The past two years have seen marked changes in how managed IT services are offered and how they are bought. These shifts have occurred in response to a competitive market where change is inevitable and buyer maturity has grown tremendously. Suppliers, in turn, are meeting the challenges presented by this new and evolving landscape with varying degrees of success. In addition, a wealth of managed services models now exist – ranging from simple skills augmentation through infrastructure and business process outsourcing – and offering alternatives to the traditional, “all or nothing” outsourcing model. This article discusses the varied commercial and delivery alternatives, their pros and cons for both buyers and sellers, and the future of the managed services space.
Staffing Model Approach
Adopting a managed services model may be as simple as sourcing/augmenting skills to fill gaps or address future needs. This staffing model approach is straightforward to establish and easy to scale. It is also particularly helpful as a stepping-stone when a significant change is taxing an organization’s existing resource capacity, or when change programs drive a need for new skills and technologies to be introduced internally.
While this staffing model can come with several challenges, when built and implemented well, it results in the development of mutual trust and drives productive partnerships for the long-term. One such challenge is that staffing may not develop in-house capability, so the knowledge developed is often lost once the engagement stops. Another challenge is that staffing and similar time-and-material models can encourage inefficiency in the supplier, who plans and charges on the basis of time expended, and often has little incentive to be efficient or to expedite a given project. However, these drawbacks can be addressed through commercial vehicles including shared reward models for speed and quality, as well as the inclusion of fixed price milestones within the staffing program.
Companies are increasingly looking into the broad variety of co-sourced alternatives. In this model, the client retains some small or large aspects of responsibility for a particular service and the provider takes on the rest. These types of partnerships have evolved tremendously and are now carefully crafted to match the unique strengths and specialties of both the buyer and the supplier.
When adopting a co-sourced model, smart companies should evaluate their internal strengths and keep those areas in-house. The challenge, then, is striking the optimal balance between in-house and third-party services. This model also requires tremendous flexibility on the part of the service provider/supplier, who must fit services around each client’s needs, thereby making each engagement unique. Another challenge for the provider is that these deals are rarely of critical mass. As such, they don’t enable the high flexibility offered by traditional outsourcing programs – but still require the high solution development skills and costs of the large deals.
Packaged offerings form a subset of co-sourced services, and while they have been in the market for many years, they continue to evolve to meet the specialized needs of customers, particularly for niche skills. Packaged offerings – covering, for example, support of a specific set of manufacturers and services in a client environment – can be bundled together, and often in aggregate form a formidable challenge to more traditional outsourcing.
In addition, software as a service applications are on the rise and, in some ways, are a form of a packaged offering. They’re centered on a service tool and process, rather than a skill set, and on freeing organizations from the maintenance, support and hosting responsibilities when it comes to their software applications. SaaS is also, for many, a welcome alternative to the well-known enterprise resource planning and customer relationship management systems, which can be slow, costly and risky to deploy. SaaS fits perfectly with the rise of Internet access and of portable devices like smartphones that are meeting the needs of a constantly untethered workforce.
Large-scale, full-scope outsource engagements are anticipated to continue in the foreseeable future, if for no other reason than that the deals of the past reach the end of their terms. Often, the easiest path for the client is replacement/renewal. However, the reliance on a single service provider in outsourced arrangements is waning – and providers are now increasingly carving out niche areas of expertise and addressing particular segments or “tower” requirements (such as network, data center/computing and applications).
Thus, the creation of smaller tower or capability-based outsource engagements, where several providers are aggregated to service a single, large project, is on the rise. Buyers will now offer requests for proposals that include a variety of alternative models – allowing bidders to respond to the whole or any number of the parts, often in different ways. The process of assessing such models, and then evaluating the overarching framework required to manage them, is challenging. Often deal intermediaries and consultants preside over the process to ensure all individual aspects of a project – as well as the project in its entirety – receive careful consideration. So while the buyer may face initial challenges in project governance, the quality and control benefits are clear.
Competing Service Providers
Deeply skilled providers are increasingly offering these quality benefits – filling the capability gaps left by the large service integrators and telcos, and improving the cost versus benefit as compared to the equivalent full-scope IT outsourcing engagement. These providers, rather than startups or smaller firms, are usually established firms with honed expertise – ready to take on niche areas with exceptional skills or take on general areas using new commercial models. In addition, these providers offer clients accelerated capabilities matched to their business needs, as well as greater turnaround in realizing ROI. Competition among providers of all types is increasingly strong, and the expert providers are now posing a more direct challenge to the mega-deal outsourcers – helping to drive down costs and increase project quality.
The last two years, especially, have seen the rise of new commercial and delivery models to meet the needs of the maturing buyer market. These models drive more value for the client and are better able to leverage service providers’ unique capabilities, while improving the competitive position of the clients they serve. These trends will continue, as will the growth of SaaS and the maturing of other tailored/packaged offerings, to satisfy the increasingly savvy buyer’s wants and business objectives.
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