Outsourcing prices falling by up to 20% in downturn, say analysts

Gartner conducted research into current pricing for data centre, help desk, network and application hosting services and found that prices for new deals were falling by 5% to 20%. Reductions were usually smaller for renegotiated deals.

The company said that the reductions were happening despite the fact that outsourcing is an industry that often holds up well in recessions as companies seek to reduce costs.

"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 service level agreements (SLAs), fees, volumes and low-cost offshore delivery locations,” said Claudio Da Rold, vice president 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, Indian outsourcing companies have faced greater demands for price reductions because of a terrorist attack in Mumbai, currency fluctuations, wage inflation and the financial scandal that engulfed outsourcer Satyam.

Gartner also said that cost reductions would be driven by competition, with new providers entering the market and old ones keen to fulfil their revenue growth predictions.

Gartner analysts looked at the price reductions in the outsourcing market during the last downturn in the IT industry, between 2001 and 2003. It then factored in current conditions and came up with its predictions for price falls in 2009 and 2010.

The panel of experts said that the price of data centre services would fall by five to 15%, helpdesk services by five to 10%, network services by 10 to 15% and application hosting services by 10 to 20%.

Da Rold said, though, that not every business should expect all of these reductions.

"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,” he said. "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."

Outsourcing consultancy EquaTerra said earlier this year that demand for outsourcing had fallen because companies were finding it hard to find the capital to fund multi-year deals.

"The business case for outsourcing is building as the global economy slides deeper into recession, but the ability to execute multi-year outsourcing deals is hampered by tight capital and market uncertainties," said an EquaTerra statement.