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What’s behind declining prices for application hosting services

While writing my story this week on CIOs looking to renegotiate IT outsourcing contracts to take advantage of cost savings, I found the drop in pricing for application hosting services particularly interesting.

As my story said, analyst firm Gartner Inc. predicts that the cost of outsourcing IT infrastructure will decrease 5% to 20% during the next two years, both domestically and abroad (with particular pressure on Indian outsourcers thanks to, among other factors, the Satyam scandal). The potential average outsourcing price reductions in 2009/2010 broke down as follows:

IT infrastructure outsourcing services and the average outsourcing price reductions:
Data center services – 5% to 15%
Desktop/help desk services – 5% to 10%
Network services – 10% to 15%
Application hosting services – 10% to 20%

Why might application hosting decline more than other areas? Gartner’s Richard Matlus explained:

“We think the reason that percentage is a bit higher is because people are going to be looking at SaaS as a solution,” Matlus said. “We’ll see more of those access-ready services delivered.”

Matlus went on to say that enterprise organizations’ decision to invest more deeply in Software as a Service, as well as virtualization and automation, will drive the price of application hosting lower, as IT outsourcing companies scramble to retain customers — even if it means dropping their prices. This is an area in which we can expect to continue to see big growth in 2009 and 2010.

Are you a CIO or IT executive renegotiating an outsourcing contract? Or seeking change your approach to application hosting? I’d love to hear your story.

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