Gartner on IT service providers

In today’s economy, IT service providers are faced with declining market revenue and a need to protect their margins.

Organisations therefore need to understand the changing behaviour of IT service providers and the measures they take to avoid unforeseen business and operation risks, according to Gartner, Inc.

“2009 and 2010 will be a critical period for the outsourcing and IT services market,” said Claudio Da Rold, vice president at Gartner. “Organisations are concentrating on IT cost reduction and aiming to improve their business performance and flexibility. We predicted in the first quarter of 2009 that the global IT services market will decline 1.7 per cent in 2009, and we are reviewing this forecast with an even more cautionary orientation.”

Gartner predicts price erosion in infrastructure outsourcing from 5 per cent to 20 percent through 2010. For application services, there has been a broad set of price reductions, from the single-digits in India to the high of 10 to 20 per cent in China, and intermediate levels in Europe and the US.

As a result of these various challenges, end-user organisations should expect very different behaviour from their providers.  “Struggling providers will concentrate on protecting their existing business, and reducing cost, as the only approach to margin protection. The duration of the downturn will dictate their future.” said Da Rold.

To increase the alignment with IT service providers during the downturn, Gartner recommends that they include the following due diligence activities:

–  Every six months (at least) — examine evidence of their strategic/major provider’s investment profile, and the announcement/availability of industrialised offerings.

In addition, due to market volatility, they need to:

–  Every six months — re-evaluate the health of their major providers, and refresh their risk analysis.

–  Every 12 months (at least) — re-evaluate their sourcing strategy to align to business requirement changes and account for markets, providers and new offering developments.

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