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Pressure in IT Outsourcing Market Squeezes Providers

by Frank Bastian

Just a few years ago, no one would have believed that Amazon could compete with established IT service providers in the infrastructure sector. Or that Rackspace and Microsoft would grab some of IBM’s market share for processer capacity, memory and network services. The proliferation of commodity-like cloud and software-as-a-service (SaaS) solutions is triggering massive price drops in the infrastructure sector and forcing traditional IT service providers to develop new business models to better address the changing needs of their customers.

What does this mean? The Top 5 signs of the new IT world order are:

1. Deals are shorter. According to ISG research, the duration of outsourcing engagements and the contract periods for individual services have shortened from an average of 4.7 years in 2005 to an average of 3.9 years in 2013. The duration of service contracts and the provision of individual services are down to a few weeks or even days. Shorter contract periods allow companies to establish multiple provider relationships, which gives them the flexibility to buy IT services at lower prices.

2. Multi-sourcing is prevalent. Instead of relying solely on one IT provider, companies choose the most suitable partner for the job. In 2013, over 50 percent of companies employed multiple IT service providers. The tendency toward multi-sourcing is encouraged by the expanding range of standardized infrastructure services in the cloud. ISG research has found that more than 70 percent of large international enterprises already have a cloud strategy, and nearly two-thirds of companies currently using the cloud plan to increase their cloud adoption by more than 20 percent.

3. Prices are falling. A broadening range of services and intense competition are pushing down prices in the infrastructure services segment, which is an important and lucrative component of any established IT service provider’s portfolio. This price drop is forcing IT service providers to re-examine the list of services companies are outsourcing exclusively and those they are planning to obtain from the cloud.

4. Only the fittest are surviving. IT service providers’ old business models are no longer competitive, and those that don’t adapt to the new reality will disappear. Providers that want to avoid this fate will expand or change their portfolios, figure out a way to grow sustainably and offer clear benefits to their clients or occupy highly specialized niches.

5. Digitization offers the chance to differentiate. Immediate opportunities for IT service providers lie in complementary infrastructure and infrastructure-related services that allow companies to round out their public cloud service plans. Private cloud infrastructures, for example, offer promising new ground for infrastructure service providers to explore. Mobile technologies and the integration of the Internet into commercial and consumer products and IT services require constant digital innovation with software development teams that can develop and redesign products in very short cycles and collect and analyze data. IT service providers that are building deep technical and industry-specific, end-to-end expertise are finding significant competitive advantage.

In the face of all of this change, IT providers are increasingly positioning themselves as business process outsourcing partners to help companies create digital transformation strategies and assist CIOs with their IT responsibilities. As the focus and position of the IT provider morphs, the relationship between companies and their outsourcing partners will also morph and reshuffle the assignment of roles and responsibilities.

ISG helps both outsourcing service providers and buyers survive disruptive change and use it to their advantage. Contact me to discuss further.

About the author

Mr. Bastian brings senior expertise in IT management in infrastructure and application management to ISG’s clients. He is recognized as a trusted advisor by his clients and the industry. Frank identifies market issues and developments to generate added value for his clients together with high competent teams. His in-depth business management experience from leading complex change and organizational transformations allows him to provide input on top management level to IT and sourcing strategies.