The $820 billion IT services market is changing quickly and dramatically, as cloud computing and offshoring become mainstream, and CIOs should take steps to manage inherent risks and unexpected costs during the cloud services revolution, according to Gartner, Inc.

During the next few years, market dynamics will determine whether cloud-enabled outsourcing will be the demise of traditional outsourcing, if it will lead to the convergence of services and products currently marketed "as a service," or if it will result in next-generation outsourcing.

Cloud-driven business and IT services include all types of solution that are developed, bundled and packaged as outsourcing service offerings for which the business or IT service provider uses one or more cloud computing technologies within the solution's overall architecture. Gartner refers to these services as "cloud-enabled outsourcing service offerings." These services can be delivered directly by a cloud provider or via a service aggregator for the delivery of pre-engineered and configurable business solutions in a timely and cost-effective manner.

"Cloud service sourcing is immature and fraught with potential hazards. The hype around cloud computing services has increased interest, as well as caution, for CIOs trying to determine where, when and if cloud services can provide valuable outcomes for their businesses," said Frank Ridder, research vice president at Gartner. "Cloud computing is driving discontinuity that introduces exciting opportunities and costly challenges. Organizations need to understand these changes and develop realistic cloud sourcing strategies and contracts that can reduce risk."

Mr. Ridder said that traditional IT services often find organizations locked in, fighting with rigid delivery or hesitation to change when engaged in traditional IT services deals. Innovation seldom materializes and solutions fail to scale, and service providers often struggle with their profits.

In the new cloud services scenario, however, flexibility, agility and innovation are design principles and, over time, service providers will succeed in delivering on these principles. The market also expects scalability, cost-efficiency and pay-per-use pricing models from cloud services solutions. Although cloud services already provide these, service providers manage their risks through terms and conditions that are still immature. However, Gartner believes that solutions and their commercial terms are maturing quickly.

To avoid the potential pitfalls and hidden costs of cloud sourcing, Mr. Ridder said that organizations need to ensure they understand the short- and long-term implications of cloud services, on the demand and supply side, as well as on the sourcing life cycle itself. The services sourcing life cycle includes four crucial elements: sourcing strategy, vendor selection, contracting, and management and governance.

"The life cycle is a critical area to plan and manage, regardless of whether organizations source their IT services through internal or external resources. Our forecasts indicate that organizations spend 53 percent of their IT services budget on external services, and that spending is growing 3.9 percent per year, while new categories of services are experiencing double-digit growth," said Mr. Ridder.

"Organizations can use Gartner's extensive analysis of changes in delivery, pricing, investment and cost to more effectively develop their cloud sourcing strategies, negotiate their cloud services contracts and manage the performance of their providers."