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InsightaaS.com works with 451 Research to bring periodic thought leadership pieces to our readers. Readers may recall that in March, we carried a piece entitled "ITaaS: turning technology into delivery services" by 451 research director Dr. Katy Ring. That post explained why establishing an IT as a Service approach is essential to both IT departments and to providers of IT services, and discussed the importance of Service Integration and Management (SIAM) frameworks.
In "From outsourcing to 'cloudsourcing' — whither ITO?" Ring returns to the subject of IT service integration and management, this time, with an extensive view of how IT service options will evolve. She notes that "As the worlds of outsourcing, hosting, managed services and cloud converge, the service delivery options are growing," and goes on to describe how these changes will affect buyer options and seller business requirements.
Citing 451 Market Monitor research, Ring states that we are currently at a transition point in cloud market development, moving from Phase 1 of "on-demand infrastructure" focused on initial cloud adoption (primarily of IaaS) to a Phase 2 centred on "management of cloud environments" in which buyers look for enhanced services features, and sellers respond with advanced integration and management tools. She states that "In much the same way that IT outsourcers were able to use consultancy capabilities to move from traditional IT outsourcing to transformational IT outsourcing around IT and business process innovation and the use of global resources in the first decade of this century, the next phase of development will be to combine dynamic cloud services and consultancy in the BPO market. The goal will be to provide agile, innovative business outcomes for customers."
All of this is intriguing — but is it encouraging for traditional outsourcing suppliers? Ring's opinion is that the outlook is at least mixed: she states that "there will be an opportunity for externally managed services, but it may well no longer be an opportunity called 'ITO."'
So who, or what, will emerge to meet buyer needs? Based on feedback from 451's network of 'commentators,' Ring sees potential suppliers grouped into six main categories: traditional IT outsourcing suppliers, "asset-light" systems integrators, "asset heavy" MSPs and hosting providers, regional specialists, process specialists, and new entrants, many of whom are "born in the cloud." Interestingly, at least at the current time, the "giant cloud specialists" (Amazon, Google and Microsoft) are not included in the roster of potential outsourcing providers; Ring finds that "at present, it appears they are viewed as the technology providers to be managed."
Clearly, the lines between ITO, cloud and other service delivery options are blurring, and the nature of demand for these services is changing as well. This is still very much a market in flux,. Ring and 451 do an admirable job of explaining why and how this is the case — in terms that are relevant for both buyers and sellers of IT service capability.
Report by Dr. Katy Ring of 451 Research
As an industry, we know that virtualization means that IT systems and the business processes that they enable can be disintegrated or deconstructed, and then bought and sold separately rather than as part of a long-term outsourcing arrangement. This means that business operations can then be operated with real flexibility in response to changing circumstances — and the business processes and software systems that underlie them can be assembled as individually sourced services from a competitive marketplace.
Although most of the IT industry understands this, there is still a lot of confusion about the continuing relevance of IT outsourcing. There is a growing perception that the concept is dying and that cloud delivery is making the whole ITO market irrelevant. However, in new-style IT services, the concept of IT outsourcing is simply shifting from the traditional facilities management model (Client outsources its operations to the supplier — aka 'your mess for less.') toward a direct sourcing of services model (Client directly sources services from a variety of suppliers and outsources the service management layer — aka 'service integration and management, or SIAM').
Companies such as Amazon and Google have pioneered the exploitation of virtualization in the practical delivery of services, using the Internet as the delivery channel. They have innovated business models based on the high-productivity manufacturing and delivery of services, with reliability, security and commodity economics. However, the question remains as to how far this approach will penetrate the enterprise market for delivery of services.
The cloud marketplace and ITaaS
Service delivery in the enterprise market is complex, but increasingly, businesses can now source services directly from a range of suppliers rather than the supplier simply taking over the customer's existing or future technology requirements. The technical architectures enabled by virtualization decouple the layers of the classic 'big company' technology stack. Each layer can then potentially be sourced as a distinct service.
These services range from cloud-enabling technologies (see Figure 1), which are now a mainstream part of ITO contracts, to services procured directly from vendors 'as a service' (see Figure 2).
Figure 1: Cloud-enabling technologies taxonomy
Cloud computing 'as a service' is defined by externally delivered services — specifically third-party, hosted, pay-as-you-go services. We believe the cloud is, at its very essence, a service delivery and consumption model. Thus, we have defined cloud computing not by the technologies that enable it, but instead by the method of delivery and consumption.
