The clouds are gathering and are becoming bigger – that’s all anyone needs to know at the moment regarding the key trends in the IT outsourcing market. The boundaries between classic outsourcing and cloud computing services are becoming ever more blurred. Pierre Audoin Consultants (PAC), for example, have even coined the term “cloudification”: according to PAC consultant Karsten Leclerque, this trend has triggered core changes in the international and European markets in the last two years. This is true for IT outsourcing in general, SAP services specifically, and even for a subsegment such as SAP Hosting, which Leclerque is currently studying for a paper on the German market. “Customers clearly want these models,” says Leclerque.
At its heart, the term cloudification refers to scalable resources and usage-related billing. With a highly diverse provider and user landscape, services generally include a fixed-price basic sum with flexible price structures offered on top. As the PAC expert explains, whereas two years ago technology giants such as HP, IBM, and T-Systems offered such mixed price structures, these have now become the market norm. For Leclerque, however, cloudification also means models where providers offer customers software-as-a-service (SaaS) in a marketplace in addition to specific services such as those offered in SAP Hosting. The message is clear: move to the cloud for more attractive and cheap additional services.
EMEA sees 15% drop in megadeals
The challenge for users is to find a coherent way of comparing all the costs involved when faced with the wide range of different services available. The trend of falling prices in recent years should come as a welcome relief – particularly in a market that for many years has been steadily, but not excessively, growing. And it is this reliable, slow path to growth that people should bear in mind when reading reports of market trends that portray a very turbulent picture. New figures released recently by US consultants Information Services Group (ISG) gave the impression that the outsourcing market in Europe had drastically imploded. ISG regularly analyzes the annual total contract value of megadeals worth €4 million or more. In the EMEA region, this figure was down 15% year-on-year in the first half of 2013 at €3.4 billion, its lowest level since the year of the financial crisis in 2009. However, ISG only ever measures megadeals, which can sometimes lead to extreme conclusions that may be random.
Gartner analysts take a different perspective, and are already suggesting that generation Y, who grew up with digital technologies, will change the outsourcing landscape. In the long-term, service providers should focus on making the end user experience their second pillar of outsourcing alongside customer satisfaction. Away from these short-term and strategic aspects, overall PAC sees healthy growth. Leclerque believes that a comparatively small and innovative subsegment in some regions such as SAP Hosting is able to post even stronger growth than the overall market.
According to Gartner forecasts, the global market for IT outsourcing this year will grow by 2.8% (5.1% after currency effects) to a volume of US$288 billion. “Deployment strategies for new IT outsourcing remain on a good curve in all service line segments,” says Gartner analyst Bryan Britz. At the same time, Gartner has slightly downward adjusted its original forecast due to continued limited IT budgets, in part justified by uncertain economic conditions and primarily owing to the trend toward cloud-based delivery models. Gartner deliberately omits SaaS from its IT outsourcing figures.
Data center outsourcing in gradual downturn
The switch of large enterprises to hybrid IT strategies, and the growing demand among small and midsize businesses for infrastructure-as-a-service (IaaS) is driving growth rates in the cloud and data service segment; by contrast, the outsourcing of data centers is experiencing a gradual downturn because ever-more workloads are being moved to the cloud on an IaaS basis. The trend toward bring your own device (BYOD), as well as the decreasing in-house support resources required for end user devices triggered by the growing number of privately owned devices, is counteracting outsourcing trends in this field. Overall, Gartner continues to see double-digit growth rates in the Asian market; in North America, a trend toward managed service agreements has been observed with annual billing in order to improve cost accounting.
Next page: SAP services with above-average growth
PAC forecasts that by 2017, SAP-procured services will grow on average 8% faster each year than IT services overall, which themselves will grow at a healthy 5%. In SAP’s home market of Germany, PAC is forecasting an additional 5% growth over the same period, underlining the strength and penetration of the SAP brand in the German market. And although there is still potential for further growth in Germany, there is even more potential in the international market. According to PAC figures, €578 billion was spent on IT services worldwide in 2012, of which outsourcing accounted for €235 billion. €45 billion was spent on SAP-procured services with 59% comprising consulting and system integration, 22% SAP Application Management, and 19% SAP Hosting.
PAC analyst Leclerque notes that until now, the “cloudification” of outsourcing has referred to pricing and scaling models associated with the cloud that users tend to compare with particularly cheap public cloud services from competitors. In the meantime, Amazon Web Services (AWS) has become a certified SAP partner that meets the required security standards. This means that service providers can essentially develop services in the public cloud based on the AWS platform. Even if there has not yet been a great deal of activity in this field according to PAC, this could mean further downward pressure on prices in future.
Insourcing is industry-specific, not a trend
The fact that General Motors and Daimler have recently begun to insource their previously outsourced SAP services does not represent an overriding trend in the eyes of Leclerque. A decade ago, both companies firmly joined the IT bandwagon, and massively outsourced their IT services – which they are now clearly correcting to some extent – not least because of the fact that the automotive industry is seen as a particularly attractive sector among IT professionals and is able to recruit the best talent fairly easily. However, Leclerque believes this is nothing more than an industry phenomenon. And in the SAP environment, too, it is safe to assume that users can generally achieve their primary target of cost reductions – thanks in part to trends toward standardization – which is why aspects of quality are playing an increasingly important role.
The PAC study on SAP Hosting in Germany focused on the market shares of T-Systems, HP, Atos, and IBM. As Leclerque notes, since Wipro is so far the only Indian service provider in SAP’s home market to possess its own data center resources, the offshoring giants in this segment do not yet play a major role in Germany. It seems, however, that the Indian providers now understand the significance of cultural factors for their business; the ongoing expansion of localization in continental Europe with native-speaker support staff is an indication of this.
Blurred boundaries between software providers and service providers
As IDC found in a study on the area of SAP implementation partners a few months ago, the boundaries between software providers and service providers are becoming ever-more blurred. And this has been even more true since SAP allowed major system integrators to sell software directly, and users consider the strategic implications of SAP services in even more detail. According to IDC analyst Gard Little: “Best practice means system integrators and SAP working together to deliver seamless solutions.” IDC estimates that new SAP technologies such as SAP HANA, mobile solutions, and industry-specific rapid deployment solutions will bring new momentum to this field. In other words, this is one area in particular that will add to the trend toward cloudification.