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Outsourcing Ready to Vanish in the Cloud?

Is the rise of cloud computing going to take out the $1.7 trillion global IT outsourcing business?

On Wednesday, CIO magazine’s Stephanie Overby posted a fascinating
interview
with Arjun Sethi, partner and head of the outsourcing practice at
A.T. Kearney consultancy. Sethi
believes that the rise of cloud computing and the move from on-premise to
hosted IT services in the mainstream enterprise will render the majority of the
current outsourced IT workload–programming, maintenance, and system
integration–extinct, perhaps in as soon as five years.

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For those who equate “outsourcing” with “unemployment,” the
reaction to this prediction is probably jubilation. Cloud computing has the potential
to restore American IT and IT services giants HP, Accenture, and IBM to peerless
prominence, elevate Amazon, Google, and perhaps some heretofore-unknowns into
the forefront of a new industry, and lift the fortunes of software companies
like Microsoft, SAP, and Oracle if they are able to pivot their business models
from licenses to access fees.

There are even some compelling efficiencies to hosting the
cloud data centers in the U.S. rather than overseas, creating viable knowledge economies
in domestic rural communities and post-industrial city centers rather than in
Bangalore and Pune. Hooray for the USA!

But are the celebrations premature? Cloud computing today is
just past its infancy. Security and network service problems still occur.
Enterprises are reluctant to turn the keys to their mission-critical systems
and their proprietary data over to remote providers. Large amounts of data
still reside on legacy systems that can’t be migrated to the cloud, and which still
require the kind of care and feeding that only dedicated IT services staff–either employed or outsourced–can provide.

Maybe we’ll have solved these problems in 4-5 years. But
then again, 15 years of dedicated investment and innovation have not put an end
to email spam, despite the rosy predictions of industry leaders. Cloud
computing is not an area where 90 or 95 or 98 percent service quality is “good
enough.” The costs of a security breach or a service outage are too high,
particularly in the high-revenue enterprise space where collateral damage may
include brand reputation and hard-won customer confidence. The progress we make
in the next five years will have to be comprehensive, not just significant, to
sway risk-averse CIOs.

But let’s say Sethi’s forecasts are largely correct. That
means that parts of the world that have just become accustomed to the income
potential of the outsourcing industry will have to become unaccustomed in a
hurry.

NASSCOM, the association of the Indian business process and IT services industry, estimated that outsourcing was worth $71.7 billion in 2008, or 5.8% of GDP. Software and
services revenue was about $60 billion. Worldwide, outsourcing was a $1.6
trillion business in 2007. New players in Southeast Asia, Latin America,
Eastern Europe and Africa are coming on strong as they build greater workforce
capacity through training and equipment.

These businesses and industries which have demonstrated
remarkable entrepreneurial zeal and transformative potential for their
countries, will need to pivot quickly to provide services appropriate to a
world where the cloud, not the on-premise data center, sits at the center of
their clients’ IT universe.

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This could prove to be a challenge in places like India.
Top-tier outsourcers such as Wipro and Infosys have succeeded by harnessing the
massive scale and comparatively low costs of Indian engineering talent,
throwing lots and lots of bodies (and brains) at IT and programming challenges.
They have thrived by taking an existing business model and running with it, but
they are largely unproven as strategic innovators.

If their familiar world is suddenly vaporized by the gathering
storm of cloud computing, it is highly uncertain whether they can discover the
agility to reinvent their value proposition. And if that happens, what becomes of
the promise of the overseas knowledge economy, and its prospects of creating prosperity
and stability for a rising global middle class?

About the author

Rob Salkowitz is author of Comic-Con and the Business of Pop Culture (McGraw-Hill, 2012), Young World Rising (2010), and two other books on youth and digital media as agents of change. He is Director of Strategy at MediaPlant, LLC, a Seattle-based communications firm he co-founded in 1999.

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