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Low-cost IT to continue to grow says Gartner

Economic pressure and competition is driving growth of low cost IT models, but may harm services market

Low cost IT models are emerging that can deliver services at one third of the traditional in-house cost.
Low cost IT models are emerging that can deliver services at one third of the traditional in-house cost.

Economic uncertainty and increasing competition could herald an era of low-cost IT, according to analysts from Gartner.

The analyst company reports that as organisations continue to closely control all spending, and with the growth of managed services and global outsourcing, that the IT services market could be significantly affected by low cost IT offerings.

"The price of IT will continue to drive decision making," said Claudio Da Rold, vice president and distinguished analyst at Gartner. "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. 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."

Gartner points to what it calls the industrialization of IT services, with more outcome-based and pay-per-use services, and the success of services such as infrastructure utilities or cloud e-mail, that are able to deliver one-to-many services at price points that are one third of in-house/traditional costs. Through the combination of industrialized one-to-many services, offshore outsourcing and technologies such as virtualization and automation, service providers are able to offer cheaper services and pricing models such as per-user/unit per-month (PUPM) that deliver IT at a minimal cost.

"If the scenario of low-cost IT accelerates in the next few years, we foresee a growing number of delivery models that could cut the cost of IT by a third or more. This could lead to the emergence of viable low-cost IT providers," said Frank Ridder, research vice president at Gartner.

Ridder warns that the emergence of low cost models could cause a considerable reduction in the IT services market, stating that the IT services market could sustain a year-on-year reduction of 10% to 25% in the average market unit price PUPM for three to five years. A yearly reduction of 10% to 25% in IT services costs, affecting 30% of the market, could cause the overall, average market price to decline by 5% to 10% yearly. 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 4%, with a market loss of $42 billion, with outsourcing prices plummeting," Ridder said. "Such extensive reductions in price and market size would stall growth in the overall IT services market by 2013."

Da Rold added: "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 multi-sourcing environment against risks, including changing service pricing, regulatory changes and providers' viability. 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."