IT services prices to decline by 5-20pc through 2010

STAMFORD, USA: Prices of IT services in outsourcing are anticipated to shrink by 5 percent to 20 percent during 2009 and 2010, according to Gartner, Inc. Analysts said IT outsourcing prices are likely to decrease during the next two years due to the uncertain economic climate, IT budget constraints and general market consciousness.

Gartner said that this fall in prices will occur due to increasing competition in the market between traditional and new providers as more providers compete aggressively to keep revenue growth on target, while ensuring margins. Furthermore, cost-focused buying behaviors in the current economic phase will be a key factor behind the reductions for IT infrastructure outsourcing services from 2009 to 2010, with a great variability based on each single deal.

“Regardless of the relative strength of outsourcing during a recession, many clients are reporting intense discussion with their vendors and renegotiation of contracts for Terms and Conditions (T&Cs) Service Level Agreements (SLAs), fees, volumes and low-cost offshore delivery locations,” said Claudio Da Rold, vice president and distinguished analyst at Gartner. “These items are under scrutiny to identify satisfactory concessions to further reduce the cost of services on a case-by-case basis.”

Da Rold added that Indian offshore providers have been coming under significant pressure for pricing reductions due to the Mumbai terrorist attack, the scandal at Satyam, rupee exchange rate fluctuations, and continued wage inflation and attrition levels.

To reach the agreement on the potential price impact, Gartner analysts started from measures (price points, benchmarks) of the price reductions associated with the last recessionary period (2001 to 2003) and added current trends and current price/cost measures. Then, a panel of analysts agreed on the reported price trends for 2009 and 2010 in North America and Europe (see Table 1). The Gartner analysts calculated the percentages based on the economic pressure or recession, and other applicable trends, including industrialization of services, clients' SLA/T&C renegotiations and offshore service dynamics.

Table 1



Source: Gartner (February 2009)

“These are not ‘price list reductions’ but represent an overall price reduction on infrastructure outsourcing deals that may apply to news deals and, albeit only partially, to renegotiated deals,” said Da Rold. "It’s important to remember that price reductions will apply with great variability across geographies, vertical industries and client size with regard to specific deals. Providers are not reporting any across-the-board price reductions, but rather will address each client situation individually.”

Gartner advises clients and providers to avoid stretching their positions to the extreme as pushing for an extremely low price will not make providers safer, deliver good services or promote a positive relationship. Not accepting a renegotiation of terms and price in a tough economy will not contribute to client’s viability. Also, especially in hard times, there is only one viable balance and that is win-win; for if one side loses, the other loses too.