In the world of IT, Cloud has been the media darling, taking center stage in every conversation and publication. While it’s true that Cloud is a major trend in and of itself, its adoption has caused a domino effect in the industry as a whole. The advent of utility-based pricing, in combination with a more savvy outsourcing customer, is dramatically impacting the way IT services are purchased and consumed – with far-reaching ramifications.
Let’s take a look at the trends.
The Decline of the Mega-Deal; The Rise of Fragmentation
In recent years, ITO was a “partnership,” characterized by long-term, mega-deals with arduous sales cycles and complex pricing structures. Smaller companies rarely had the breadth to compete. Today, all of that is changing.
“We see ITO morphing into something that’s more fragmented, “ explained Ben Trowbridge, founder and CEO of Alsbridge, Inc. and author of Cloud Sourcing the Corporation. “Instead of the mega-deal, single-provider contracts, clients are starting to break up deals based on competencies. Two, three or more providers will become the norm.”
According to Trowbridge, today’s outsourcing client is now well-equipped to manage the complexities of governance in a multi-sourced environment.
“You have to remember that clients are maturing in their use of outsourcing, so they’re starting to govern the outcome instead of overseeing every tactical step,” Trowbridge explains. “This approach makes managing multiple ITO providers far more feasible.”
This new breed of client is engaging the advisor community differently as well.
“Buyers are more informed, they’ve gone through the process – and service standardization has given them price transparency they didn’t have before,” explained Chris Pattacini, director of benchmarking for Alsbridge’s benchmarking division. “Rather than coming to us to identify what and how to outsource, clients are engaging us to benchmark existing deals to make sure they’re not only getting a good price but are maximizing the value of that relationship.”
Service-level agreements (SLAs) are no longer enough to secure client satisfaction.
“We’re seeing a lot of ‘value leakage’ – clients who are seeing red when they should be seeing green. Their outsourcing partners are meeting the SLAs, but the clients just aren’t happy for a variety of reasons,” Pattacini said. “Clients ask us to do a ‘health check’ to identify what’s really causing the dissatisfaction.”
An Expanded Provider Landscape
At the same time the ITO market is transforming, new competitors are emerging. India, which historically competed in the space with applications, is now entering into the ITO market with a noticeable price advantage.
“Years ago, most U.S. ITO providers started out as a body shop – order takers – then developed a solution around service delivery,” Trowbridge said. “The same transition is happening with Indian providers. They’re teaming with organizations that have rack space and creating a solution that capitalizes on the fundamental advantage of the Indian market – an extremely low cost of labor.”
Other smaller, more specialized outsourcing providers are appearing worldwide. At the same time, many established providers are re-vamping their delivery models to compete, including going to market with new, “Cloud-like” service offerings.
“On the server side, we’re going to see traditional data center services look more like Cloud solutions, so these providers can protect market share and provide a viable alternative for applications that don’t really ‘fit’ within the Cloud model,” Pattacini explained.
For example, a traditional environment may have 100 servers, 30 operating systems and five or six platforms, making it difficult to manage cost effectively. A Cloud-like, more standardized solution enables clients to reduce costs, without following a pure Cloud model.
“In Cloud, the client goes to the Internet, buys server capacity with a credit card, and acquires the needed capacity. In Cloud-like solutions, there’s no self-provisioning, but the client has the cost benefit of solution standardization,” Pattacini said. “It’s like renting a car, leasing a car or buying a car. Cloud is renting, Cloud-like is leasing and the traditional approach is like buying. The truth is, not every application needs the flexibility provided by Cloud. That’s where Cloud-like delivery can be a viable, lower-cost alternative.”
So, what does all of this mean to traditional, legacy providers?
“The lower cost options will undoubtedly create some turmoil in the market, and we anticipate legacy providers responding in a couple of very significant ways,” Trowbridge said. “Traditional ITO providers will start offering more granular solutions – more of an ‘a la carte’ menu of sorts — as opposed to one, big mega-solution. They’ll start to match the market’s move toward specialization, providing a broader range of very specific, very focused services.”
The real game-changer could be when providers, like Amazon, begin making enterprise sales calls.
“Today, if you want to procure ITO with Amazon.com, you log in, view a video and purchase what you need,” Trowbridge said. “But, consider what would happen if Amazon committed to deploying an enterprise sales team. That alone has the potential to turn traditional ITO upside-down.”
A New World Order
Although opinions vary on where the market will go or what will happen next, one thing is certain: the world of ITO as we know it today will never be the same. Gone are the days of ‘an IT partner for life;’ in are the days of multiple, smaller, shorter contracts with a variety of specialized providers. India-based outsourcers are expanding their service portfolios beyond applications and programming to provide more traditional ITO services at significantly reduced rates. A more mature client base is taking a new approach to governance, managing by outcome and benchmarking to ensure they get the greatest value from their combined service provider partners.
In short, the times they are a-changing – and the transformation is starting right now.