by Stephanie Overby

Outsourcing Prices Still Headed Down in 2010

Mar 04, 2010

Prices for most outsourced IT services will continue to drop in 2010, albeit at a slower pace than 2009, according to Alsbridge's ProBenchmark. However, the costs of some notable service categories -- like virtual server support -- are headed higher.

Two major trends led to lower prices for outsourced IT services last year—the global economic downturn and the uptick in remote infrastructure management (RIM) adoption.

With the financial picture still far from clear and companies remaining interested in offshoring and remote infrastructure management to save money, outsourcing prices this year should follow a similar—if less dramatic—path downward, according to first quarter IT service price analysis from ProBenchmark, the pricing subsidiary of outsourcing consultancy Alsbridge.

“How long the economy will be like this and how long client companies will continue to more aggressively [offshore] infrastructure remains to be seen,” says Chris Pattacini, ProBenchmarks’s director. “It is clear that RIM will continue to proliferate in the market, continuing that downward price pressure, but not as much as last year.”

Another factor causing outsourcing prices to drop is contract renegotiation, according to ProBenchmark’s Howard Davies. He says clients are responding to tough times by renegotiating with their vendors on price.

“That’s creatively pulling the price of services down,” says Davies. Consequently, when other customers benchmark their own deals, they’re more likely to find they’re paying more for IT services than the benchmark, and that encourages them to reexamine their deals with their providers. “The longer they wait, it seems the larger the opportunity is,” he adds.

Pricing Outlook for Specific IT Services

Desktop services, the prices for which had been dropping 10 to 14 percent annually, should fall another seven to 10 percent this year, according to ProBenchmark. Help desk prices, which had been decreasing five to seven percent a year, may fall three to six percent this year.

Only storage prices are on track to continue their 10 to 14 percent annual declines, in part because the hardware itself continues to get cheaper and because less expensive labor is now being exploited more extensively offshore. (Labor accounts for more than half of storage costs.)

Still, as in 2009, some of these so-called lower IT service prices may be higher than they appear. IT service providers have been actively disaggregating services to protect their profit margins. The price for desktop services today may be 20 percent less than two years ago, but the definition of desktop services has narrowed.

“You end up with what I call with “skinny” solutions,” says ProBenchmark’s Pattacini. “An onshore provider’s desktop support solution may be more like what we’d call field services back in the day, while offshore providers try to deliver as much as possible through the service desk.”

There’s one big exception in the downward pricing trend for outsourced services—virtual server support. With IT service providers expecting more and more of their infrastructure business to come from these smaller servers, they’ve been quietly raising their rates for virtualization support even as they’ve slashed prices for traditional server support. Clients looking at the bottom line for total server support, including mainframe, mid-range and virtual solutions, may not even realize it. And vendors will take advantage of that ignorance as long as possible.

“Unit prices are higher for virtual servers because vendors know when the contract grows, that’s where growth will occur,” says Pattacini. “The whole virtual server market is still shaking out. It’s a pricing anomaly. Over time, it should come back down.”

The overall downward pressure on outsourcing prices that has occurred over the last few years continues to be harder on domestic vendors than offshore providers. “The offshore players are being fairly aggressive on price. But they can manage within that because they still have the competitive advantage from a delivery cost standpoint,” Pattacini says. “The domestic players are still struggling to work toward a lower cost delivery model. It’s either that or go back to the old value-add argument [for higher prices] that they bring something to the table that offshore providers can’t. But that value-add is diminishing.”