Managed Services Model – Pros and Cons

Managed Services Model – Pros and Cons

by Raj

in Outsourcing

As detailed in the article titled ‘types of technology outsourcing models‘, yet another governance based technology outsourcing model is Managed Services.

Managed Services is widely acknowledged as the best model to adopt for technology outsourcing if you have a long term outlook. Widely tipped as the holy grail of technology outsourcing, Managed Services model is an attractive proposition both to vendors as well as the outsourcing organization.

Salient Features

Salient features or key characteristics of the model are as described below:

  • Also known as the Fully Outsourced Model, this is where the vendor takes complete, end-to-end responsibility of a set of deliverables in a project.
  • Vendor also has complete decision making responsibilities in providing the agreed set of deliverables.
  • Budgets, often calculated on the basis of named personnel working on the project, are set for a certain period of time, typically ranging between 6 months to 5 years.
  • At times budgets are also made for the entire piece of work, thereby making it more like a fixed price managed services engagement. In such a scenario, the vendor has a free hand in deciding how, where and with how many personnel the project can be delivered.  There are risks associated with such an approach as vendors may decide to allocate shared resources for the project resulting in delivery issues.
  • This model is often adopted when the work can be clearly scoped out with clearly marked out deliverables.
  • For this model to work, the vendor should have an excellent understanding of the client’s systems. The client in turn should be confident enough to hand over the piece of work to the vendor.
  • The role of the client will be that of a reviewer with additional responsibility of contracts management and budget tracking.
  • Vendor will be responsible for selection of resources as well as take responsibility of managing stakeholder expectations.
  • There will be clearly marked Service Level Agreements or SLAs for each deliverable and penalties applicable for non-delivery.
  • Delivery of service can be performed onshore at client location or offshore or a combination of both.
  • Managed Services model is often adopted by organizations as a continuation of an existing Staff Augmentation engagement. Adopting a managed services model from day one comes with lots of risks.

Example

This is an example of a client organization moving from a Staff Augmentation based project to a Managed Services based project. A logistics company implemented Oracle EBS with a total of 9 major modules spanning Financials and Order Management. The project was executed onshore with a team of 14 people and the company’s own Project Manager. All 14 members were contracted for 6-8 months from an IT Services vendor, and were on a Staff Augmentation model.

Once the project went live, there was a period of 1-3 months for post-production support and from the second year onwards, the same vendor was awarded a three year Support and Maintenance, Managed Services contract for the implemented Oracle suite. Responsibilities included Level 1 and Level 2 support, support for patches, upgrades and implementation of new modules as the contract progresses. The vendor proposed a reduced team of 7 personnel that included a Program Manager, 2 functional consultants – all three onshore, and 4 technical consultants including the shared services of a DBA offshore. The vendor was also covered by SLAs in order to improve responsiveness, with penalties for continuously missing SLAs and rewards for a high level of consistency in achieving the SLAs.

Pros and Cons of Managed Services

Pros

  • Since delivery and management of stakeholder expectations are the responsibility of the vendor, the client organization can fully focus on their core strategic initiatives.
  • Vendors can be more independent and can have a relatively interference-free management of the project.
  • It will enable vendors to make long term strategic investments that should indirectly benefit the client organization.
  • Vendors can also bring their best practices into the project, thereby making key process improvements.
  • Compared with Staff Augmentation, the SLA driven approach can, to a great extent, put to rest clients’ worries about management of stakeholder expectations.
  • SLA driven approach can also result in key process improvements delivering significant, measurable benefits to the client organization.
  • Knowledge retention becomes more streamlined and sustainable.

Cons

  • Vendors are sometimes reluctant to assume more management responsibilities.
  • Culture mismatch between client and vendor organizations can often result in lack of understanding among both parties, which in turn can affect deliverables.
  • In some situations, vendors wont be in a position to understand all of the client organization’s pain points as well as a clear understanding of the scope of the project, and ultimately might result in major setbacks.
  • In a multi-vendor scenario, where one vendor manages Applications and the other manages Infrastructure, blame games are common, with both parties not willing to assume responsibility for failures.
  • Process improvements sometimes can result in the reduction of manpower supporting the project, a scenario not favoured by vendors due to an inherent loss in billing.
  • Re-allocation of the contract, possibly due to performance issues or non-conformance of SLAs,  from an existing managed services vendor to a new vendor will become a huge challenge for the client, given the fact that the existing vendor will be less cooperative.

Managed Services is a proven model and this is what I can personally recommend to client organizations. But you should not start with it from day one. Begin with Staff Augmentation and slowly switch to Managed Services.