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The Death of Traditional IT Outsourcing

This perspective comes from one of our consultancy team with extensive experience as a CIO managing large outsourcing contracts across central government.

The traditional model of outsourcing was typically based on writing long-term contracts for a fully-configured managed service following a competitive bidding process, with the provider’s expectation that they would bid low to occupy the territory and then make real money on variations and locked-in growth.

This approach is gradually breaking down as the commodity IAAS and SAAS markets mature.

The public sector and large corporates are looking to exploit economies of scale across their back-office functions, and then concentrate their internal resources on the value-added systems that either give competitive advantage or deliver genuine changes in working methods.

However there are still significant barriers to overcome in terms of specifying requirements in terms of business outcomes, rather than detailed functionality.

A simple example of this is the State of California’s choice of a Microsoft Cloud solution which created a strong reaction from other suppliers as the specification was written too closely to reflect Microsoft product features, generating a hearty response from Google on the relative merits of their approach to email search.

Once committed to a particular solution set, then the lock-in implications start raising unexpected constraints and commercial challenges. Microsoft suits have not really changed their spots!

Acting as commodity service brokers is a growing opportunity for systems integrators and larger IT departments. In this model a range of cloud services are combined into a portfolio that provide some degree of local choice and a bias towards pay-by-use rather than an annual ‘all-inclusive’ fee.

There is still a gap in the provision of automated charging models for SAAS and IAAS, which adds to the overhead of managing the service integration and support; often leading to a much higher overall cost than envisaged.

The traditional large-scale providers of managed services are trying to adapt to these new approaches, but with limited success to date.

The root cause of their malaise is in the predominance of clever technologists that prefer to offer bespoke solutions than live within the limitations of typical cloud platform architectures.

In some instances there may be lucrative proprietary solution sets or partnership agreements that are hard to unwind, especially where margin is threatened. The sales-force may have to be trimmed and retrained to reflect these new competitive realities.

While the industry is grappling with these issues, business users are going on a binge with personal devices and high-speed wireless networks.

There is an increasing mismatch between their experience within the office and outside, with less and less tolerance of the high-cost, locked-down misery of many architectures that are based on traditional Microsoft desktops and wired networks.

A new breed of CIOs just will not accept the prospect of yet another Windows release and server platform upgrade.

Application platforms that are not channel independent out of the box will be rejected.

The requirements for business agility on an international stage combined with a desire to exploit more infrastructure independence and reduce high-cost fixed assets will squeeze old-style corporate IT budgets.

In this sense the debate is no longer about internal or external provision of IT services.

CIOs who are not starting to adopt some commodity cloud services, grappling with all the challenges and risks they present, will soon be unemployable.

Suppliers that are already experienced in the management of IAAS and SAAS offerings will have a bright future as they work with the new breed of CIOs to help revolutionise the businesses they serve.

The economics of this new approach will make legacy retention unaffordable, in spite of vested interests and the business costs of change.

via The Death of Traditional IT Outsourcing – Welcome to the Transputec Blogs. | Transputec.

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