Market & Sourcing
by Karsten Tampier
It is a rule that demand falls when prices rise. The situation is usually different when it comes to the procurement of IT services.
If demand for an outsourced service decreases, the unit price goes up. If, on the other hand, demand increases, IT or procurement may be able to negotiate a lower price. However, the service provider is in a better position and has more leverage because the customer cannot change spontaneously.
The Metrics Data Lake shows interesting price trends for outsourced IT infrastructure services:
- When the purchase quantity is doubled, the unit price falls by around 15 percent. Example: initial quantity 100, new quantity 200; initial price per unit €100, new unit price €85.
- As volumes decrease, the contracts show a more pronounced price change. For example, a 30 percent reduction in the volume purchased results in a 15 percent price increase. Example: initial quantity 100, new quantity 70; initial price per unit €100, new unit price €115.
This phenomenon is familiar from car leasing: Lower annual mileage may be reimbursed by a small amount, whereas extra miles are charged at a significantly higher rate. To prevent unpleasant surprises, companies should already limit the financial impact of volume changes during outsourcing negotiations.