Forrester: Credit crunch may freeze tech services projects

Forrester Research in a report is confirming that the credit crunch is beginning to hit technology services firms.

The extent of the damage is unclear, but IBM's lower-than-expected third quarter revenue (its earnings are stronger than expected) may indicate something worse is afoot.

Forrester's report indicates that customers are putting off new projects, trying to negotiate new terms and cutting contractors. The companies impacted could range from HP, which just bought EDS, IBM and Accenture to name a few. Forrester writes:

During recent weeks, we have seen some unprecedented events in the global financial markets that will also have a profound impact on the tech sector, including the services business. Service providers are already seeing their clients and prospects taking proactive measures to mitigate the risk of coming under severe financial pressure themselves. As a result, clients are deferring project decisions, consolidating their vendor relationships, and starting to renegotiate prices with their existing providers. While this is not the time to panic, service provider strategists need to be prudent about their actions and focus on key priorities, such as expanding global delivery capabilities, offering flexible payment and billing schemes, and positioning the underlying business value of their services.

Forrester's report is largely anecdotal. In fact, its most recent data gauging buying habits is already outdated.

Also see: IBM: Beats earnings target but…

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Clients are disappearing. Consolidation among key customers--especially in the financial services industry--is dinging service providers. Forrester quotes a partner at a large systems integrator saying that "it’s pretty hard to manage a sales pipeline if some of your key prospects or customers simply disappear overnight." Decisions are being put off. Customers aren't ditching projects completely, but companies are wary of making any big decisions. Thus far, deals are being put off three to six months to evaluate the new conditions.

Companies are financing IT services deals as they hoard cash. Services providers are offering flexible billing and payment options. The rub is that these providers could be on the hook if customers fail. For now the financing approach may be working. Forrester quotes:

“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.” (VP sales, global service provider)

It's renegotiation time. Forrester reports that clients are renegotiating rates and pricing. Providers were expecting to increase services rates by 10 percent 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." Vendors will be consolidated. Forrester--and others--have noted that customers want fewer vendor relationships to manage. The downturn will accelerate that move. One quote via Forrester: “We are currently working with one customer who wants to reduce the number of direct service provider relationships from more than 200 to five," said an account delivery executive at a large European services firm.