03 it outsourcing trends

7/28/2019 03 It Outsourcing Trends

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Enterprise IT Outsourcing Trends 2013 | 1

2013, HfS Research, Ltd | www.hfsresearch.com | www.horsesforsources.com | bpo.horsesforsources.com

The Knowledge Community for Global Bus iness and IT Serv ices

ENTERPRISE IT OUTSOURCING

TRENDS 2013Results from the HfS Research Global IT Trends

SurveyPart Four

Author:

Dr. Thomas Mendel Ph.D., Senior Vice President IT Services, HfS Research

February 2013

Executive SummaryUnderstanding trends and shifts in IT markets requires more than anecdotal evidence. Well-designed, focused, and

executed telephone surveys are a prime vehicle for conveying whats going on in general and in a specific market.

The HfS Research Global IT Trends Survey concludes that in the area of IT infrastructure outsourcing, cloud

computing is the hottest spending trend for 2013, followed by a desire for more flexible contract terms and a

movement from fixed-based pricing towards outcome-based pricing. In the area of application development and

outsourcing, a shift towards packaged and cloud apps is high on the spending agenda as well as achieving an

overall reduction in apps spending. Long-term infrastructure outsourcing will be dominated by the IT utility

concept and hybrid cloud services, whereas application development and outsourcing will gravitate towards

verticalization as well as SaaS and other cloud apps.

Survey BackgroundEvery year, IT executives and vendors alike struggle to prioritize their scarce resources, with technology and

operational budgets on one side and marketing, sales, and pre-sales labor on the other. One of the important tools

for making these decisions is the use of timely and targeted surveys that explore the real buying trends of

enterprise IT decision makers. HfS Research, therefore, decided to field its first Global IT Trends Survey to get a

better idea of what is happening with the IT budget overall and in the most important IT markets (such as cloud,

virtualization, IT service management, outsourcing, and SAP) as well as to determine where IT departments are

going to invest in 2013.

The HfS Research Global IT Trends Survey consisted of a phone interview fielded to 468 IT decision makers in

various enterprises. The respondents job titles included CIO, VP IT, VP Infrastructure, VP Operations, IT Manager ,

IT Operations Manager, and IT Supply and Purchasing Manager. All companies interviewed were large enterprises

with a headcount upwards of 250 and a turnover of more than 50 million. Major countries, such as the United


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Exhibit 1: IT Infrastructure Outsourcing Spending in 2013

Source: HfS Research 2013; Base: 468 IT Managers in Enterprises

Hybrid Cloud

To some, cloud computing3

is already old news, but this is not the case when it comes to IT infrastructure

outsourcing. Cloud computing took first place for 2013 spendingwith 18 percent of respondents top priorities

on hybrid cloud4 services and another 10 percent on IaaS5which is proof that cloud has most definitely arrived in

the enterprise. There will be no more is this really real? kind of discussion. Enterprise IT managers are now

putting their money where their mouths are and vendors are busy offering new cloud services every day. Clients,

however, will be cautiously evaluating IaaS and hybrid cloud options when it comes to infrastructure outsourcing.

As a manufacturing company CIO reported, We spent 2012 evaluating many cloud outsourcing options. We are

more confident with hybrid solutions for the time being, but this may well change in the future.

3HfS defines cloud computing as standardized IT services, based on Internet technologies delivered in a flexible, self-service

way.4

Hybrid cloud is also known as virtual private cloud services delivered by traditional IT services companies and outsourcers but

with added security and reliability, whereas public cloud uses the native Internet to deliver services.5

Infrastructure as a Service (IaaS) supports the Platform as a Service (PaaS) layer, which includes the middleware and

development tools used to build, provision, and manage cloud-optimized applications. Both are necessary to create the

Software as a Service (SaaS) layer and cloud applications such as CRM, ERP, help desk, or email.

