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The future of IT outsourcing: smaller and chunkier?

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Information technology operations are more likely to be contracted out in bite-size chunks nowadays, versus outsourcing entire departments. Cloud and SOA may enable even smaller chunking of outsourced tasks.

For years now, the outsourcing of IT functions has been both a dreaded and lauded practice. Dreaded because IT professionals' jobs have been on the line; lauded because businesses have been able to alleviate themselves of non-core operations. Does a snack-food provider really want to be in the IT business?

Credit: Atos Origin

In a commentary published at Network World, Stephanie Overby observes that we may be seeing the end of the famous IT mega-deal, in which whole IT departments are signed over to be managed by outsourcing providers. "In 2010, outsourcing contracts tend to be shorter in duration and smaller in value. The average total contract value of an IT outsourcing deal in 2000 was $360 million. Today, it's nearly a third of that."

It's not that IT outsourcing is going away anytime soon. Rather, it's occuring in smaller, more bite-size chunks, she says:

"Increasingly mature customers, a more competitive IT service marketplace, and a greater acceptance of offshore outsourcing should lead mega-deal customers to unbundle their work, awarding it in separate contracts to specialized suppliers, a practice known as multisourcing."

Overby cites examples in her article of mega-deals winding down and being supplanted by more specialized projects. The downside of breaking up IT outsourcing arrangements into chunks is that they may lose economies of scale, and therefore cost more than a single mega deal.

However, for many client companies, it's worth it. As Paul Reynolds, director and chief research officer for TPI, an outsourcing consultancy, is quoted as saying: "Spreading the work allows the clients to mitigate their risk and increase competition amongst service providers. The trade-off is that there is added complexity to the governance function, but many companies are willing to manage multiple delivery models in exchange for cost savings."

Along with the unbundling Overby and Reynolds speak of, emerging practices such as cloud computing and service oriented architecture may also be helping to chunk up outsourcing into even finer granuals. As more enterprises adopt cloud and service-oriented architecture principals and practices, outsourcing may become an easier, more manageable option -- digested as on-demand services from third-party providers.

Three factors may drive fine-grained outsourcing as cloud and SOA develop:

  • Busy IT shops — especially those with large enterprise systems — may not have enough human resources to effectively deploy increasingly complex enterprise systems, network, and architecture. IT managers, analysts, and architects will need to become business analysts, and spend a good deal of their time working with business units. They will need to turn to third party firms either for assistance with application and system maintenance.
  • Infrastructures supported by cloud resources and based on SOA principles will lower the barrier of entry for smaller outsourcing providers, which will in turn multiply their numbers, heightening competition and lowering prices. This will energize the outsourcing market.
  • The growing standardization and "hot-swappability" of cloud and SOA-aware components makes it easier to outsource — as cloud-based services — pieces of the IT infrastructure. This may make outsourcing less of the onerous either/or business decision it has been, as chunks of applications or services can be outsourced or brought in house as the situation fits, with minimal disruption to IT operations and priorities. As a result, we'll see more "micro-outsourcing" and less big-ticket-turn-the-whole-operation-over types of deals.

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Joe McKendrick

Contributing Editor

Joe McKendrick is an independent analyst who tracks the impact of information technology on management and markets. He is a co-author of the SOA Manifesto and has written for Forbes, ZDNet and Database Trends & Applications. He holds a degree from Temple University. He is based in Pennsylvania. Follow him on Twitter. Disclosure