Figure 2 shows the main discrete cloud service areas that we currently see buyers looking to source in the ITO space.
Fig 2: Cloud computing as a service taxonomy
The cloud at its simplest level can be seen as a marketplace where these new stand-alone services can be bought or sold. The potential lies in the cloud as a marketplace of discrete services that can be sourced 'on demand' and paid for 'as used.' If procured effectively, this can enable significant business benefits, and this approach is beginning to have an impact on the ITO market because most enterprises now expect a component of their ITO contracts to be delivered in this way.
Indeed, buyers expect to be able to make rational decisions about how and where to run applications and tasks based upon workload profile, policies and SLA requirements. As the worlds of outsourcing, hosting, managed services and cloud converge, the service delivery options are growing. The most sophisticated IT users may choose to operate as brokers themselves.
IT as a service (ITaaS) is the operational model that supports this approach — where the IT department of an enterprise acts and operates as a distinct business entity, creating services for the other lines of business (LOB) within the organization. At its core, ITaaS is a competitive business model where an IT department views the LOBs as having many options for IT services, and the internal IT organization has to compete against those external providers for the LOB IT requirements.
In response to this, ITO vendors are adding new features to their portfolios: they are beginning to offer cloud broker services for IaaS, and they are starting to offer access to their PaaS environments and to their own app stores as part of their outsourcing capabilities. Typically, these app stores offer software assets at the intersections of business applications supporting customers, employees and partners. These are the areas that are in the 'blind spots' of the big application software vendors and provide 'adjacent apps' opportunities for service providers.
Creating cloud services for the enterprise ITO market
The focus of enterprise IT has shifted away from IT infrastructure to investment in customer experience, citizen engagement, employee empowerment and IT-enabled business innovation. Consequently, vendors need to develop a business service model around these goals so that it can lead engagements to address them. This requires a different structure to classic ITO services because the new opportunity is less about providing lower-cost staffing capabilities and much more about developing agile, transformational, consultative services to assist with the delivery of business outcomes.
According to our Market Monitor research, the cloud services market is in the middle of a transition between two phases, moving from the crude, initial phase of on-demand infrastructure toward the management of cloud environments as shown in Figure 3.
Figure 3: Cloud market development
Phase 1 centers on initial adoption and is focused on infrastructure (primarily IaaS). Phase 2 represents a shift in cloud adoption where enterprises begin to embrace robust platform services that go beyond basic functionality and integrate with multiple cloud infrastructures, process massive amounts of data and cover numerous geographic sites. While Phase 1 was primarily driven by workload transition, Phase 2 is all about higher levels of customization, integration and management.
We now see an increase in demand for Phase 2 offerings such as enhanced service features, complex integration and management tools. The increased availability of these competitive offerings has been key in boosting demand for cloud computing tools by the enterprise.
This means that vendors in the IT services market need to be far more proactive in selling services than the old ITO market required. The service provider needs to bring customers what they want, rather than simply what the vendor account team knows it can offer. Clients have an evolving spectrum of requirements and are buying both traditional and new-style IT services. So some services (the cloud services) need to be iteratively developed with clients to build new value propositions that are pragmatic as well as agile. This is the introduction of the 'what's app' approach to ITO — in other words, what is the customer's current pain point (what's up?) and can we create an app for that? This feat is made possible by combining use of consultancy capabilities with PaaS technologies and DevOps skills.
This is an 'edge IT' opportunity that is open to all service providers that can capitalize on their expertise by offering added-value apps to their customers. Such apps are usually based on industry domain knowledge, which is why this is an approach being embraced by consulting-led organizations from the 'Big Four' to smaller, regional specialists. However, all service providers have industry domain knowledge that could potentially provide added value to their customer base. This 'what's app' approach is a new opportunity opened up by cloud technology, and it is bringing some new entrants to the managed services market — so even companies such as EY and PwC are beginning to offer managed services around their software intellectual property.
What does 'cloudsourcing' look like?
Cloudsourcing really moves beyond both the disintegration of monolithic ITO contracts and the introduction of multi-sourced technology towers delivered by best-of-breed providers. Multi-sourcing may be where most ITO activity is today, but in order to deliver the business agility promised by cloud services, outsourcing needs to move beyond multi-sourced technology tower management to the aggregation of IT services to deliver requested business outcomes.
