Weekly Update

More cloud and more outsourcing

The shift to cloud continues to accelerate, with a resultant increase in both small- and large-scale outsourcing. One new report demonstrates the pace of cloud acceptance, with the 50 largest public cloud providers reporting a 47% gain in revenue for 4Q13 over the year-earlier period; while another study out this week chronicles the demand for both high- and low-end outsourcing deals. I posit that the two trends are linked, with the adoption of public cloud services leading to changes in outsourcing trends.

Outsourcing megadeals

The ISG Outsourcing Index registered a 14% gain in annual contract value for outsourcing deals in the first quarter of 2014. This was fueled by the signing of 10 megadeals of more than $100 million, which is a return to the levels previously seen before the financial crash of 2008. Further into the numbers, the public sector outsourcing market, at 64% of the global total, is particularly robust, with a 30% ACV gain over the previous 12-month period. The public sector healthcare market in the U.S. was a key driver of this growth.

But more small deals

But deals at the $5-9 million level continue to proliferate as well, with a 21% gain in the number of contracts of this scale awarded in the first quarter over the year-earlier period. (ISG’s index only tracks contracts down to the level of $5 million ACV.)

What is happening? In part, the availability and economics of new cloud solutions is leading to new investments in cloud, big data, and mobile technologies with a ‘best of breed’, mix-and-match, approach. This is leading to more small contracts—including, undoubtedly, those below the level that ISG tracks.

Daunting complexity

But for enterprises of significant size (e.g., $10 billion-plus in revenue), the complexity of this best-of-breed approach is daunting. One way to mitigate this growing confusion is to settle on a few preferred services providers. Another is to rely on one favored provider to integrate and manage the multiple products. The larger IT services firms (e.g., IBM, Accenture, TCS, and Cognizant) have practices and partnerships covering the popular new technology providers, and these servicers tend to integrate the individual products within vertical market-specific platform solutions that add further value. For large enterprises, this is leading to a return to a few larger contracts.

Still, the tools for multi-sourced, cloud-based contracts are improving, and other large companies will simply learn to better manage the complexity themselves.

Technology vendors will pitch in?

Technology vendors are also announcing efforts, at least, to improve their product interoperability. The Industrial Internet Consortium, launched two weeks ago by AT&T, Cisco, GE, IBM and Intel, is an example of such an effort. The IIC will undertake several initiatives to improve data integration in physical (Internet of Things) environments across industry sectors. Of course, such physical connections are driving big data demand, and big data is also driving a good portion of new cloud demand.  Gigaom has its skeptics on the announcement, with Stacey Higginbotham tracing the motivation to some fat government funding. Still, even vendor puffery indicates perceived demand and need.

One way or another, cloud technology will continue to enable more specialized, high-value solutions to reach the market. Connecting those solutions is the larger challenge. A combination of in-house and external approaches will be applied to make the pieces fit together. Buyers looking to an outsourcer for help would do well to look for the market leaders within their vertical sector–with whom they are almost assuredly working already–and perhaps update their contract terms for higher-level accountability that also incorporates the new business and IT metrics that are becoming feasible.