Rise of hosted IT spells gloom for outsourcers

This year will see in a shift in the IT services market as firms turn to direct sourcing from hosted software providers, rather than traditional outsourcing opportunities, according to industry experts.

Richard Sykes, chair of the Outsourcing Group at IT trade association Intellect, pointed to the difference between direct sourcing and classic outsourcing as “very high productivity server farms at work rather than thousands of IT professionals”.

In reaction to recent reports about Royal Dutch Shell’s plans to outsource around 3,000 IT staff to three services providers ­ EDS, AT&T and T-Systems­ Sykes said this would be a “conservative deal” that is unlikely to achieve maximum cost savings. “Shell could become more competitive by buying services straight off the internet,” he added, for example online email and CRM systems provided by Google and Salesforce.com respectively.

A new book due to be published tomorrow by Nicholas Carr, ­famed for his IT Doesn’t Matter article, also promotes the direct sourcing model.

Carr argues that the cost benefit to firms through use of large utility computing providers, whose economies of scale would dwarf in-house efforts, will eventually lead to on-demand software dominating firms’ IT infrastructures.

“It may take decades for companies to abandon their proprietary supply operations and all the investments they represent. But in the end the savings offered by utilities become too compelling to resist, even for the largest enterprises,” he explained.

Clive Longbottom, service director at analyst Quocirca, pointed out that the biggest barrier to Carr’s model is mindset. “For large organisations in particular, it would be a very brave CIO and COO who would go the whole hog. The first time there’s a break in connectivity they’d suddenly say, ‘Hell, we can’t do anything at all’,” he added.

According to Sykes, the trend by small and medium-sized enterprises towards direct sourcing deals will also result in fewer contracts involving Indian locations because the services are more automated and less people intensive.

The movement to locations for offshore services other than India is an outsourcing trend set to continue in 2008. Indian provider Cognizant has about 500 professionals in Shanghai and plans to double the headcount in the next 12 to 18 months, according to Henry Yang, head of the firm’s China Development Centre.

Meanwhile, experts are playing down reports that Indian offshoring giant Wipro is looking to acquire Capgemini. In late December, a Hindustan Times story said that a bid is expected to take place in January. Ovum analyst Phil Codling said the deal made little sense “in terms of business strategy and logic”.