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CIO - For all the vagaries of IT services, traditional IT outsourcing has always been quite tangible--servers, data centers, networks, specifications, man-hours, lines of code. The rise of cloud computing, however, is changing all of that with flexible, asset-free IT services available on an as-needed basis for more aspects of enterprise technology.

Cloud services are a boon for many IT departments willing to forego customization: They help IT organizations chip away at hefty capital expenditures from back-end infrastructure to customer-facing software and everything in between. Consequently, the cloud is turning the traditional IT services industry on its head.

"Cloud computing represents a fundamental shift in how companies pay for and access IT services," says Susan Tan, IT services and sourcing research director for Gartner.

In fact, Gartner predicts that by 2012, 20 percent of businesses will own virtually no IT assets. That will be a game changer--for better or worse - -for outsourcing vendors of all stripes, from traditional onshore and offshore IT service providers and consultants to system integrators and new, niche vendors.

"If [the] cloud was only about gutting the clunky, expensive and environmentally-unfriendly infrastructure, and having Amazon and company deliver the computing power, then it's really just an infrastructure utility offering," says Phil Fersht, founder of outsourcing consultancy Horses for Sources.

"However, if you're going to have your data and applications hosted externally in the cloud, do you really need to manage them yourself anymore? Do you really gain a competitive edge with the way you process your insurance claims, or isn't it time to find a services vendor that will host the app, the associated infrastructure and even process the transactions for you?"

Fersht calls cloud services the foundation for next-generation enterprise sourcing solutions. He believes cloud services will make traditional delivery of IT services more efficient and cost-effective. "They also help create a delivery mechanism for true business process services," he adds. "This new class of [outsourcing] has the potential to unlock tremendous value for customers."

Cloud computing's threat to traditional IT outsourcing

Traditional, asset-heavy IT outsourcing deals won't go extinct overnight. (Remember the predicted death of the mainframe? Big iron is still humming along.) But the clock is ticking.

"While adoption of cloud services is still low, outsourcers need to adapt to this change. The days of dedicated data centers are probably limited," says Tan. "A lot of outsourcing hinges on having external providers manage assets -- both infrastructure and applications -- owned by IT departments. This part of the market will decrease. Outsourcers need to invest in cloud services and cloud-based offerings or risk being marginalized."

Originally published on www.cio.com. Click here to read the original story.