Application Outsourcing Industry Shaken by Hyper-rationalization, Unprecedented Pricing Pressure | Press Release

In search of agility and reduced costs, enterprises seek reductions in application portfolios, deployment time, and pricing.

DALLAS, June 3, 2014 — Two significant trends—hyper-rationalization and unprecedented pricing pressure on providers—are rocking the world of Application Outsourcing (AO), according to Everest Group.

In its just-released report, Everest Group describes how enterprises are seeking to reduce application portfolios by as much as 60 percent through hyper-rationalization initiatives. For ages, enterprises have adopted application rationalization strategies; hyper-rationalization is the next stage of this journey. Hyper-rationalization not only encompasses the “mass” peripheral applications but also focuses on the core applications landscape.

Simultaneously, enterprises are demanding of providers complete pricing transparency and cost reductions, driving average pricing of AO engagements down for the third straight year. Buyers believe that service providers are unable to offer incremental value through application services and, therefore, demand price reduction. Cutthroat competition among providers assures that most providers agree to these price reduction demands.

These findings and more are discussed in Application Outsourcing – Annual Report 2014: Rationalization Goes Hyper.”

Key Findings from the Report

  • Discretionary spending on custom development saw an increase in 2013, while investments in application maintenance remained unchanged.
  • Consulting services as part of AO are on the rise as enterprises seek assistance in adopting Software as a Service (SaaS) and cloud computing models and face challenges in effectively leveraging these models to derive meaningful business value.
  • Input-based pricing continues to be the preferred pricing model due to ease of negotiations. Enterprises with significant outsourcing experience are looking to push their service providers to take up more complex pricing models, such as output-based pricing.
  • The European market continues to witness an increase in AO activity, with increased penetration in verticals beyond key outsourcing industries such as Banking, Financial Services and Insurance (BFSI) and manufacturing.

Graphics Available for Publication

Graphics illustrating the report’s key takeaways can be included in news coverage of the report with source attribution to Everest Group and a link to the graphic source page on the Everest Group website. Graphics include:

  • Application hyper-rationalization
  • AO contracts with consulting in scope
  • Unprecedented pricing pressure in Application Outsourcing
  • AO annualized contract value
  • AO adoption by buyer industries

Jimit Arora, vice president at Everest Group, observed,“Traditional rationalization initiatives have peaked, and so enterprises must now move beyond these and embrace hyper-rationalization to further derive value from their applications landscape. It is a worthy exercise for enterprises aspiring to achieve greater business agility and reduce management costs, and it is an exercise made timely by cloud services, SaaS models, automation, and other digital disruptions. Enterprises save costs in traditional application services to invest in these newer initiatives. This is further pushing down the prices for traditional application services.”

Everest Group’s AO Annual Report 2014 analyzes major trends that are shaping the applications market and the outlook for the next year. The report provides fact-based perspectives on buyer adoption by geography, industry, and revenue size. It also sizes the IT services market in terms of application outsourcing and consulting services.

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