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August 9, 2012

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IT Outsourcing, Cloud Services Spending Trending Upward

By Chris Gonsalves

If there was any lingering doubt that cloud computing and “as-a-service” solutions are reshaping both the technologies and the markets that constitute IT in the modern age, consider these heady numbers. Fueled by meteoric demand for cloud services and hosted applications, worldwide spending for IT services is expected to top $250 billion this year, a 2 percent hike over last year’s already impressive numbers, according to the IT research firm Gartner Inc.

Cloud compute services and cloud-based infrastructure as a service easily constitute the fastest-growing segment within the global IT outsourcing (ITO) market, Gartner finds. Sales of these cloud services offerings are expected to jump 48.7 percent this year to just over $5 billion, up from $3.4 billion last year.

The reason for the cloud run-up is simple; hosted services deliver greater functionality, improved automation and better value, analysts insist.

“Cloud compute services primarily provide automation of basic functions,” says Gartner research director Gregor Petri. “As next-generation business applications come to market and existing applications are migrated to use automated operations and monitoring, increased value in terms of service consistency, agility and personnel reduction will be delivered.”

The cloud numbers may look small compared to the overall outsourcing market. But the trajectory of the cloud versus traditional ITO services is unmistakable. Cloud is waxing; the rest are waning.

For example, data center outsourcing, a relatively mature and established segment of the outsourcing market, made up about 35 percent of total worldwide ITO last year, but is expected to drop a full percentage point by the end of 2012.

“Data center outsourcing is at a major tipping point, where various data center processing systems will gradually be replaced by new delivery models through 2016,” writes Gartner’s Bryan Britz.

In stark contrast to DCO, areas such as applications outsourcing, which Gartner tallies separately from cloud services, but that still reflect major disruption in the hosted versus on-premise technology markets, are riding an adoption wave among customers seeking better ways to manage the growing list of increasingly complex apps that manage today’s businesses. Application outsourcing is expected to reach nearly $41 billion this year, 2 percent above 2011 spending levels.

“The burdens of managing the legacy portfolio, along with the limitations of IT budgets, have shifted the enterprise buyers to be cautious and favor a more evolutionary approach to other application services, such as software as a service,” says Britz. “New applications will largely be packaged or SaaS-deployed in order to extend and modernize the portfolio. While custom applications will remain ‘core’ for many organizations, the trend in the next few years to SaaS enablement in the cloud will reflect in the growth of the [applications outsourcing] outlook.”

The Asia/Pacific region is leading the charge with a 1 percent uptick in outsourcing spending this year over last, thanks in part to an influx of new business capital. ITO could jump another 2.5 percent for 2013, Gartner analysts said. The market remains on a solid growth curve through 2016 in North America as well where buyers are looking to trim IT costs and reduce capital expenditures on IT through managed service relationships with external providers. The positive grown is being offset slightly by economic challenges in Europe, where ITO is expected to decline 1.9 percent this year, according to the report.

Still, the future remains bright for purveyors of hosted services overall. If there’s any dark side to this cloud it could come in the form of continuing nagging questions about the security and reliability of hosted infrastructure, platforms and applications, Gartner warns.

“Continued privacy and compliance concerns may however negatively impact growth in some regions,” Petri adds. “Especially if providers are slow in bringing localized solutions to market.”

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