Is The Cloud Going To Replace Offshore Outsourcing?

Online, February 15, 2011 (Newswire.com) - With the recent news that went mostly unnoticed regarding Egypts decision to shut off Internet access (see our previous coverage on Egypt turmoil, it begs the question whether something similar could happen in offshoring powerhouses such as India and how the cloud plays into that.

Pam Baker from CIOUpdate.com provides a unique, and potentially disturbing viewpoint for the outsourcing industry's long term perspective:

The cloud is already affecting outsourcers to a considerable degree. "Cloud-based services will change outsourcing contract methodologies," explained Sadagopan Singam, VP of Cloud Computing at HCL Technologies, an offshore IT and software development company. "Buyers will move away from long-term contracts where ROI depended on continuous improvement," he said. "They will move to shorter-term contracts with more flexibility to quickly buy new services."

Such a move hampers outsourcers in that they will no longer be sure of their revenues since their backlogs (the amount of business committed for the year at the beginning of the year) are beginning to dwindle.

"Contract cycles and agreements will have to be revisited as niche core cloud service players will go after the buyers as contract renewal approaches," said Singam.

Fixed contracts will come under fire as demand for variable contracts increases. "Traditional vendors will have a problem as their models are based on one-time fixed with incremental charges while, with hardware/software costs dropping dramatically, customers will end up paying more," he said. However, well-run offshore firms "shall see net positive opportunities with large enterprises embracing the cloud."

He may be right. According to The Hackett Group, a global strategic business advisory firm, acceleration of offshoring is expected to drive a jobless recession in IT in the U.S. and Europe through 2014 and beyond. More than 500,000 corporate IT jobs in the U.S. and Europe were lost in IT in 2008 and 2009 alone due to a combination of offshoring, productivity improvements, and lack of economic growth. Another 600,000 IT jobs are set to disappear between 2010 and 2014.

"Offshoring is becoming a larger and larger factor in this trend with each passing year," said Tony Chauhan, senior research director for The Hackett Group.

But then along came Egypt to pull the plug on the Internet and in so doing leave traditional outsourcers with a new boogie man in the closet. But, like in the best of horror movies, most of the players are blissfully ignorant of his lurking. We'll have to wait for the story to unfold to do a body count and for the survivors to emerge.

The outsourcing impact is closely followed by the leading management team at InsideOutsourcing.org.
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