A View From the Clouds: What’s Going On With Outsourcing?

November 27, 2012

The outsourcing sector is a troubled area at present, with depressed economic markets, stretched company balance sheets and bad publicity all taking their toll. However, there are some exciting trends in the sector with technological innovation, exponential growth of shared Cloud services and increased complexity of service offerings, leading to new opportunities in the marketplace.  

Has Outsourcing Become a Dirty Word?

The very concept of ‘outsourcing’ has become negatively perceived in recent months – particularly when it has been in the form of ‘offshoring’ rather than simply moving services within one country. In the USA, President Obama and Mitt Romney have both been accusing each other of sending US jobs elsewhere to the detriment of its citizens. Whilst US technology companies rely heavily on the sourcing of services to Asia (and as such Silicon Valley will be concerned about the negative backlash), the campaigns of both politicians, coupled with recent news stories, have created negative publicity for outsourcing.  

In the field of banking in the UK, NatWest/RBS’s recent computer system failure led to speculation surrounding its causes and some commentators were quick to blame outsourcing. The financial services sector is often wary of publicising its reliance on outsourcing and managed services for their IT, fearing public displeasure that their personal and financial information may be at risk. This fiasco was no different. 

Even more recently, G4S did no favours to outsourcing with its self-confessed shambolic failure to provide the security services it pledged for the 2012 London Olympic Games – a crisis which was ultimately solved by the contributions of the British Armed Forces. That debacle may well have put a hold on outsourcing plans in the police and security services for now. This is just another example of how outsourcing public services to private companies with the intention of saving costs can sometimes lead to massive reputational damage and a larger ultimate bill for the customer. 

Where Are the Big Deals?

It is undeniable that the number of large-value outsourcing transactions has decreased significantly in 2012 compared with 2011. According to technology advisory service company ISG, the cumulative value of outsourcing deals in the EMEA region (Europe, the Middle East and Africa) in the first quarter of 2012 was just €6.9bn, down from €17.2bn in the last quarter of 2011.  

This may be due to a multitude of factors, perhaps the most fundamental of which is the fifth consecutive year of global economic downturn, now acutely focused on the future and the liquidity of certain Mediterranean states in the EU. The reduction may make sense, as outsourcing is a medium-to long-term business strategy. With low economic confidence, coupled with high levels of international political and financial uncertainty, it is understandable that many projects are being shelved. In the UK, only the public sector seems to be bucking this trend, with UK government spending on outsourcing considerably outstripping that of the rest of the EMEA area (although still not at levels seen pre-2008) 

The pre-recession world of outsourcing supplier giants and their massive deals (both in value and duration) has also evolved considerably in recent years, with an increased number of suppliers of all shapes, sizes and service offerings. Many businesses have moved away from the model of outsourcing all of their backroom or administrative services to a single provider, now opting to source multiple services from multiple suppliers. This applies even within sectors such as IT outsourcing, with an increasing reliance on ‘interconnectors’ to integrate multiple technology service offerings – many of which are now in the Cloud. Cloud service provision itself – the delivery and use of hardware and software computing resources as a service over a network (typically the Internet) – has also grown exponentially (as considered below). 

Interconnectors – Who Are They and What Do They Do?

For an end-user business, a Cloud offering is a relatively simple service. For a set fee, the business gets access to an up-to-date IT services platform for a designated period. It can have that for as many employees as it wishes and, if its requirements increase, it can pay a fixed price for that as well.

However, developing, integrating, rolling out, running and managing Cloud services and platforms is increasingly complex, particularly given the lack of any interoperability standards in the industry. The European Commission announced in December 2011 that it has been asked to ‘provide a coherent legal framework for Cloud computing services’ by industry leaders, but this has not yet been carried out. Managing these issues can become problematic for small and large organisations alike, and that is where interconnectors are becoming increasingly useful. 

Interconnectors – also termed ‘Cloud brokers’ by the US Government’s National Institute of Standards and Technology – are organisations that sit between Cloud providers and their end-user customers. The Institute defines them as ‘an entity that manages the use, performance and delivery of Cloud services, and negotiates relationships between Cloud providers and Cloud consumers’. Interconnectors act as the prime negotiator and contractor with all Cloud service providers, and amalgamate those services into an integrated platform that a business can readily use.

According to organisations like ISG and Gartner, we have seen, and will continue to see, a significant increase in companies operating in this space and providing these services. 

More Clouds on the Horizon?

The Cloud has become a huge area of growth for the outsourcing market; the movement of IT business functions to the Cloud represents a fundamental change in the way that businesses work. Increasingly, sophisticated organisations are opting for solutions like Desktop as a Service (DaaS) or Software as a Service (SaaS) based solutions – and indeed Infrastructure as a Service (IaaS) and Platform as a Service (PaaS). According to Gartner, the global market for Cloud services will have a value of $150bn USD by 2013. However, there are consequences as they estimate low-cost Cloud services will cannibalise up to 15% of the current top outsourcing players’ revenue by 2015, and by 2016 more than 50% of Global 1000 companies will have stored customer-sensitive data in the public Cloud. 

For businesses the attractions are: cost savings, scalability and flexibility; certainty of economic spend; reduced capital expenditure and IT infrastructure budgets; and (in theory) a highly up-to-date and tailored IT platform offering. There are, of course, risks, particularly with data privacy and security, ensuring regulatory compliance and disaster recovery – the last of these being in everybody’s minds after the NatWest crisis. For Cloud providers and indeed interconnectors, costs must be kept down in the face of increasingly complicated service requirements, leading to increased integration and training costs, coupled with greater complexity in contracting, pricing and contract management.

From our working desktops to vast data centres in subterranean Scandinavia, the way that businesses are structuring their IT provision is changing fundamentally. Indeed, will non Cloud-based desktop PC computing in the business environment become a thing of the past? We wait to see. 

So What Now?

The outsourcing sector faces challenges, opportunities and changes in the years ahead. It will succeed if it focuses on two key areas: first, adapting to operating in a climate of financial uncertainty, and secondly, keeping up with technological developments. Olympians and the British public adapted to a shift in the jet stream, which ruined an English ‘summer’. Outsourcing suppliers, customers (and their lawyers) must adapt to shifts not just in the economic and political landscape, but also the technological developments coming out of Silicon Valley and its equivalents in the UK.

In short, we must not keep our head in the clouds, but we must keep a weather eye on the Cloud!


Edwin Moore-Gillon is a member of the IP and Technology Group at Davenport Lyons. Edwin’s practice covers a wide variety of commercial, intellectual property and technology matters, providing advice to clients both in the UK and Scandinavia.