Outsourcing Prices Falling, Buyers Getting Savvier

The stalled economy could kill many IT projects, but industry watchers say outsourcing might flourish as prices decline in the coming year and IT executives become more strategic when inking services deals.

The stalled economy could kill many IT projects, but industry watchers say outsourcing might flourish as prices decline in the coming year and IT executives become more strategic when inking services deals.

Gartner Monday forecast that the prices of outsourced IT services will shrink by 5% to 20% during 2009 and 2010, due to the "economic climate, IT budget constraints and general market consciousness." The firm expects the biggest price reduction to come in the cost of outsourced network services and application hosting services.

IT buyers today are renegotiating contracts to alleviate costs, the firm says.

"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&C), service-level agreements, fees, volumes and low-cost offshore delivery locations," said Claudio Da Rold, vice president and distinguished analyst at Gartner, in a statement. "These items are under scrutiny to identify satisfactory concessions to further reduce the cost of services on a case-by-case basis."

This trend, while accelerated by the recession, was inevitable, analysts say, as outsourcing contracts developed with traditional pricing models often didn't deliver the expected results.

"Everyone went through the first round of outsourcing and in most cases it was a wasted effort. Enterprise IT departments aren't handing the keys over to outsourcers anymore," says James Staten, principal analyst at Forrester Research, who last week delivered a keynote address on the subject at Forrester's IT Infrastructure and Operations Forum in Las Vegas. "Now enterprise IT buyers are considering the business requirements and more options when fulfilling business needs."

Dubbed "rightsourcing" by Forrester, enterprise customers can mix and match internal resources with external providers. That means IT executives aren't just sending all the work out or tackling it all in-house, he says. Now customers can choose from cloud computing models, software-as-a-service and pay-as-you-go platforms. IT groups today are also learning to extend outsourced IT services with their own internal development and projects.

"In this new world of outsourcing you don't hand over services but wherever possible build them as hybrids that tie together critical components you continue to own and operate with lower-cost Web-based components," a March Forrester report reads.

Staten recommends IT departments begin analyzing what they do well internally and begin partnering with external sourcing providers that can fill in the gaps at a reasonable price. Yet Staten warns that choosing to send work to outsourcers shouldn't be done as purely a cost-cutting measure -- because in many cases costs aren't reduced significantly.

"Oftentimes it is not cheaper to outsource, but the cost of focus and prioritization of your internal people is where you get the most savings. For instance, if you have 60 full-time people and need 20 new services, that isn't going to happen," Staten says. "Outsourcing should be used to focus people on the internal projects that contribute to transforming the business."

In response, outsourcers are revamping their pricing models. For instance, Staten says outsourcers are embracing the rollover minutes model of the cell phone market. If a customer pays US$50 per month for a service, but in any given month only uses $10 worth of services, then the remaining $40 could be applied to a month when more services are consumed.

"It can be easy for pay-per-use models to get out of control and become very difficult to forecast," Staten says. "But with the concept of rollover minutes, enterprise customers can forecast a monthly expenditure and float services throughout the year."

Staten says vendors must also analyze what they do best and market those skills to a new wave of IT buyers looking to blend smaller sets of services with their own internal resources.

"We are already seeing it with bigger traditional outsourcers, which are being more selective with the services they offer," he says. "But others will have to learn as they get trounced by competitors that specialized in a set of services and helped the enterprise become much more efficient."

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This story, "Outsourcing Prices Falling, Buyers Getting Savvier" was originally published by Network World.

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