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: When the world’s largest chip equipment maker, Applied Materials hit a slump, its IT department was forced to cut costs. It wasn’t easy as CIO Ron Kifer had already slashed IT costs by 35% and reduced service providers to three in the last two years. Renegotiations with the three service providers—IBM, TCS and Wirpo—slashed the costs further but this was not enough. The nano-manufacturing firm decided to get creative and eased service-level agreements with its suppliers and demanded lower costs in return.

The key to bigger savings here was the flexibility in the managed services model. Managed services optimisation was one of the three tracks they had identified, according to Applied Materials India director, Global Information Services, Nagraj Bhat. “This model helped us to scale up and down based on business needs and better manage our cost structure,” he explains.

Applied Materials is not alone. Economic downturn has forced IT departments of several multinational majors to experiment with new models while outsourcing their IT operations. And offshore service providers are joining in the re-engineering exercise of their clients. HCL Technologies, for one, has helped a large aerospace and logistics company in consolidating a diverse set of IT applications during the last six months. This exercise has made them a “closer partner of the client’s CIO”, claim HCL officials. The trick, insiders say, is to find cost saving options that don’t punish the vendors. Analysts are also working out new models to cut further costs after the current round of renegotiations in such a way that vendors are not squeezed further.

These changes might have been forced by the economic slowdown but are far from temporary and might change the way IT is bought and sold forever. The paradigm shift in the outsourcing models seems to be irreversible, especially since this is a win-win situation for suppliers as well as buyers. “The entire notion of offshoring is changing,” says Forrester Research principal analyst Paul Roehrig.

Buyers and suppliers are now constrained to deliver cost savings through long term improvement initiatives, economies of scale, optimised service delivery and relationship management. Forrester is predicting a fundamental restructuring of the economy, IT spending and the supplier landscape in another survey of North American and European technology decision makers. It expects firms to have the desperation as well as the courage to rationalise the application portfolio as dust settles in 2010.