The interplay between cloud and outsourcing

There is a complex interplay between traditional outsourcing and new cloud and, particularly, “as a Service” solutions. Along with intensifying the competitive dynamics between providers and creating new systems development, integration and management opportunities, cloud is also taking cost and thus revenue out of some traditional outsourcing solutions. One provider, Wipro IT Services, has recently responded to the challenge with an innovation-intensive approach, and the company this month revealed several initiatives that provide a rare glimpse into an outsourcer’s belief as to how fundamentally cloud is about to transform its industry.

Offshoring is still a force

As offshorers, the India-based outsourcers (e.g., TCS, Infosys, Wipro ITS) have provided a low-cost alternative that has been disrupting the more traditional outsourcers and in-house computing for years. That dynamic is still in play, with multinational companies in Europe and the big banks in Canada, for example, among the recent converts to lower-cost, offshore solutions. Cloud and other transformational technologies are now giving the IT service providers a chance to provide a new generation of development, integration, and management services. Also, new cloud delivery technology is a factor in the increased automation of the business, which is helping the labor-arbitraging offshorers to break the tightly linear relationship they have had between increasing revenue and increasing offshore hiring.

(For the enterprise, it is important to note that the switch to SaaS solutions has more traditional pricing terms than some of the current cloud hype would imply, however. ISG’s Stanton Jones presents some of the unanticipated complexities of many cloud contracts in this terrific, short video, as well as this piece on the in-house costs of many public cloud solutions.)

Cloud is a double-sided sword

However, cloud is a double-sided sword for the IT servicers, because the technology takes cost, and thus revenue, out of much IT services delivery. This month, we have seen some of the biggest, traditional IT servicers reference pricing and margin pressure as a force in the market. Both IBM and Accenture discussed the dynamic this quarter in their earnings calls with security analysts. These companies have historically provided services at a higher price-point and therefore have more room for prospective renewals to be squeezed. Even these largest and most traditional outsourcers have long built significant operations in India and other offshore locations to help manage costs.

Some winners in the market

While these bigger players have tended to have more or less flat revenue in recent years, some of the most dynamic India-centric providers, including TCS and Cognizant, have been gaining share and with it, global scale and credibility. The growth of these providers has been driven in part by their strong position in several key verticals, for which they especially package their services. This vertical orientation is an advantage they have in what is viewed as a increasing factor for the cloud market more generally.

One competitor steps out
Wipro ITS is one Indian provider that has slowed its revenue growth in recent years. Under a new CEO, the company recently restructured and realigned its business and has begun to grow somewhat more rapidly again. More notably, however, the firm’s sluggish performance has apparently led its management to take a more serious look at the longer-term dynamics in its industry and to take some dramatic steps to increase its innovation in response to the dynamics.

Wipro restructures for innovation

In a classic move to invest in innovation, Wipro last year invested in two U.S.-based firms, putting $30 million in Opera Solutions, a data science firm, and $5 million into Axeda, a M2M cloud service provider. Picking up the pace, Wipro announced this quarter that it has made a combined $19 million investment in two additional startups, which the firm declined to identify.

The company also launched two new business units. Wipro Digital, which will focus on marketing new digital technologies, is not especially different than the similar digital units that some of its competitors have been forming. But Wipro Digital will target direct sales to chief marketing officers as a means to capture some of the increased IT spending that is occurring outside of enterprise IT departments.

‘Change the Business Services’

Wipro’s other new unit, Change the Business Services, will be operated as a completely separate unit from its traditional business. CEO T.K. Kurien has described to the Times of India the need for the unit and the approach that Wipro will take with it:

“It will function with a startup mindset where reward mechanisms will be different. We will have an accelerator that focuses on machine learning. Anurag Srivastava’s role is not to be the CEO of that business, but to look for opportunities to invest and create a new business. It will have its own CEO and leadership structure to offer everything as a service. We might give entrepreneurs sweat equity and if they are successful, they can keep equity and sell it back to us at a higher price during exit. It’s a massive incubation shop where we will make more investments. Our belief is that it will require a couple of years of experimentation. But if we succeed, it will change the way the future of the company is going to be in the next 10-15 years.”

As Kurien has further explained, “as a Service” is driving the change:

“Our business is going through a fundamental change and companies that are able to anticipate the change and react to it ahead of time are better off. In the tech industry, most businesses last for 10-15 years. We believe with the advent of cloud and all consumer technologies coming in, ‘as a service’ would become a reality. For instance, if you’re buying IT services, you no longer make capital investments. This means, customers are not going to increase the budget given to their IT function every year. Instead, they are going to ask how much are you going to charge for this service, and let me bench-mark this service. It is very nascent yet.”

The money quote

Perhaps most bluntly, Kurien has simply stated:

“In the technology sector, the life of every business is 15-20 years; after that, it matures and dies. We will hit the maturity cycle of our business in four to five years. On the one hand, we are preparing Wipro to be future-proof. On the other, we are experimenting with new opportunities.”

Conclusions

In sum, some of the Indian outsourcers are gaining share by providing competitive cloud (and mobile and analytics) development, integration, and management services, particularly within the value-added context of vertical platforms. Indeed, SaaS and other *aaS solutions are just another form of outsourcing.

But the level to which the cloud model will challenge traditional outsourcing in the future should not be underestimated. One Indian outsourcer, Wipro, has become blunt in acknowledging the dynamic, and by taking classic actions to foster innovation is looking to leapfrog its competitors in honing a new business model.

Enterprise customers can start to see which providers will be best positioned to combine cost competitiveness with a new business model, and also look to the vertical platforms of the providers now moving to new technologies as a model for more enterprise cloud management. Cloud is both giving and taking away for the enterprise and its service companies alike.

Relevant Analyst
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Laura Stuart

Analyst Independent Industry Research

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