The Importance of Demand Management for Expanding Managed Services Scope

Introduction

Managed service contracts are agreements between a service provider and a client that define the scope, quality, and cost of the services delivered. They are often used to outsource non-core functions, such as IT, to external vendors who can provide more efficiency, expertise, and innovation. However, not all organizations are able to leverage the benefits of managed service contracts to their full potential, especially when they lack proper demand management practices. This article will explore the case of a US-based utility that is attempting to expand the scope of work included in their managed service contracts, but faces challenges due to its funding model and demand management practices.

Background

The utility currently has its operations and maintenance (O&M) application services provided through a managed service contract, but they use managed capacity and staff augmentation resources for enhancement and project work. This is because they do not have proper demand management practices to understand the amount of enhancement and project work that will be done across longer time horizons. This is largely due to how the work is funded. O&M work is largely funded through IT, which can plan capacity for this work across five-year time horizons and is therefore able to commit this work to a provider for managed services work. The business, on the other hand, forecasts work on a one-year or ad hoc basis for the work they expect IT to do (mostly application development and testing work), making it very difficult for this utility to dedicate any non-maintenance work to a managed service contract for application services.

Challenges

A lack of proper demand management practices can lead to a variety of challenges for an organization attempting to expand its use of managed services. Typically, companies attempt to outsource their full scope of application related services to a service provider, which includes O&M and application development services. This leads to many benefits for the company, as the Service provider has visibility into and is held accountable for the full scope of services related to these Applications. Moreover, combining this work under a managed service leads to economies of scale that greatly reduce costs. Unlike companies with better demand management practices, this utility is unable to achieve an ideal managed services model, leading to the following challenges:

• • Higher costs: The utility pays more for its IT services than it would if it had a managed service contract for development-related work, because it must pay for T&M resources that are often underutilized and overpriced. The utility also misses out on the economies of scale and the cost savings that a managed service provider can offer.
  • Lower quality services: The utility receives lower quality services due to a fragmented scope that reduces performance oversight. When one service provider provides O&M and development services through a managed service, they are held to SLAs for the full scope of work. When the development scope of work is provided on a T&M basis, service quality declines for two reasons. Firstly, the development scope of work is not held to SLAs, which means there is no set financial penalty for poor services. Secondly, there are handoffs between the O&M team and development team, which lead to inefficiencies and a reduction in service quality.
  • Reduced innovation: The utility has less access to the latest technologies, best practices, and industry trends because it does not have a strategic partnership with a managed service provider who can offer continuous improvements and innovation. The utility also has less flexibility and agility to respond to changing business needs since it does not have a scalable and adaptable IT infrastructure that a managed service provider offers.
  • Increased management strain: The utility faces higher management strain due to the increased number of vendor teams involved in providing application services. This utility must rely on multiple vendors and contractors who may not have the same standards, processes, or tools. This lack of standardization in processes and many points of contact leads to greatly increased complexity in managing Application related services.

Conclusion

Managed service contracts are a valuable way for organizations to outsource their IT functions and gain greater efficiency, quality, and innovation. However, not all organizations are able to utilize managed service contracts to their full potential, especially when they lack proper demand management practices. The key to improving demand management practices is to create alignment between Business and IT outcomes. In this case, the utilities IT department needs to communicate to the Business that there would be significant cost savings associated with increasing their managed services footprint, thus creating greater incentive for the Business to work with IT to properly establish demand management systems. In the current state, if enhancement work were committed to a managed services contract and the budget allocated (from the Business) for that work is cut, IT would be responsible for paying the Service provider for funding they do not have. This fear makes it so that IT is not willing to commit any of this work, even though the work is consistent at some base level year-over-year. If the different business teams were able to consolidate development related expenses and commit this funding to IT, this work could be shifted to a managed services contract without leading to funding concerns.

By James Cantor, Senior Consultant