Gartner: Outsourced IT Services Prices Could Fall 20%

Outsourced IT services prices will decline between 5 and 20 percent through 2010 as the market for them becomes more competitive, according to a new report from Gartner released this week.

The price pressure will come from increasing competition in the market between traditional and new providers, Gartner says, as more providers compete aggressively to keep revenue on target.

But so far IT solution providers contacted by Channel Insider aren’t seeing the price declines. However, those may be just around the corner, since solution providers did report that they are seeing the additional competition.

“I think the industry is feeling pressure to lower managed service pricing thanks to the trunk slammers wearing the managed service lipstick,” says Doug Ford, president of MSP (managed service provider) The I.T. Pros in San Diego. “But I don’t call them competition. To me, a competitor is someone that has the ability and potential to take my core customers from me by offering a similar, equal or better offering than I can offer. Using that definition, I am not seeing much competition.”

Ford says there’s plenty of confusion in the marketplace, however, as customers and potential customers get deal proposals from several different MSPs that say they are selling so-called managed services in a box.

“These small one- and two-man consulting firms can’t really execute on the true managed service offering,” says Ford.

David Bennett, president of Connections for Business, which provides IT services to small and midsize businesses in Florida with 10 to 100 employees, says that while he’s not seeing any pricing pressure in his market, he has colleagues in Berkeley, Calif., and Chicago who are reporting pricing pressure.

“I think anyone getting stuck on pricing is having a hard time differentiating themselves in their actual offering,” he says. “Too many are focused on the features and benefits such as monitoring, patching, spam mitigation and others, and not on the heavily value-added services such as strategic planning, CIO services and others, and so they get knocked down on pricing on these commodity aspects.”

Deepak Thadani, of SysIntegrators, in New York, says that it’s a more competitive and tougher market out there today because of the economy.  Still, he says, he hasn’t dropped his prices and he hasn’t seen any other solution provider he knows drop prices.

“I have seen smaller shops pop up, but they haven’t really affected us in any way,” he says. “Most of them are very basic in what they can provide, so it hasn’t been something that I’ve been worried about.”

Systems integration giant Dimension Data’s Gene Chao, vice president of strategic services for the company’s Americas region, says there is always pricing pressure on certain IT services. But Dimension Data counters that pressure by offering more customized services.

Chao says he sees more customers moving to operational-level services as well as professional services and consulting.

“Our market and clients are looking for service partners versus product partners,” he says.

The Gartner predictions call for data center services prices to fall between 5 and 15 percent, desktop/help desk services prices to fall between 5 and 10 percent, network services prices to fall between 10 and 15 percent, and application hosting services prices to fall between 10 and 20 percent.  The Gartner forecast covers North America and the European Union.

“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,” says Claudio Da Rold, vice president and distinguished analyst at Gartner, in a statement announcing the results. “Providers are not reporting any across-the-board price reductions, but rather will address each client situation individually.”

Gartner advises clients and providers to avoid stretching their positions to the extreme because pushing for a very low price will not make providers safer, deliver good services or promote a positive relationship.

“Also, especially in hard times, there is only one viable balance, and that is win-win; for if one side loses, the other loses too,” Gartner concludes.

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