Thanks to the rise of cloud services and fluctuations in currency valuations, leading IT services vendors are reporting a 2.1 percent decline in revenue in the second quarter, which is forecasted to decline further to 3.3 percent in third quarter. But, a new report from Technology Business Research (TBR) suggests that IT services providers are investing heavily in higher-margin business process outsourcing and managed services to compensate for this decline.
In general, IT services are down across the board, but the TBR report finds that the decline in business process outsourcing (BPO) and managed services is much less pronounced. This is partly attributed to increased usage of analytics within BPO services, which is driving organizations to outsource new classes of processes. Also, the complexity associated with cloud and mobile computing is driving more organizations to look for external expertise to help manage increasingly complex IT environments.
Navigating big transitions
Based on financial data from 30 IT services providers that TBR tracks, the report reflects a dynamic IT services market that is currently navigating major transitions in terms of how IT applications are delivered. As organizations of all sizes get more comfortable with Software-as-a-Service (SaaS) applications and cloud infrastructure services such as Amazon Web Services (AWS), there is naturally less demand for traditional technology consulting services.
At the same time, organizations are facing major challenges stitching all those SaaS applications and cloud services together in a way that enables them to create a workflow that accomplishes a specific business task. As a result, demand for business consulting expertise is expected to increase in the months ahead.
Meanwhile, the rise of application programming interfaces (APIs) is having a profound impact on how IT is managed. APIs make it simpler to deliver managed services that ultimately serve to manage IT at a higher level of abstraction both inside and outside of the cloud. That capability reduces the total cost of IT and serves to make it easier to consume more IT resources than ever.
Pulling it all together
The cycle that creates for managed service providers (MSPs) is that the more resources that get consumed, the harder it becomes for organizations to find the internal expertise needed to manage it all. As a result, the demand for higher margin managed services is expected to rise soon.
The challenge, of course, is that pricing for more traditional managed services is under pressure as IT vendors continue to bundle their own managed services with the products they sell. That puts pressure on MSPs to sell managed services and IT solutions made up of multiple products as opposed to a single product that a vendor might have more expertise in supporting than they do.
Put it all together, and it’s clear IT services providers are entering a new era where the bar for what defines a successful IT services provider is about to be substantially raised.
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