2%

4%

5%

6%

6%

7%

8%

8%

10%

12%

13%

18%

Others/Don't know

IT supply management

Remote IT management

Multisourcing

Contract re-negotiation

Contract innovation

Data center outsourcing

Vertical solutions

IaaS

Outcome-based pricing

Flexible contract terms

Hybrid cloud


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Flexible Contract Terms

Driven by the overall promise of the cloud phenomenon that of slashing the cost of running IT servicescompanies also want to become more flexible in their contracting terms. No more five-year (or more) contract

durations. A full 13 percent of respondents see this as their number one investment priority for 2013, and another

six percent want to re-negotiate existing contracts outright for better conditions. So, the heat is on for the service

providers to react. There has been a lot of talk about pay-as-you go, but little did we hear from our IT service

providers in real life. 2013 will be the year when I will be demanding more flexibility in our contracts, explained an

IT sourcing executive for a chemical company.

Outcome-Based Pricing

Along the same lines is the second runner-up, with 12 percent: linking IT infrastructure outsourcing fees tobusiness outcomes. This is old news for business process outsourcing clients, for whom the link is obvious. In IT

and especially infrastructure outsourcing, this is still new, and few vendors are currently ready and capable to fulfill

that need. Watch for much innovation on that front in 2013 as vendors are gearing up accordingly. A CIO for an

airline stated, Our business in under huge cost pressure. We can no longer afford to sink huge chunks of our IT

budget on fixed spending blocks without linking it to real consumption.


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Survey ResultsIT Infrastructure

Outsourcing Trends Beyond 2013With a clear understanding of IT infrastructure outsourcing priorities and budgets for 2013, HfS looks further into

the future to see whether folks will invest in the same categories in the long term (see Exhibit 2).

Exhibit 2: Long-Term IT Infrastructure Outsourcing Spending Trends


IT Utility

Will it finally be a reality five years from now? According to our survey, 19 percent of respondents believe so. The

IT utility and all good things that come with it, such as cost reduction, easy switch of services, and full

industrialization. A CIO for an insurance enterprise commented, I cannot believe that five years from now we will

still be buying and managing IT infrastructure services as a separate line item. It will all be part of a vertically

integrated package.

3%

5%

8%

11%

12%

12%

15%

15%

19%

Others/Don't know

IT Supply management

Co-innovation


True pay-as-you-go

Cloudsourcing

Cloud service brokering

Hybrid cloud

IT utility


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Hybrid Cloud

As number one on the agenda for 2013 and number two for the long-term trends with 15 percent, hybrid cloudsare most certainly going to be with us for a long time. This is also consistent with HfS findings on overall

infrastructure outsourcing market changes. HfS concludes that the hybrid cloud infrastructure services market will

enjoy the highest growth rates of all cloud markets over the next five years6. Long-term, I am expecting almost all

my IT services to be hybrid cloud ones, remarked a vice president IT services at a life sciences firm.

Cloud Service Brokering

Already in third place with 15 percent closely behind hybrid cloud7, cloud service brokering is a new topic that

appeared on the radar screen only as recently as 2011. Its score as a high priority among 15 percent of the

respondents is surprising because it is rare to see an emerging idea capture mind share so quickly. Clearly, ITexecutives need external assistance with managing cloud investments. The idea behind this concept is to use a

service provider to broker and manage cloud services on behalf of a buyermuch like a travel agent aggregates

the different elements of a vacation. A CIO for a financial services company explained that the concept is hugely

compelling since I am fully aware that, in the future, I will provide far fewer services in-house. And I will certainly

never go back to a one-stop-shop outsourcing. Respondents also told us that the rise of the cloud service

brokering idea will necessarily force ITIL8

to become less rigid, with the term ITIL-light named frequently.

6Corporate IT buyers as well as IT departments are looking toward IT service providers to help manage the various service

delivery options. IT service providers will gradually replace existing outsourcing contracts with more flexible ones, adding cloud

flavors as they go. We expect that by 2015, approximately a quarter of the IT infrastructure outsourcing contracts will be able

to qualify as hybrid cloud infrastructure services, resulting in a $22.7 billion market. An additional driver, albeit on a lower level,

will be cloud management and cloud broker services. See Market Overview: Cloud Infrastructure Services 2012.7

The actual percentage result before rounding was slightly lower, hence it is not a joint second place. 8

IT Infrastructure Library, see http://de.wikipedia.org/wiki/IT_Infrastructure_Library.


