Outsourcing Prices: Why the Recession Isn't Really Driving Them Down
The common perception is that IT outsourcing prices are heading south this year, to the benefit of customers everywhere who are clamoring to cut costs in this economic environment. But hold off on the Hallelujah chorus. Here's why you may actually pay more to--and get lower quality from--IT services providers today.
CIO — There has been much discussion about the global economic recession's impact on the price of IT outsourcing services. The consensus has been that buyers keen to cut costs coupled with decreasing demand for IT services would drive prices down across the outsourcing market—welcome news for IT executives under pressure to slash their budgets while maintaining quality.
Indeed, according to a report from outsourcing consultancy EquaTerra, 76 percent of outsourcing service providers said that pricing pressure had increased during the first quarter—a jump of more than 30 percent from the previous quarter and last year. And while customer pricing pressure does not necessarily equal provider price slashing, Garter had predicted that IT services would decline in price anywhere from five to 20 percent, depending on the type of work, over the next year.
Gartner vice president and research director William Maurer notes that while 2009 pricing analysis is just beginning, those predicted percentages are on target thus far.
But outsourcing experts say the price decreases aren't necessarily a direct result of the recession, nor are they happening industry-wide. In some cases, prices aren't falling at all; customers are just paying for fewer or lower quality services.
"Making a blanket assessment of falling pricing levels is generally inaccurate and misleading," says David Brown, EquaTerra's managing director of financial architecture. "Prices have, in general, declined, but it's very situational to specific service providers and specific buyers."
Reasons for Price Decreases
Some price decreases are due to process improvements and better technology, Gartner's Maurer says. Others may be attributed to current events, such as the terrorist attacks in India, explains Chris Pattacini, director of Alsbridge's ProBenchmark group. The terrorist attacks, he says, may have led to "some localized, short-term price discontinuity," but it would have been limited to transactions that were in negotiation or just about to be signed at the time of the attacks.
Pattacini adds that smaller tier two and three firms as well as Indian outsourcing vendors have been more aggressive on price "because they need to do so to keep the business, and they have little to compete on beyond price." He notes that offshore vendors have the flexibility to give up some margin and still remain profitable.
Thus, prices for offshore application development projects or testing are the most likely to have dipped over the last year. But even those prices may be impacted by other factors like exchange rates, inflation, and scope and volume of services.
"Publicly announced examples of lower prices have often been around contract labor and shorter term project work rather than longer term outsourcing deals, especially those already launched," notes EquaTerra's Brown.
