Automation - 80% price reduction? Where is the bottom?

I recently had a client who, for the last 15-years, was a legacy style "Big O" outsource shop. A few years ago, they merged with another company with higher operating requirements, which exposed critical flaws in the relationship with the service provider (notice the wording there - not necessarily flaws with the service provider, but in the way the relationship was structured). They tried to restructure the agreement in 2010 and made progress, but apparently not enough.

Late last year, the client tendered to the market a fairly large bundle of device management functions (no hardware, no maintenance). In the 4-years since the rates had been refreshed with the service provider, the market had reduced almost 80%. Not a typo - almost 80%. I have another client who struck a deal in 2009 and for the managed services components, it appears the market has shifted a similar percentage.

What's going on? Well, the recession for one. Similarly to what happened in the dot-com bust of 2001, when the going got rough, the pink slips flowed (telecom alone lost 300,000 jobs in the dot-com bust). As the economy improved, jobs return and life is good again.

Except this time it's different. Instead of hiring back employees, companies are investing in productivity enhancements - tools and processes designed to displace labor. I recently spoke with Erik Brynjolfsson, the author of "Second Machine Age", He noted that Apple Computers recently opened a plant in Austin TX not because labor is cheap, but because labor is irrelevant.

But here's the real challenge - the silent killer of giants. The older legacy providers have embedded business at the old rates. And the new kids on the block are aggressively poaching their business - they smell blood in the water. Think about it: suppose IBM or HP struck a 10-year deal in 2007. At the very least, the underlying labor-related rates are 80% out of market. At no time in my memory have incumbents been more vulnerable.

The bottom? If telecommunications rates are any guide, they will bottom out in about 5-years. A managed router that was $225/month in 2009 is well under $100/month today (under $50/month for very large customers). There is likely another 50% cost take-out in the next 3-4 years. Which is why it's important to (a) go to market to understand the costs; and (b) remain flexible to avoid being locked into a rate that rapidly becomes stale.