Outsourcing prices on the wane, says Gartner
Optional smiles on service
If IT vendors think that their services businesses are going to save their cookies this year, they may have another thing coming.
According to a report just released by the analysts at Gartner, prices on infrastructure outsourcing services are expected to drop this year and next by anywhere from 5 to 20 per cent on new deals. The report, which has the pithy title Potential Impact of Economic Downturn on IT Infrastructure Outsourcing Prices Q109, says that pricing pressure thanks to the economy and competition among the global outsourcing players is putting prices in a pincher.
The terrorist attacks in Mumbai, the accounting scandal at Satyam, and the weakening rupee have put particular pressure on Indian outsourcers, apparently. And you can bet that outsourcings in North America and Europe will use any lever they can to steal back some business.
"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," says Claudio Da Rold, a vice president at Gartner who tracks outsourcing. "These items are under scrutiny to identify satisfactory concessions to further reduce the cost of services on a case-by-case basis."
Gartner is not saying that will be an across-the-board reduction in outsourcing contract prices. It's saying that for new contracts - and for tough customers who are up for renewal and who are willing to shop a deal around - outsourcers are having to make price concessions.
The company's analysts left a pretty broad range of price declines, but they are something to go on if you are shopping. The company expects that the price of data center service outsourcing contracts will see prices fall by 5 to 15 per cent in 2009 and 2010. Outsourced support for desktop computers and help desk operations will see a 5 to 10 per cent decline this year and next, with network service outsourcing falling by 10 to 15 per cent and application hosting falling by 10 to 20 per cent. (It is very odd for Gartner to have such wide ranges and to have them span two years, but it is their report, not yours or mine).
Gartner says that outsourcers and their clients have to be careful not to push each other too hard. Otherwuse, they will end up being bitter on the outsourcer end (because they can't make money on the deal) and bitter on the customer side (because they get the least amount of service from the vendor to stay in compliance with the contract).
Such an enlightened attitude maybe fall victim to economic necessity, just the same. ®
Maybe I'm just bitter
"bitter on the customer side (because they get the least amount of service from the vendor to stay in compliance with the contract)"
So Gartner know of outsourcing contracts where the supplier freely delivers service over and above the small print in the contract? Sorry, have to go, I'm being dive-bombed by a squadron of flying pigs.
Looks like sanity may finally be prevailing.
Unless the service is extremely specialised outsourcing will never be good value. Outsourcers provide minimum service they can get away with at the maximum price they can screw the customer for, they need to benefit their shareholders. A properly governed internal service provides best value for the available resources. Anyone who outsources needs to explain to their shareholders why the service is so specialised or why they do not have the capability of managing their IT departments.
Currency Cost of Outsourcing
This article is not considering the impact of currency valuations on the cost of outsourcing. The US Dollar has risen significantly against the Rupee and the Philippine Peso, dramatically cutting the cost of the services. European companies haven't been as lucky, but the drop in demand has helped prices remain stable. For instance, outsourcing companies located in the Philippines with primarily US clientele, such as http://hitratesolutions.com , are growing rapidly despite the sluggish economy.