Companies and governments will spend $553 billion on external IT services on a worldwide basis this year, even as the services industry works to redefine itself, IDC said in a report released Wednesday.

The market research firm predicted services spending will continue to grow at a compound annual rate of 6.9 percent over the next five years. The industry is in the midst of a dynamic period in which services players are dealing with rapid change, IDC said, adding that the industry is challenged by new issues involving utility-based computing, new partnership structures, offshore strategies, and the delivery of project-based services.

"We think there is going to be a ramp up of acquisitions with larger companies picking up mid-sized companies," said Marianne Hedin, program manager of IDC Worldwide Services Research. "We expect to see a lot of acquisitions in the health care field." Europe in particular is ripe for acquisitions, she added.

Along with an expected surge in mergers and acquisitions, she expects partnerships among vendors will increase as they take advantage of each other's expertise. "They (vendors) are all looking at partnerships as a way to strengthen themselves in areas where they aren't strong," she said.

As an example, she pointed to the partnership between Accenture and SAP. That partnership has been a long-term relationship and continues to strengthen with time.

Utility-based computing was also cited as another important area. "The emergence of utility/on-demand services in outsourcing contracts will also add some pressure at renegotiation time," the report states. IDC predicts the utility computing phenomenon will grow across-the-board as clients increasingly demand that they pay only for the IT services they actually use.

Another area receiving strong attention was "project-based services," in which IT organizations are expected to increase their requests to services vendors to help address and fix specific problems. "For instance, it might be a systems integration problem," Hedin said, noting that IT organizations and services companies are likely to increase their cooperative work on any number of IT-specific projects. "And it (the project) doesn't have to be IT-specific. It could be about outsourcing " should we outsource or not? And, it could be business-specific."

The IDC report " entitled "Worldwide Services 2004-2008" " predicts also that services providers will keep building their offshore capabilities to provide global "on demand" resources and flexible delivery models.