SaaS, cloud computing seen to slash cost of application hosting

By Christina Torode, Senior News Writer | May 13, 2009

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Application hosting pricing is expected to decrease by up to 20% over the next two years thanks to increased competition on a number of fronts, including the advent of cloud computing, as well as reduced provider expenses, according to Gartner Inc. But not everyone will be in a position to renegotiate their contracts and take advantage of the cuts.

Driving the price declines are a number of factors: the rise of new offerings, in particular infrastructure utility services for SAP and other packaged applications with lower price tags than application hosting service providers'; competition from on-demand or utility-like models such as Software as a Service (SaaS) and cloud computing; and lower infrastructure costs that providers are passing on to customers.

'I think service providers are almost waiting for clients to come beat them up, and that will drive prices down,' said Ted Chamberlin, a research director at Gartner in Stamford, Conn., explaining how new service offerings and the recession will lead to contract renegotiations.

But Chamberlin cautioned that not all companies will be able to renegotiate with their application hosting providers, which range from traditional providers such as IBM, Computer Sciences Corp., NaviSite Inc. and Electronic Data Systems to telcos such as AT&T, which bought ASP USinternetworking, and niche providers such as SunGard and Secure-24 Inc., which specialize in SAP.

For one, most contracts have specific renegotiation time frames that can't be broken unless you already have clauses written into your contract for special circumstances such as price decreases of at least 10% for similar services in the market, or less-than-stellar service delivery, Chamberlin said.

Your ability to renegotiate will also be affected by the scope of the service and agreed-on cost base line, the service-level agreements (SLAs) and associated terms and conditions, the duration of the contract and penalties and benchmark clauses, Gartner said.

Chamberlin said users can build a business downturn clause into a contract to account for layoffs or the sale of a division so they don't have to continue paying for capacity for those users. But to realize a lower price, CIOs may have to make concessions, such as signing a longer contract, signing on for a broader scope of services or agreeing to lower SLAs or partial offshoring of the services, according to 'Potential Impact of Economic Downturn on IT Infrastructure Outsourcing Prices,' a Gartner survey.