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Survey ResultsIT Application

Development and Outsourcing Trends

for 2013Lets also look at the trends on the application management side of the IT budget (see Exhibit 3).

Exhibit 3: IT Application Development and Outsourcing Spending in 2013


Migration to Packaged Apps

Migration to Packaged Apps comes in at first place, with 18 percent of the respondents placing this at the top of

their investment prioritieswhich is further proof that the mantra of industrialization and standardization is

resonating with buyers. Many enterprises will seize the opportunity and move from own developed software to

more standardized offerings. As a vice president IT for an energy company told us, We used to only use our owndeveloped apps. But today, there are very good (and cheap) vertical back-office solutions available. We will

migrate to be able to further innovate and compete where it matters to the customer- the front- and not the back-

end.

2%

8%

8%

9%

9%

10%

11%

11%

14%

18%

Others/Don't know

Provider consolidation

Testing automation

Hybrid Cloud hosting

SaaS

Apps retirement

Nearshore apps development

Reducing apps lifetime costs

Migration to cloud apps

Migration to packaged apps


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Migration to Cloud Apps

Along the same lines, 14 percent of respondents see a migration to cloud apps as their main investment for 2013.This is primarily driven by the promise of cost reduction. We have a rule now: if we save 75 percent of the running

costs and the RoI is less than 12 months, well do the project no need to ask for the budget a year in advance,

said the CIO of a media company.

Reducing Apps Lifetime Costs

With the cost of running IT as high as it is (recall that it accounts for 70 percent of an IT budget on average), it is no

surprise that there is a desire to reduce the total overall lifetime costs, as voiced by 11 percent of respondents.

And it seems that the market is starting to react and companies can actually reap substantial savings. My business

leaders complained about our high IT costs for years. Now I feel that I can really start doing something about it;however, the pressure is now on me to perform, commented a CIO for an engineering company.

Nearshore Apps Development

Slightly behind third place but still with 11 percent of votes, nearshore apps development came in at fourth place.

Particularly in Continental Europe and the Americas outside of the United States, the idea of nearshoring apps

development as opposed to offshoring is quickly gaining traction. Weve never really been that comfortable with

offshoring. Now, within the European Union, we have great nearshore opportunities in the former Eastern

European countries. We tried it for a while and are now heavily investing, said a CIO for a manufacturing firm.


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Survey ResultsIT Application

Development and Outsourcing Trends

Beyond 2013And finally, lets ask the question: Are the long-term application management trends consistent with the short-

term trends (See Exhibit 4)?

Exhibit 4: Long-Term IT Application Development and Outsourcing Spending Trends


Vertical Packaged Apps

A whopping 24 percent of those interviewed believe that, in the future, vertical packaged apps will be the biggest

thing. This is surprising since many of the packaged apps vendors, such as SAP and Orcale, have been investing in

vertical solutions for a long time. It seems that only now are these solutions becoming truly accepted by themarket. A vice president for apps development of an oil and gas company told us, We start to like the new

industry solutions and capabilities that SAP provides and hey, it took em long enough. Five years from now,

everybody will be using industry solutions as opposed to generic templates.

4%

6%

7%

7%

8%

10%

11%

23%

24%

Others/Don't know


True pay-as-you-go

Global BPaaS

Apps development automation

Application lifecycle

Dynamic business apps

SaaS/cloud apps

Vertical packaged apps


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SaaS/Cloud Apps

In the application services space, cloud is also a long-term trend, with 23 percent of companies seeing SaaS andcloud apps as their most important area of spending. Acceptance does vary by region; however, by far and away,

the following quote represents the way clients feel right now: 2012 was the tipping point. I cannot see any new

apps that would not be SaaS, said the CIO of a consulting company.

Dynamic Business Apps

In third place, 11 percent saw a long-term shift towards dynamic business apps as important. The term is still ill-

defined, there seems to be a consensus brewing, however, that dynamic business apps will become a way of

helping companies to change business processes and apps on the fly, mainly running on cloud environments. A CIO

for a utility company told us, I have standardized, automated and outsourced non-key IT services for years; now Iam ready to take the next step: Abstracting business process design from the infrastructurethats dynamic

business apps to me.

