More IT Services Contracts to Come under Review

By Michael Vizard  |  Print this article Print


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IT consultants should heed the opportunity coming out HP's acquisition of EDS -- customers who are now able to re-evaluate the long term contracts those customers had been locked into. Smaller IT consultants could potentially gain as such contracts get shorter terms and come under more pricing pressure.

Now that Hewlett-Packard is moving to cut over 24,000 jobs in the wake of its merger with Electronic Data Systems, there is a lot of speculation about what all this ultimately means for the IT services industry.

The more negative-minded folks typically see this as a move to reduce HP’s cost structure around EDS by relying more on workers in places like India to replace more expensive workers in the U.S.

But if that’s a core tenet of the HP plan, the odds are good that it’s likely to fail on several scores because things are a lot different in the world of IT services than they were a just a few short years ago.

With the sale of EDS, a lot of customers that were once locked into long-term contracts can now look to get out of those deals. In recent years, it’s become pretty clear that what first looked like a good deal proved to be somewhat expensive. That's because a lot of the costs of IT services started to escalate as EDS looked to recoup some of the profits it lost in a lot of IT contracts that had some very favorable initial rates.

The end result of these deals is a new reluctance to sign long term contracts. Instead, IT organizations have come to see IT services as being similar to IT products in that the services have a defined price. That means that rather than signing a multi-year contract, they would rather put defined scopes of work out to bid every one to two years to get the best pricing available.

Secondarily, a lot of them are less enamored with IT services delivered overseas. While the providers of those services are technically competent, providers of those same services that are local are often seen as being more responsive. And given the value of the dollar and rising salaries in India, it’s becoming a lot easier for local IT service providers to compete.

None of this means that local IT services companies will not have to fight tooth and nail to win new business. But it does mean that no matter how much HP relies on offshore outsourcing to be competitive, there are no guarantees that it will hold on to the majority of the existing EDS customer base.

That means smaller IT services companies, even with the presence of IBM Global Services in the market, stand a good chance of winning a lot of new business in the months ahead as customers look find ways out of long-term IT services contracts that given the current state of the economy and technology in general now look ill-advised.



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