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Are managed services the 'Holy Grail' for app outsourcing?

Stephanie Overby | May 12, 2014
A managed service approach to application development and maintenance seems like a win-win for outsourcing customers and providers. But how do you make it work? Steven Kirz, principal with outsourcing consultancy Pace Harmon, talks about what a successful managed service deal looks like. How should a managed service model for ADM work?
Kirz:In a managed service model, a client looking to maintain a suite of applications needs to ensure that the supplier knows the good, the bad, and the ugly about the comprehensive application environment. Giving the supplier complete visibility into interfaces, incidents and outages, how data moves within the applications, and the infrastructure they sit on is required so they can gain a realistic understanding of the level of effort and expertise needed to maintain the apps.

The supplier applies this knowledge in determining ways to more efficiently manage the applications using their methodologies, tools, and locations worldwide. The client and supplier can then prepare a three- to five-year deal that includes SLAs to be met during the first year for a certain price, with pricing reducing in a graduated approach for each year thereafter to reflect the efficiencies generated by the supplier. We've seen many companies experience a 50 percent cost reduction over the course of five-year application maintenance deals.

Using a managed service model for application development requires a different approach as it is project-based rather than a consistent body of work. The same high level of visibility (as with application maintenance) should be given to suppliers regarding what needs to be developed and a fixed bid should be established with flexibility to build in ad-hoc projects. Milestones should be outlined and enforced for each development project. The biggest challenge for managed service models in application development deals is that business and IT stakeholders frequently have trouble agreeing on requirements as a first step. What else has to change beyond the pricing model itself for this kind of approach to work?
Kirz:Pricing is the starting point for aligning objectives between clients and suppliers, but there is much more to establishing a successful ADM deal. When clients go out to bid for a project, full transparency must be given to suppliers regarding requirements, existing applications, and their issues. Clients must also be clear on contract terms, including key SLAs and personnel requirements, upfront. Additionally, there should be no commitments required aside from a specific managed service level of effort that aligns with an agreed-upon fixed monthly rate.

To build in flexibility for future projects, it's wise to ensure the contract is structured to include staff augmentation, time and materials, and managed service pricing models so both the client and suppliers understand all options. This includes gathering rate cards, resource certifications, and so forth.

Another key piece is that both application development and maintenance should be included in all contracts for statements of work in order to enable any supplier that bids on application maintenance to also bid on application development work at any time through a statement of work rather than entering into a major contract negotiation.


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