Price of IT services to slide as low-cost providers gain ground

Outsourcing trend will drive a prolonged reduction in the unit cost of IT services

The price of IT services worldwide could slide by as much as 10 per cent each year as businesses switch to low-cost providers, according to a report.

IT research company Gartner says businesses are increasingly outsourcing their IT work to low-cost providers including overseas companies because of economic uncertainty and competition in the market.

Claudio Da Rold, vice president and analyst at Gartner, said: “Cost cutting, restructuring and the move towards offshore outsourcing continue to increase while growth in emerging countries [such as India] accelerates, widening the gap between high-growth areas and stagnant economies and low and high-cost IT providers. This trend could drive a prolonged reduction in the unit cost of IT services, significantly affecting the IT services market by 2013.”

Business buyers will force traditional service providers to switch to per-user per-month pricing models by 2012 as these are more cost effective, according to the report.

And overall average market prices could drop by five to 10 per cent per year in a worst-case scenario, Gartner said. Research vice president Frank Ridder added: “This reduction is possible because, in 2009, we saw the IT services market shrink four per cent, with a market loss of $42bn (£27bn), with outsourcing prices plummeting. Such extensive reductions in price and market size would stall growth in the overall IT services market by 2013.”

Outsourcing IT to reduce or control costs is commonplace in large UK firms, but small-to-medium-sized firms are increasingly making the switch, according to Ben Birmingham, managing consultant at outsourcing specialist Quantum Plus.

“Firms are focusing on their core operations and are outsourcing IT because they think of it almost as a commodity at the moment,” said Birmingham. “Small-to-medium-sized businesses see it as a way of controlling, rather than reducing, IT services costs.”

And clients now expect flexible pricing options to be offered, Birmingham said. “Traditionally, clients would have been expected to pay a transition charge for moving from one outsourcing provider to another, or moving from in-house provision to outsourcing, but increasingly they are asking for the charge to be waived or significantly reduced.

“Clients are also pushing for more business-related pricing connected to the delivery of certain objectives, rather than paying an annual charge as they used to.”