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Gartner: Avoid long-term services deals

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Matthew Broersma ZDNet.co.uk

Published: 16 Jun 2009 17:31 BST

Organisations should monitor the health of outsourcing partners and avoid long-term contracts, according to research published by analyst firm Gartner on Monday.

Prices are falling in the world IT services market, which is good news for customers, but could drive some suppliers out of business, Gartner said. As a result, the firm recommends that customers periodically re-evaluate the health of major providers, and look at alternative service delivery models such as software-as-a-service (SaaS).

Gartner presented the research at its Outsourcing & IT Services Summit 2009, held in London on Monday and Tuesday.

Customers are spending less on services as a result of the economic downturn, and this is leading to a contraction in the overall services market, according to Gartner analyst Claudio Da Rold.

"We predicted in the first quarter of 2009 that the global IT services market will decline 1.7 percent in 2009, and we are reviewing this forecast with an even more cautionary orientation," he said in a statement.

Meanwhile, prices are expected to fall between five and 20 percent next year, Da Rold said. "As price reductions of more than 10 percent would be higher than the net profit of most IT service providers, they could potentially make them bankrupt," he stated.

Gartner expects prices in the infrastructure outsourcing business to fall by between five and 20 percent, according to Da Rold. Price drops in application services will vary by geographic location, from single digits in India to a high of 10 to 20 percent in China, and intermediate levels in Europe and the US, Gartner said.

For providers, the best survival strategy is to invest in delivery models such as SaaS that can allow them to cut staffing costs, while looking at approaches such as spin-offs and partnerships that can give them more flexibility, Da Rold said.

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For their part, customers need to use caution and should not be tempted to sign long-term deals, even if these are accompanied by steep discounts, Gartner said.

"For strategic relationships, especially in hard times, there is only one viable balance: win-win. If one side loses, the other loses, too," Da Rold stated.

In general, the economic downturn is giving buyers more scope to negotiate the terms of supplier deals, including pricing.

Earlier this month Forrester Research said software vendors are becoming more accommodating about pricing because of the economic crisis.

In May, UK IT industry body Intellect called for wider use of what it calls outcome-based agreements, a relatively new type of contract that binds suppliers to provide particular business results — and not just a service or product. Such contracts are the way of the future for private- and public-sector bodies with ever-shrinking budgets, Intellect argued.