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Outsourcing prices likely to drop- but where’s the catch?

Outsourcing is strengthening the economy, improving infrastructure and upgrading quality of life…We've heard it all. So does this industry ever face any failures? It surely does, especially when thinking at the economic realities nowadays. The pricing for information technology services market are changing in response to the current economic atmosphere and corporate America’s drive to cut costs.
The prices are being driven by competition from global IT services providers that are playing a much bigger role in the service delivery to American companies. But not only. We should not forget that regardless of the relative strength of outsourcing during a recession, many clients are reported intense discussions and renegotiations of contracts for terms and conditions, service level agreements, fees and low-cost offshore delivery locations. The buyers want lower prices, and IT service providers are responding. The dropping prices in the outsourcing industry depend on whether or not the apparent signs of economic recovery prove true. TPI believes that if the economy strengthens, the service providers will attempt to recoup some of the price concessions that they have made over the past year.
Trowbridge considers that as remote infrastructure providers improve their capabilities, more infrastructure outsourcing customers may look offshore for savings, while the broader global economic slowdown will continue the pressure to reduce costs in the Americas. The market share will continue to shift toward remote delivery of services where possible and offshore players will drive desktop and network service prices to new lows. But Gartner warns that customers pushing for prices which are too low could affect the quality of the services provided and the relationship between provider and client.

What about the new price model …

One part of the price changes is the reduction in labor through automation and reduced hardware. The other part is that prices are being broken down by vendors to remove major price drivers and develop a lower base service charge. ProBenchmark believes that the pricing methodology is moving toward a model that is similar to how a new car is priced, with the options added on top of a stripped model (base services charge). The traditional IT services, like mainframe, servers, desktop, service desk, and network are still there, but the pricing units are not the same anymore. The fully managed service has given way to a basic service charge and optional services are the major price drivers. There are now multiple price metrics for certain towers where there used to be only a single one. However, warns the research company, when you take into account the difference between the older "managed service" models where a large basket of services was included in the base charge vs. the segmented pricing models, you may find that the price diminishing is not that big after you add all the add-ons to the base price.
According to ProBenchmark, prices for desktop services should fall seven to ten percent this year. Help desk prices, which had been decreasing five to seven percent a year, may fall three to six percent. The big exception in the downward pricing trend for outsourced services is the virtual server support- says the report. The explanation is that the IT service providers raised their rates for virtualization support in order to get more from their infrastructure business - without clients noticing it.
Pentalog chose a flexible way to deal with the economic crisis and the result is that we reached economic growth in 2009 and also for the first quarter in 2010. Rather than decreasing our prices, we leveraged two solutions: first, we use the possibility to bill both euro and dollar. As we know the recent fluctuations in the euro/ dollar parity have significantly destabilized the number of companies exporting to other countries in the dollar area. Big companies like Infosys Technologies, lost $21.6 million during the first quarter (April-June) for fiscal year 2003-04 on account of the rupee's appreciation against the US dollar. Thus, Pentalog has decided to adapt to these constraints by offering companies to purchase their services directly in dollars, limiting the exchange difference between the client and the supplier. We agreed upon on a 50/50 exchange risk… making the risk virtually disappear. Second, we constantly work on metrics and productivity improvement in our clients projects as well as in our internal organization. Of course our clients directly benefit from the improved quality of service we thus reach and they are ready to waive lower rates and sometimes even ready to pay a bit more for that.
There is a continual downward trend in most IT services pricing. Prices are being driven by fierce competition and further integration of remote infrastructure management. Because of the segmentation of some of the traditional IT services, it may appear that prices have been dropping dramatically - but this is only an appearance. It is important for clients that are examining outsourcing as a potential vehicle to reduce IT costs, to look closely at the resource volumes and billing metrics.

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Tags: billing, dollar, metrics, outsourcing, prices


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