Organisations renegotiating their outsourcing contracts should avoid long-term deals and look at cloud computing, according to analyst firm Gartner.
The next two years will be a “critical period” for the outsourcing and IT services market,” said Claudio Da Rold, vice president and distinguished analyst at Gartner.
Speaking at the Gartner outsourcing conference in London, Da Rold said: “Organisations are concentrating on IT cost reduction and aiming to improve their business performance and flexibility.
“We predicted in the first quarter of 2009 that the global IT services market will decline 1.7 percent in 2009, and we are reviewing this forecast with an even more cautionary orientation.”
In the face of these pressures, outsourcing firms are looking at ways to reduce costs by cutting staff and increasing standardisation.
Service providers will create greater flexibility by using non-traditional approaches like spin-offs and partnerships, Da Rold said.
Gartner predicts that IT outsourcing pricing is set to shrink by 5 to 20 percent during 2009 to 2010, as traditional service providers compete with new players.
Indian offshore providers, in particular, are under significant pressure to cut costs, after the Mumbai terrorist attach, the Satyam scandal, exchange rate fluctuations, wage inflation and high staff attrition levels.
But Gartner urged enterprises to not be swayed by heavily discounted offers from suppliers.
Linda Cohen, vice president and distinguished analyst, said: “Don't sign long term deals, there won't be enduring value for you or for your service provider. The days of the ten year deals are long gone.”
Gartner advised IT department to look alternative outsourcing models such as cloud computing or software as a service.
“Clouds don't need long term contracts to make profits. They've already invested in service delivery for other clients. Also the costs go down over time, in the utility model, year over year.”