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Cloud services now account for a third of IT outsourcing market

Stephanie Overby | July 25, 2016
The ‘as-a-service’ market now accounts for a third of IT services activity. Can traditional outsourcing survive?

In traditional sourcing, annual contract value (ACV) this quarter was at its lowest level since the fourth quarter of 2013, when it dropped below $5 billion. The decline this time came mainly from a weak new scope market, particularly in the IT outsourcing space. New scope posted its lowest ACV since the second quarter of 2013. That stumble also can be attributed to weakness in restructuring activity.    

In contrast, the value of the as-a-service market jumped 45 percent over last year. IaaS exhibited vigorous year-on-year growth of 70 percent, compared with SaaS, which logged a decent but modest 16 percent growth over this time last year. IaaS amounts to about 54 percent of the as-a-service market at present, and the gap between IaaS and SaaS has been widening since the end of 2014.

CIO.com: How long can as-a-service and traditional outsourcing activity remain on their respective trajectories? 

Keppel: The as-a-service space is on a tremendous growth trajectory, and we expect its rapid growth to accelerate into the foreseeable future. The SaaS market in particular will continue to be reshaped, with lots of consolidation and continued innovation. In the meantime, for every company that is acquired in the space, we expect new ones to pop up in their place and be every bit as competitive. 

The traditional sourcing market pulled back in the second quarter and came in at lower levels than we initially expected. Looking to the second half, we expect a tough comparison, particularly against the very robust fourth quarter of 2015. Even though we continue to see increasing market demand and interest in sourcing, we expect second-half ACV from the traditional market to come in slightly lower than last year, albeit with an increase in the number of contracts.  However, once you factor in the as-a-service flow into the combined market, ACV will most likely finish with high single-digit growth.

CIO.com: Will we ultimately see the end of traditional IT outsourcing?

Keppel: Many of the as-a-service characteristics we’ve referenced thus far are only fully realized with massive scale, multi-tenant platforms typically shared across hundreds, thousands, or even millions of buyers. Only a select few providers can offer this level of scale and innovation, such as Amazon Web Services and Microsoft Azure for infrastructure, and Workday, Salesforce and ServiceNow for software.  

While the move to an as-a-service model creates some serious challenges for traditional sourcing providers, it should not be construed as the end of the road for the traditional market. Many providers are transforming their businesses to accommodate and leverage cloud-based services, infrastructure, and platforms as part of their delivery models. They are making that transformation—both organically and through acquisitions—at a heightened pace, some more rapidly than others.

 

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