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 Gartner, Inc.

Gartner defines low-cost IT as the delivery of managed IT services (infrastructure, application, business process services) designed and implemented to minimize IT price — per-user/unit per-month (PUPM) — while maximizing the number of client organizations and users that adopt the services.

“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.”

The industrialization of IT services*** is also enabling a greater orientation toward outcome-based and pay-per-use services. 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.

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 PUPM pricing models by 2012.

“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.

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 5 percent to 10 percent 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 percent, with a market loss of $42 billion, with outsourcing prices plummeting,” Mr. Ridder said. “Such extensive reductions in price and market size would stall growth in the overall IT services market by 2013.”

“Organizations must invest in scenario planning and risk management,” Mr. Da Rold said. “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. 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.”

Additional information is available in the Gartner report “Uncertainty and Low Prices Could Stall the Growth of the IT Services Industry Market by 2013." The report is available on Gartner’s website at http://www.gartner.com/resId=1419615.

More detailed analysis on outsourcing is available in Gartner's Future of Outsourcing and IT Services Special Report at http://www.gartner.com/technology/research/future-of-outsourcing-it-services/report/index.jsp. The Special Report provides links to research notes that cover various aspects of outsourcing and IT services. This report provides insight and actionable advice for IT services buyers, providers and investors to achieve more successful future outcomes.

Additional information on the future of outsourcing will be discussed at the Gartner Outsourcing and Vendor Management Summit 2010 taking place September 14-16 in Orlando, and the Gartner Outsourcing & IT Services Summit 2010 held in London, September 20-21. This is the only event that comprehensive view of the entire outsourcing market — infrastructure, application and business process outsourcing, global delivery and the use of offshore providers, as well as issues and trends about new delivery models, such as SaaS.