disciplines”, he adds. 

“This is not to say IT outsourcing will no longer be around, it will merely change, as successful IT outsourcing involves aligning the as-a-service capabilities and business to function as one, and this is rarely a skill set grown in-house by any company. The term ‘IT’ may not be around in a few years, but the activity and its alignment to the success of a company will always be there.”

New approaches

It’s not a question of using either XaaS or outsourcing. The focus for IT leaders revolves around what this changing IT environment means for future outsourcing strategies, especially around what factors they should take into account to ensure this decision is the most effective.

Data from ISG Index shows that both traditional IT outsourcing and XaaS deals have grown over the past three years at 11% and 71%, respectively. These figures clearly show the momentum is with XaaS projects, but traditional IT outsourcing rates are hardly in freefall.

Of course, pricing considerations will remain a core part of any outsourcing offering, but the evaluation of cost should not happen solely in terms of selecting the cheapest proposal put forward, but rather weighing up the value for money and overall quality.

The days of labour arbitrage are over. Automation is king – and it’s driving the kind of savings that in years past might have been gained through offshore models and currency conversion
Steve Hall, ISG

Closely aligning values with outsourcers will help ensure you are working towards the same goal and that they are not seeking to achieve the lowest possible price at the cost of service quality. Recent years have seen low costs trump quality in much of outsourced IT provision.

“We call this the industrialisation phase of IT. But there’s a huge shift underway. For many IT organisations, it’s no longer just about efficiency – it’s about value,” says Steve Hall, partner and president at ISG, a technology research and advisory firm.

“And that’s because enterprises are increasingly creating value with digital products. IT is no longer a support function – it’s at the heart of a company’s product, service and operations,” he says.

Aggressive competition

Companies burdened by legacy systems that drive up IT costs and limit efficiencies will obviously benefit from a transition to a cloud-based Xaas model. However, the true value from this shift will come from the new technological abilities presented to firms through the XaaS system.

“We are seeing enterprises refocus their IT initiatives to speed up efficiencies and save costs, but what’s changed is that those savings are being reinvested in digital strategy initiatives,” says Hall.

“The days of labour arbitrage are over. Automation is king – and it’s driving the kind of savings that in years past might have been gained through offshore models and currency conversion.”

The days of using a single supplier for all outsourcing needs are firmly in the past, with ISG data showing that in 2018 only 15% of Forbes Global 2,000 businesses used single-supplier outsourcing, compared with 42% in 2008.

For their part, service providers are responding by competing more aggressively, with new players who offer relevant and distinctive outsourcing solutions that incorporate XaaS services set to come out on top.

“Clients are increasingly receptive to niche players who are getting creative in their solutions, especially in SaaS and PaaS [platform as a service]. They also want vertical expertise – providers will need that to gain credibility. It’s not good enough any more to offer generic solutions,” says Hall.

XaaS models are changing many of the parameters set by traditional outsourcers, particularly around shifting the boundaries of service differentiation.

“This is seen, for example, through the delivery of extensive off-the-shelf application services delivered as PaaS,” says David Groombridge, research vice-president at analyst Gartner.

“They deliver improved automation, which increases commoditisation and reduces costs; simplify complexity by forcing standardisation; and drive a move towards opex [operational expenditure] spend.”

Mixed reputation

The widely reported problems at outsourcers such as Carillion, Interserve and Capita have clearly contributed to the negative perception of the industry. High-profile cases of major IT outsourcing companies running into trouble has led to questions to be asked about why such failures happen.

“Notoriously, large IT outsourcing companies play to their scale and operate with thin margins, meaning any minor mistakes can leave the business under existential commercial threat. Far too many businesses are focused on the goal of making money win or lose, instead of creating lasting partnerships,” says Laurence Norman, chief architect at IT services provider, NTT Data UK.

A few bad apples may have spoiled the reputation of outsourcers and damaged business confidence in the industry as a whole – but these are rare, albeit major, failures.

In light of the collapse of major outsourcers, companies need to ensure that the outsourcing contract is not only suitable for what the business needs in the immediate future, but also covers the range of eventualities that may appear during the duration of the contract.

Norman suggests companies progress from a simplistic day-rate outsourcing system that has the potential to breed an adversarial client-supplier relationship to an outcome-based approach that promotes a more collaborative relationship.

“This will open up access to smaller innovative companies that are simply unable to work with larger enterprises right now,” he says.

Relevant applications

While IT outsourcing is undergoing a period of significant change, it has long adapted to new technologies and competing services. Yet there are a number of situations where XaaS services are more appropriate for firms than traditional outsourcing approaches.

ISG’s Hall finds XaaS models to be an ideal fit for services that are commoditised and where little differentiation is required.

“Hosting services are the most obvious examples, but anywhere that a standard service can be bought will be appropriate – commoditised platforms consumed on a utility basis such as database-as a-service; standard software like expense management bought as SaaS; or commoditised business processes such as invoice processing delivered as BPaaS [business process as a service],” he says.

At a time of immense talent scarcity, it’s essential for businesses to automate low-value tasks so that skilled employees can concentrate on meaningful work that adds value to the bottom line.

At a time of immense talent scarcity, it’s essential for businesses to automate low-value tasks

“SaaS reduces the support burden on enterprises as the SaaS suppliers are responsible for upgrades, patching and security. For areas such as HR and marketing, this is huge, because these functions don’t have the staff or knowledge to do this kind of support work,” says Hall.

Robert Rutherford, CEO of IT outsourcer QuoStar, agrees that XaaS is well-suited to many day-to-day business IT operations as well as some low-level security elements, but there is a limit to its utility.

“You need to make sure there is a human element to the service – often an experienced expert who you can meet. So many cloud service providers are bundling the security basics up, but they aren’t joining the dots and taking complete ownership, they are in effect just reselling products on a per-month basis,” he says.

Traditional forms of outsourcing are being remade by cloud-based XaaS models and allowing even small businesses to make use of once expensive applications, including enterprise resource planning (ERP) and customer relationship management.

There are countless benefits from this transition, but the ability for a wide range of firms to access data analytics tools and insights that were in the past only available to the global giants is a game changer.

“The economies of scale and shared cloud platforms means innovation is now truly possible for any business,” says Rutherford.

Read more about IT outsourcing

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