Forrester forum: Businesses will pay service firms 'according to output'

Businesses will pay service providers according to whether they meet agreed objectives, rather than on a traditional time and materials basis, a leading analyst at Forrester Research has predicted.

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Businesses will set contracts to pay service providers only if they meet agreed objectives, rather than on a traditional time and materials basis, a leading analyst at Forrester Research has predicted.

The shift of responsibility, where IT service firms would only receive payment if they met agreed targets, has been prompted by "clear evidence" of application service providers and software developers increasing the percentage of their business carried out in this way. This is according to Andrew Parker, vice president at Forrester Research, and director of the Services and Sourcing Forum, which takes place 29 - 30 November, in Nice.

In order to meet price objectives, many service firms have shifted application management services to low cost centres such as India, according to Forrester.

Most large service providers have begun to make the change, said Parker. For example, LogicaCMG bases payments on approximately 30% of its application-related contracts around meeting set output objectives. This represented a "significant increase" from mainly delivering those deals on a time and materials basis, Parker said.

"In the last 12 to 18 months, there has been an exploration of the value-led approach to service delivery," Parker explained. "Service providers are starting to agree a set of deliverables and taking responsibility for achieving that in order to receive payment."

Parker said businesses were increasingly demanding such contracts, in response to a growing need for effective processes and the ability to quickly respond to competitors.

Service providers are also standardising much of the code they used, in order to help them meet these tougher demands. "About 30% to 50% of code is often reusable from one client to the next," Parker said.

Sourcing strategy and preparation, and vendor management issues will be some of the key themes at the Forrester’s Services and Sourcing Forum this week.

Service delivery has come under the spotlight in the UK, with broadcaster BSkyB suing EDS for £709m, claiming the IT services firm could not deliver on its promises in 2000 for a customer relationship management system. EDS denies the claim, saying it was only able to work on a time and materials basis because Sky "did not know what it wanted" from the £48m planned system.

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