IT managed service buyers should prepare for the impact of inflation and recession on IT outsourcing pricing and labor. The International Monetary Fund (IMF) warns that nearly half of the European Union and one-third of the world may face a recession. Global inflation is expected to increase from 4.7% in 2021 to 8.8% in 2022, and then decrease over the next two years to 6.5% by 2023 and 4.1% by 2024. These economic conditions can directly affect businesses, including IT outsourcing deals.
IT managed service buyers face challenges such as,
- understanding current market labor rates
- validating IT budgets for long-term multiyear budgets
- forecasting IT spending over a 3- to 5-year horizon
Here are some trends they can see in the coming years.
IT outsourcing price trends for the next 2 years
IDC’s benchmarking and sourcing advisory services have analyzed market price data from IT outsourcing deals signed in the past 12 to 18 months and found that inflation has had a direct impact on the market price for outsourced IT services and labor rates.
Previously, annual price reductions in the range of 5% to 10% were typical for outsourced IT infrastructure services such as server, storage, and network device management. This was due to the economies of scale and automation provided by service providers from offshore delivery locations, benefiting end clients.
According to IDC, there is a significant reduction and reversal in traditional year-on-year price reductions for IT services that require high direct labor content, such as service desk and deskside support, over the past few years.
The trend of digital transformation (DX) in Europe remains strong, with a growing focus on initiatives related to digital service development and modernizing back-end applications and processes.
It has become important to update skill sets to ensure resilience and agility in rapidly changing environments. The pandemic-induced changes in the workplace have increased the demand for cybersecurity and data analysis, highlighting the need for improved skills development and training.
Despite the COVID-19 pandemic putting strong constraints on larger implementation projects, European technology employment grew by 2.7% in 2021, driven by continued demand for digital transformation (DX) skills. In contrast, 2020 saw essentially flat growth of 0.4%.
Inflation in labor rates
Labor rates are a key component of IT managed service deals, but not the only one. Tools and automation are also essential in enabling service providers to offer a cost-efficient solution. However, the benefits of server virtualization and offshoring have reached a plateau, and further cost savings for existing outsourced infrastructure deals are marginal.
Despite this, first-time outsourcing deals can still provide significant savings due to lower offshore labor rates than in western Europe. However, global labor rate inflation remains a reality. According to IDC market research, rising prices for IT supplies, services, and talent remain a challenge in 2023.
AWS recently raised consulting day rates by 7-8%, and Adobe increased pro-serve rates by 20% due to high demand and a critical IT skills shortage.
Although recent rounds of layoffs within the high-tech industry may ease labor shortages, the focus of these layoffs is likely to be on internal operations.
As a direct result of global inflation, the cost of professional services will continue to rise for technology buyers in the next 18 to 24 months. However, the impact on multi-year IT outsourcing agreements is expected to be less severe as service providers make use of offshoring, automation, and standard offerings to achieve efficiencies.
Existing service providers are likely to implement their economic price adjustment clauses. While this may have a bottom-line impact, clients can counteract it by investing strategically to reduce labor-intensive processes and associated services and increase productivity gains.