RecommendationsFollowing are a number of clear recommendations that can be derived from the data:

HfS Research Recommendations for Buyers

While 2013 may go down in history as the year of cloud, it is also a good year to take advantage of opportunities to

reduce IT costs. Many of your peers will pressure IT service providers for cheaper hybrid cloud services, more

flexible contract terms, and outcome-based pricing. The same is true for apps. Buyers will gravitate towards

standardized packaged apps and lower overall running costs. Support the move! After all, the power is with the

buyer.

HfS Research Recommendations for Service

Providers

2013 will be the year when finally every service provider will have to realize that they cannot stand still. If by nowyou dont have a solid plan regarding flexible contract terms , a movement from fixed to outcome-based pricing,

and a movement to hybrid cloud offerings, you had better get moving. And the same goes for apps, cloud

migrations, and TCO reduction galore. Theres a lot of opportunity out there and not much sense in hanging on to

the old way of doing business.


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About the Author

Dr. Thomas Mendel Ph.D.

Dr. Thomas Mendel Ph.D. is Senior Vice President IT Services at HfS Research, where

his prime focus is Cloud Computing and SAP Services.

Thomas is an IT industry veteran with more than 15 years of experience in advising IT

vendor and end-user clients and performing research-based writing and consulting.

He did consulting work with major end user organizations and vendors in many

countries.

Thomas is an internationally recognized authority on Cloud Computing and IT ServiceManagement. He also maintains research interests in the areas of infrastructure and

applications outsourcing, converging IT and telecommunication technologies and markets, as well as IT to business

alignment.

Thomas is best known for his 9+ years of service at Forrester Research, where he held various analyst and

management positions. Most recently Thomas had the Global responsibility for serving the Vendor Strategy

professionals and leading a team that delivers research to help these professionals. He was responsible for a

research agenda that illuminates strategic opportunities and risks, market demand and competitive dynamics, and

go-to-market, as well as organizational strategies and the use of emerging technology to improve business results

for technology vendors.

Before joining Forrester, Thomas was vice president of the Solution Center Global Network and program director

of Global Information Technology Infrastructure at Heidelberger Druckmaschinen AG. He was responsible for the

management of the Heidelberg Global Network and the design and rollout of all global infrastructure projects

for example, the implementation of the Heidelberg intranet in more than 60 countries. Prior to joining Heidelberg,

Thomas was an IT manager at ABB Kraftwerke AG.

He is in great demand as a conference speaker, both in Europe and North America. Thomas' work has enjoyed

wide exposure in the media.

A native of Germany, Thomas is a graduate of business studies at Mannheim University and holds a Ph.D. in

computer science from the University of Wales in Swansea.

Thomas has both lived and worked in Germany and the UK but also traveled to many countries both on business

and leisure.

In his spare time, Thomas enjoys cooking, skiing, football and rock music.

Thomas can be reached at [email protected].


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About HfS ResearchHfS Research is the leading analyst authority and knowledge community for the global services industry.

In addition to researching business services and technology services strategies, HfS educates and facilitates

discussion among the worlds largest knowledge community of services professionals, currently comprising

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visited professional community in the global services industry, offering rapid and insightful commentary on,

analysis of, and debate about enterprise shared services, outsourcing, and global operations dynamics.

In 2011, HfS was awarded Outsourcing, BPO and Services Analyst Firm of the Year by the International Institute of

Analyst Relations (IIAR), the premier body of analyst-facing professionals, and runner-up for overall Analyst Firm of

the Year. Led by recognized industry expert Phil Fersht, HfS Research differentiates itself with its global team of

expert services analysts with real industry experience, provocative and opinionated research, unrivalled marketanalytics, and a view of technology as an enabler for business process improvement. Its on-demand expertise

relationship model helps clients leverage HfS knowledge and strategic insight in a rapid, responsive and engaging

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HfS Research also manages the HfS 50 Sourcing Executive Council, the premier peer discussion group for enterprise

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practices sharing among the most senior sourcing executives of large global enterprises. This powerful forum is

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