Partnership boom: Just a symptom of depressed IT spending?

There is a trend in IT for supplier-customer relationships to be called partnerships. Anthony Plewes finds out why this is happening and whether it's a practice that's here to stay.

Partnerships are springing up as a name for what otherwise could be considered traditional supplier-customer relationships. In many cases, the supplier is simply trying to articulate that they are involved in the long-term plans of the customers but in some instances there is an element of risk sharing involved.

Sharing the risk in technology procurement is attractive for IT directors suffering from reduced budgets and working with sceptical financial directors. Instead of having to spend millions upfront on technology, a risk-reward partnership offers customers the option to pay a supplier only if they gain the productivity benefits the supplier promises them.

Tim Smith, MD of IT services company Sapient, says: "Customers have significant market power at the moment, which means they can exert pressure on their suppliers. But suppliers realise they are being squeezed on cost and budgets as well. The customer's reasoning is that they will pay the price but they need it to produce results. Many of our clients are asking us to share the risk in their IT projects."

The decision to enter into a risk-reward partnership for technology sales is not one suppliers should take lightly. They need to understand their prospective partner's business plan and judge whether it is worth taking the risk. Most companies would be advised to employ outside help for this task, as making a mistake could end up being very costly.

The key to success in risk-reward partnerships is to look for measurable business results. Both the supplier and the customer need to agree on what they want to achieve and how they can measure it.

In some cases this is going to be straightforward, such as cost savings or increased revenue; in other cases the metrics can be more complex.

Gerry Sheridan, VP at Hewlett-Packard's UK & Ireland technical solutions group, says: "For example, in an outsourcing relationship if the savings are more than the base agreement, then the outsourcer will be able to share this money with the customer. This requires trust and openness in the relationship such as through open book accounting."

Unsurprisingly, there appears to be no shortage of customers trying to tie their suppliers down to this type of deal. And it is not vertical-specific. All industries including the public sector are keen to take the risk out of technology deployment.

This trend can be seen partly as a backlash against technology oversell and the wild claims that are sometimes made by overenthusiastic marketing teams. Maxine Holt, an analyst with the Butler Group, says: "Organisations are tired of marketing spin. Customers are effectively telling the vendors to put their money where their mouth is and prove that their projected productivity gains don't just happen on paper."

What is perhaps more surprising is that suppliers are willing to accept these terms. Tighter IT budgets are undoubtedly an important factor here - as suppliers may think a risk-sharing deal is better than no deal at all - but some commentators say these deals can actually work out to the benefit of both partners.

"Suppliers can also reap benefits," says Butler's Holt. "They should be able to cross-sell more technology when they have successful projects because the software is not sitting on a shelf gathering dust." And because they continue to play an important part in their customer's business, suppliers are well positioned to bid for further business.

In addition, these agreements will not automatically put the customer in the best position, as Ovum analyst Katy Ring points out. "If the customers' plan is very successful then they might end up paying more than if they simply bought the licences."

Although risk-reward partnerships could be applied to most business situations, they are unlikely to become mainstream. Given the extra effort involved in setting up the metrics for the deals, most suppliers would be unwilling to consider this approach for any other than their largest customers. These partnerships also seem to work best in situations such as outsourcing agreements where both parties have already established service levels which can be directly translated into a shared risk agreement.

Partnerships as a concept are going to continue to play a big part in the market but are better suited to more traditional areas of cooperation, such as a telco and software supplier collaborating to sell services based on the latter's products to third parties.

BT, for example, has increased its revenue gained through its strategic partnership programme by just shy of 80 per cent over the last couple of years. Lucy Dimes, director of ICT and strategic partnerships at BT, says: "Partnerships allow us to meet the market's requirements quickly. They are positioned between organic growth, where you grow you company over time, and inorganic growth through acquisition."

These partnerships also have an element of shared risk to them, as the software supplier needs to develop a new service in cooperation with the telco and will only gain the revenue once the product has been sold to a third party.

Another type of shared-risk deal is hardware suppliers selling pay-as-you-use equipment. But these are considered to be more about proving a utility computing business model rather than creating a partnership-based strategy.

HP, for example, recently inked a deal with travel company Amadeus to provide equipment for its data centre in which HP pays according to each reservation processed.

This fits in with the utility computing end-game for hardware suppliers such as HP and IBM. And if these initiatives come to fruition, then raw computer power can be delivered on tap without the need for any complicated partnership deal.