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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.

In this model, the client will ultimately choose one application maintenance supplier with the expectation of reducing costs by 50 percent over a five-year period. For application development, it is more beneficial to choose multiple suppliers to create a competitive environment for follow-on deals. How receptive are vendors to the managed service approach for ADM?
Kirz:In our experience, suppliers have largely welcomed this approach as they can yield a much higher margin than with the commodity-based pricing of the time and materials or staff augmentation models. They also appreciate the increased visibility into the nuts and bolts of any given project, as well as contracts and requirements. Many suppliers realize this approach is more about building a long-term partnership than trying to reduce margin. You note the importance of clients providing full transparency about all the issues associated with their application work to their vendors. Once customers have made their requirements clear, should they demand that their vendors provide visibility into their proposed pricing, plans, tools, and resources for meeting those demands?
Yes, this piece is central to the model's success. Clients must retain the ability to compare apples to apples across deals with multiple suppliers. While traditional negotiations involve redlining contracts, we've found that it consistently saves months of time and produces more predictable results when clients establish their needs and stick to them. If they give full visibility to suppliers regarding their exact needs, then it should just be a matter of what price the supplier will charge for those services. Once the price has been established, clients can then focus on how to differentiate among suppliers by comparing resource quality, methodologies and approaches, and transition plans. What are the biggest benefits you've seen from the managed service approach to ADM?
Kirz:Well, one company's team that had been negotiating the same ADM deal for more than a year was able to close four ADM deals in four days each by using this model. But it's about more than the speed of closing the deal. Companies are more likely to secure the requirements outlined by business and IT stakeholders without having to compromise on key elements.

They can maintain a competitive supplier environment as well as land market-leading project pricing with a stable of development suppliers meeting identical contract terms. They get guaranteed application maintenance pricing for three to five years with the flexibility to shift work to qualified alternate ADM suppliers if performance doesn't hold up to standards.

They secure access to new thinking, resources, and tools among multiple suppliers that are aware of the competition and are trying to rise to the top. Finally, governance is easier with a standardized contract that multiple suppliers must adhere to. It levels the playing field.


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