Cloud services put a dent on traditional IT outsourcing

But the fastest growing segment of outsourcing--cloud computing services--is expected to nearly double from $3.4 billion in 2011 to $5 billion this year. Even more notable--infrastructure-as-a-service (IaaS) will contribute 38 percent of the increment outsourcing growth in 2012, compared to 8 percent in 2011. "This is reflective of how difficult the current market is for established IT outsourcing services--like data center outsourcing--and the providers of those services," Britz says. "There is definitely some displacement or substitution of cloud for what might have otherwise been delivered through more traditional outsourcing models taking place."

Indeed data center outsourcing, which represented 34.5 percent of the market in 2011, is set to decline 1 percent in 2012, according to Gartner. It could be a tipping point for traditional infrastructure offerings as various data center processing systems will gradually be replaced by new delivery models through 2016. In four years, Gartner predicts data center outsourcing will slip to 28 percent of the market while infrastructure utility services (such as utility hosting and standard application infrastructure blocks like IU4SAP) will grow to 10 percent of the market, and IaaS will expand to 6 percent of the market.

"The big question facing IT leaders in thinking about an overall sourcing strategy is to what degree do they look to fragment their spending across multiple providers for these different delivery models, or do they pursue a bundled solution," says Britz. "We see evidence for both approaches in the market today."

But, says Britz, enterprises may accelerate their overall outsourcing spending in support of their cloud efforts, which could take some of the sting out for traditional IT outsourcers. "We see more organizations evaluating and choosing to contract for IT outsourcing services to manage their [private and public] services," Britz says. "This will help to moderately balance the cannibalizing aspect of cloud on ITO through the next couple of years."

Applications outsourcing is also expected to grow around 2 percent to $40.7 billion this year, according to Gartner, driven largely by legacy application support and off-the-shelf package implementations. But IT leaders, straining under their legacy portfolio and facing tight budgets, are shifting to a software-as-a-service (SaaS) bias going forward.