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.

This meant that responsibility for delivery was moving over to those services firms, and away from the customer, said Andrew Parker, VP at Forrester and director of this week's Services and Sourcing Forum in Nice.

The issue has recently come under the spotlight in the UK, with broadcaster BSkyB 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.

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, Parker said.

He told CIO that he had seen most large service providers beginning to make the change, including LogicaCMG, which now based 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, he 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. “30% to 50% of code is often reusable from one client to the next,” Parker said.

In order to meet price objectives, many service firms were also delivering application management remotely from low cost centres such as India, which now had high levels of capability, according to Forrester.

See our reports later this week from Forrester’s Services and Sourcing Forum, where key themes include sourcing strategy and preparation, and vendor management issues.