IT outsourcing costs set to fall: Gartner

Technolgy market researcher Gartner Inc projects a 5 - per cent to 20-per cent decline in the cost of outsourced IT services during 2009 and 2010 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.''

According to Da Rold added that Indian offshore providers have been coming under significant pressure for price reductions in the aftermath of the Mumbai terrorist attack, the Satyam scandal, 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. A panel of analysts agreed on the reported price trends for 2009 and 2010 in North America and Europe. The Gartner analysts calculated the percentages based on the economic pressure or recession, and other applicable trends, including industrialisation of services, clients' SLA/T&C renegotiations and offshore service dynamics.

Table 1
Potential Average Outsourcing Price Reductions in 2009/2010, North America and European Union

''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,'' Da Rold says. "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 says clients and providers should 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.

Gartner analysts will further discuss outsourcing and IT services trends at Gartner's Outsourcing Summits held in Tokyo (April 20-21), Las Vegas (May 4-6) and London (June 15-16). These Summits provide a comprehensive view of the entire outsourcing market - infrastructure, application and business process outsourcing, global delivery, and the use of offshore providers, as well as issues and trends about new delivery models, such as SaaS.