Outsourcing Prices Likely to Drop in 2010, But at What Cost?

Outsourcing prices dropped overall in 2009, and industry watchers expect the downward trend to continue next year. It's not just the global economic slowdown that's sending IT service prices south, it is also the increased use of offshoring, pricing pressure from customers, and a reduction in vendors' services.

"We see more companies willing to outsource offshore to take advantage of global labor arbitrage opportunities than in the past," says Ben Trowbridge, CEO of outsourcing advisor Alsbridge, which owns price benchmarking firm ProBenchmark.

"One of the issues we see is that lower prices can also be driven by disaggregated services."

For example, lower desktop support prices might be due to a vendor delivering remote infrastructure management support. But they might just as well be the result of a reduced scope of services that leaves the client with a lower level of service or possibly having to retain other costs--which negates or reduces the customer's potential savings, Trowbridge adds.

Mark Toon, CEO of outsourcing consultancy EquaTerra, says that buyers of outsourcing services have remained focused on cost cutting and avoiding future investment throughout 2009. Toon believes that IT services customers will continue to focus on price through 2010. But, that "price pressure will be tempered by the need to ensure overall deal parameters do not jeopardize success," adds Stan Lepeak, EquaTerra's head of global research.

Should the economy show strong signs of life in the new year, some say it won't be a buyers' market at all.

"Much depends on whether or not the apparent signs of economic recovery prove true," says Chris Kalnik, partner and managing director of financial analysis for sourcing advisor TPI. "If the economy strengthens, TPI believes that the service providers will attempt to recoup some of the price concessions that they have made over the past year."

RIM's Effect on IT Outsourcing Prices

On the infrastructure side of the IT outsourcing house, market share will continue to shift toward remote delivery of services where possible , and offshore players will drive desktop and network service prices to new lows. As remote infrastructure providers improve their capabilities, more infrastructure outsourcing customers may look offshore for savings, while the broader global economic slowdown will continue the pressure to reduce costs in the Americas, says Trowbridge. "These two trends are working together to drive overall market prices lower," he adds.

But those cost savings may be short lived and slight. What's more, RIM isn't for everyone. "Maturity in this market has led organizations to identify the processes that are better delivered locally and to select service providers [based] on flexibility and customer intimacy as well as price," notes Paul Cornelisse, managing director of Equaterra's information technology advisory.

Overall, most infrastructure services--desktop, midrange and network services--will decline at single-digit percentages in 2010, according to Compass America. That excludes storage costs, which will continue to decline another 25 percent in the coming year.

Of course, the majority of cost savings that can be achieved by offshoring infrastructure support are labor-based. "Organizations should keep in mind, that if assets are included in their vendor's pricing, offshoring is unlikely to have a significant impact because the hardware and software that makes up the majority of the price is unaffected by the locale of support personnel," says Bob Mathers, senior consultant with Compass America.

IT Outsourcing Prices and Merger Mania

The biggest news in the outsourcing industry in 2009 was vendor consolidation. HP completed its integration of EDS, and new mergers were announced between Dell and Perot Systems and Xerox and ACS, among others.

So while increased offshoring, economic malaise, and customer focus on cost-cutting points to price drops, any further mergers could--in theory at least--foretell another story.

"Recent consolidation may portend upward price pressure, especially if other providers follow suit," says Trowbridge. Decreased competition rarely leads to lower prices. But, notes Trowbridge, offshore vendors continued inroads into the marketplace could serve to keep prices in check: "We anticipate that this upward pressure will be more than offset by global delivery capabilities in the marketplace. It's an area that will require reassessment as events shake out in 2010.

New IT Outsourcing Pricing Models

Amid continued economic uncertainty, outsourcing buyers will seek out pricing flexibility in the new year. "We see increased emphasis on on-demand transactional-based pricing predominantly because companies can't predict what the rebound will look like," says Bob Cecil, head of EquaTerra's business and financial process practice.

"We are also seeing more outcome-based pricing."

Cloud computing will also attract more buyers. Dave Brown, head of EquaTerra's financial architecture practice, says cloud service providers and customers will begin to better understand cloud computing pricing and software as a service pricing in 2010, and that will drive organizations to adopt the new cloud delivery model.

"The downside," says Brown, "is that they are immature offerings [relative] to outsourcing transactions and will go through various iterations before the right pricing structure emerges."

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