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Economic Downfall - Will It Reduce Outsourcing Prices?

Maneet Puri

June 26, 2009

The global economic recession has taken a heavy toll on businesses across the world. And the Indian outsourcing industry has been no different. In fact, the outsourcing industry is one of the worst hit sectors. In this situation, companies are increasingly seeking to reduce costs and plus the demand for IT services have gone down tremendously. As a result, the prices of outsourcing services have also taken a serious dip.

Outsourcing service providers are feeling the increased pricing pressure and as a result have succumbed to the price decline. Add to this, the increased competition in the market and the situation becomes all the more worse.

However, if industry experts are to be believed, these price decreases are not a direct result of the recession. There are points where the outsourcing costs and prices are consistent and not falling. Often customers are paying for lower quality services.

Causes of Price Decline

Process Improvements & Specialized Technology

These are the two most popular reasons for outsourcing prices to decline. This is because any improvements in the processes would mean less amount of work that needs to be outsourced. When the amount of work is less, the price obviously staggers. Same is the case with specialized technology. When the technology improves, the prices of outsourcing goes down.

Security Threats

There have been issues about thefts and terrorist attacks in countries like India. This has led many international companies to believe that their data is not in safe hands. This further increases their reluctance to outsource and if at all they do, they need cheaper rates for the same. As a result, outsourcing service providers are pressurized to slash their rates.

Profit Margins

Offshore service providers, even if they slash the prices of their services, still have enough margin to make profits. This makes them more adjusting to price pressures and a chunk of them do not mind the price decline in order to stay in business and steer ahead of competition.

Other Factors

Other factors that influence the prices of outsourcing services are currency exchange rates, the value of dollar, inflation and most importantly the volume of services that is outsourced.

Causes of Price Stability

Long Term Outsourcing Contracts

Companies that are signed long term outsourcing deals with their outsourcing service providers are locked within the contract and cannot take advantage of the market situation and the consequential price decline. They are forced to pay what was the agreed upon sum of money. This is the prime reason for price stability for the service providers.

Complex Outsourcing Deals

There are multi-million dollar deals that are just too complex to be opened up and renegotiated. Because of this, companies prefer to carry on the existing model and don't try to induce market trends into it. Companies rather try to maintain their own cost figures instead of renegotiating the outsourcing contract.

Reduced Amount of Work

Companies are increasingly reducing the amount of work that is outsourced to the service providers. However, the price remains the same for the services and thus clients end up paying more for the per unit deliverables. This works in favor of the service providers as they get to maintain their pricing.

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