To position for this, IT service providers need to create their own dynamic service stores with their own services and those of their partners and have the business orchestration capabilities to deliver on outcome-based contracts. In this way, service providers should be able to provide both tower management and service aggregation for clients. With a consultancy arm, service providers will also be able to offer process blueprints to enterprises in order to effectively outsource outcomes.
In much the same way that IT outsourcers were able to use consultancy capabilities to move from traditional IT outsourcing to transformational IT outsourcing around IT and business process innovation and the use of global resources in the first decade of this century, the next phase of development will be to combine dynamic cloud services and consultancy in the BPO market. The goal will be to provide agile, innovative business outcomes for customers.
In order to be able to deliver these types of cloud services, there will be a large supply-side opportunity around demonstrable data integration, management and governance capabilities. Indeed, for IT service providers, the enterprise data integration requirement will, over the next 10 years, be analogous to the ERP implementation requirements of the 1990s in terms of new business development.
So is ITO in decline?
According to TheInfoPro Wave 7 study on cloud computing, the shift in focus toward cloud computing is noticeable, with respondents planning increased spending for cloud-related technologies and services across the board going into 2015. As my colleague Peter Ffoulkes puts it: "At a simplistic level, if the word 'technology' describes the category, spending is increasing without exception. If the word 'service' is in the descriptor, then not so much. Cloud-related service spending is mostly increasing, with the exception of fully shared IaaS. For traditional services such as colocation, outsourcing, hosting and on-ramp services, a slight decline in increased spending is visible."
So, overall, data from our commentator network suggests that ITO is in decline. During the past two years, we have seen a nine-percentage-point fall in those using ITO services (see Figure 4).
Figure 4: ITO implementation roadmap
In terms of future spending, the decline is a little less clear, with slightly more enterprises planning to reduce spending on ITO next year as opposed to 2014 (see Figure 5).
Figure 5: ITO spending change
At the moment, the old ITO business models of business sheet engineering, combined with outsourced use of technical and human resources at scale are being slowly replaced by the sourcing of more highly automated, virtualized technical services from a wider variety of suppliers. However, with complexity comes a desire for simplicity and provision of 'a single throat to choke,' and so it is likely that brokerage and SIAM services will also begin to flourish. As long as demand volume for external IT services continues to grow, there will be an opportunity for externally managed services, but it may well no longer be an opportunity called 'ITO.'
As the market evolves, the vendor landscape in this new IT services world for ITO appears to have six main categories of provider as referenced by the 451 Commentator Network (see Figure 6).
- Traditional IT outsourcing suppliers — this includes IT organizations that are developing their existing outsourcing models to cope with demand for cloud services — e.g., CSC, Dell, EMC, Fujitsu, HDS, HP, IBM, SunGard and Unisys.
- Asset-light systems integrators such as Accenture, Capgemini, CGI Group, Cognizant, HCL Technology, Infosys, Stefanini, TCS and Wipro.
- Asset-heavy MSPs and hosting providers including CenturyLink, Cisco, Digital Realty, Dimension Data, EarthLink, Equinix, NTT Data, TELUS and Verizon.
- Regional specialists: Allcomp, Atos, CompuCom, Computacenter, Hollstadt & Associates, Microland.
- Process specialists: AllScripts, CIS IT Solutions, Vertex.
- New entrants — There are multiple smaller specialists born in the cloud organizations that are able to offer a range of services designed around the cloud computing model, offering a low-cost, high-service model, often targeted at specific industries or business functionalities. Appirio is such a company mentioned by the Commentator Network.
Figure 6: ITO Vendor Implementation
One obvious vendor category missing from this list is the Web giant cloud specialists such as Amazon, Google and Microsoft, which are all offering cloud in the form of infrastructure or applications services and have the scale and credibility to become major competitors in the previously closed world of corporate IT outsourcing. However, at present, it appears they are viewed as the technology providers to be managed by the service providers listed, or, at least, they are not considered part of the ITO market. However, according to our commentator community, the company that currently appears to be making headway in positioning itself in buyers' minds as a service provider instead of a technology provider is Oracle with its Managed Cloud Services.
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