Credit crunch may freeze IT services projects, says Forrester

by Editor 10/14/2008 2:26:00 PM
IT services firms are beginning to feel the effects of the credit crunch, confirms a new report from Forrester Research.

The report suggests that clients are putting off new IT projects, trying to negotiate new terms with providers, and cutting contractors. The exact extent of the damage remains to be seen, but analysts are not too optimistic.

IT services companies are witnessing their clients taking proactive steps to avoid financial risks. The clients are postponing decisions on projects, consolidating their vendor relationships and renegotiating prices with their IT providers.

The Forrester report gives several conclusions (all based on anecdotal data). First, clients are disappearing and consolidation among key customers is dinging IT service providers.

Second, decisions are being put off even if clients are not ditching projects completely. Deals are being postponed three to six months to evaluate new terms.

Third, companies are financing IT services deals as they hoard cash – IT services providers are offering flexible billing and payment options, but they could be on the hook if their clients fail. For the time being, the financing approach may be working.

The Forrester report also quotes an industry executive saying:

“While everybody talks about software-as-a-service, we have recently started to offer application services on the basis of a ‘sale and lease back’ program. I can’t tell you how much interest and demand we seem to have generated with this over the past two months alone.”

Fourth, clients are renegotiating prices and rates. Service providers were hoping to increase rates by 10 to 15 percent this year, but “anecdotal evidence suggests that overall consulting rates are more likely to decrease by 2 percent to 5 percent this year.”

Finally, vendors will be consolidated. Clients want fewer vendor relationships to manage and the downturn will accelerate that move.

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