Businesses ‘must understand’ challenges faced by their suppliers

Businesses need to appreciate the challenges their IT suppliers face during the recession, according to analysts, in order to maintain a productive relationship.

IT suppliers are being confronted with fast falling revenues and are acting aggressively to protect their margins, analyst house Gartner said. Renegotiation of outsourcing deals, the development of software as a service, and forming an effective response to client budget reductions were major challenges.

It is crucial that companies appreciate the steps suppliers are taking to confront these problems and avoid bankruptcy, it said. This would help avoid strains in the relationship between the two parties.

Suppliers were likely to avoid reducing prices by more than 10 percent, because this would eliminate many of their profits, potentially heightening the risk of bankruptcy, Gartner said.

“Struggling providers will concentrate on protecting their existing business, and reducing cost, as the only approach to margin protection,” said Claudio Da Rold, VP at Gartner. “More-traditional providers will favour their capability-based business models, and will eventually accept a degree of revenue reduction (coupled with cost reduction) to maintain limited margin erosion, instead of embracing the high-risk transition of business models.”

They may also increase standardisation and automation in clients’ systems, as well as target potential partnerships, he said.

During and after the changes, Gartner said, firms also needed to check that their suppliers remained the “right fit”. It advised a six-monthly review of their IT suppliers’ health and risk, as well as a yearly evaluation of sourcing strategy.

But analysts also warned that businesses with a “wait and see” attitude to IT investment were inflicting heavy wounds on the suppliers they depend upon. Many businesses were putting major IT investment decisions on hold, said IDC, citing a “visible change” in demand.

"Companies are rethinking their top priorities, looking at projects that will provide an immediate return on investment, deferring large new IT projects, and turning to outsourcing to lower their cost structures," said Laura Converso, research manager at IDC.

The analyst firm forecast a three percent slide in project expenditure this year. But it said businesses would continue to invest in projects tackling customer retention, supply chain optimisation, and M&A integration.

Demand for application outsourcing and systems consolidation remained strong, said IDC. But overall IT services expenditure will decline 0.6 percent in Europe this year, it said, until modest growth begins in 2010.

Copyright © 2009 IDG Communications, Inc.

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