Economic Uncertainty, Competition to Drive Low-Cost IT: Report
Economic fluctuations and business uncertainty, accelerated service globalization, and increasing competition of IT services are major factors that could force businesses to move further toward low-cost IT, according to a study from IT research firm Gartner. Gartner analysts said that based on the proliferation of advertising 'IT as a service' as a pricing model, business buyers would force traditional providers to switch to per-user/unit per-month (PUPM) pricing models by 2012.
Gartner defined low-cost IT as the delivery of managed IT services (infrastructure, application, business process services) designed and implemented to minimize IT price, through modes such as PUPM, while maximizing the number of client organizations and users that adopt the services. Claudio Da Rold, vice president and distinguished analyst at Gartner, said the price of IT would continue to drive decision-making.
"As credit markets in the U.S. and Europe remain challenging, end-user organizations are reducing costs by sourcing IT services from emerging countries and lower cost providers," Da Rold said. "Cost cutting, restructuring and the move toward offshore outsourcing continue to increase while growth in emerging countries accelerates, widening the gap between high-growth areas and stagnant economies, and low and high-cost IT providers. This trend could drive a prolonged reduction in the unit cost of IT services, significantly affecting the IT services market by 2013."
The report, "Uncertainty and Low Prices Could Stall the Growth of the IT Services Industry Market by 2013", also found the industrialization of IT services (refers to the standardization of IT services through pre-designed and preconfigured solutions that are highly automated and repeatable, scalable and reliable, and meet the needs of many organizations) is also enabling a greater orientation toward outcome-based and pay-per-use services.
Da Rold said early offerings like infrastructure utilities or cloud e-mail show that providers can deliver one-to-many services at price points that are one third of in-house/traditional costs, due to the right combination of industrialized one-to-many services, offshore outsourcing and technologies such as virtualization and automation. He noted organizations must invest in scenario planning and risk management.
"About two or three times a year — depending on dynamics in their business environment — they need to assess their multisourcing environment against risks, including changing service pricing, regulatory changes and providers' viability," Da Rold said. "They also need to consider leveraging new IT services options depending on their compatibility with their corporate risk profile, and add business value through risk mitigation and business continuity planning."
Frank Ridder, research vice president at Gartner, suggested if the scenario of low-cost IT accelerates in the next few years, Gartner foresees a growing number of delivery models that could cut the cost of IT by a third or more, which could lead to the emergence of viable low-cost IT providers. In such a scenario, the IT services market could sustain a year-on-year reduction of 10 percent to 25 percent in the average market unit price PUPM for three to five years.
A yearly reduction of 10 percent to 25 percent in IT services costs, affecting 30 percent of the market, could cause the overall, average market price to decline by five percent to 10 percent yearly. Ridder said this worst-case scenario reduction would equal the revenue of two to four of the largest IT service providers. "This reduction is possible because, in 2009, we saw the IT services market shrink four percent, with a market loss of $42 billion, with outsourcing prices plummeting," he said. "Such extensive reductions in price and market size would stall growth in the overall IT services market by 2013."