CIO Straight Talk - Issue 4 - 40
These managed services deals are significant in size,
according to Schonenbach, from $100 million to $500
million, and the customers that pursue them are looking to
cut costs by at least 20% to 30%. "It's an easy number to
communicate to the market, but what comes with that is
risk because you don't own the process anymore," Schonenbach says.
Clients who pursue the managed services model must
spend more time up front mapping out the scope of the deal
and the desired outcomes in the contract. Some "are going
through them too fast, which creates a lot of ambiguity,"
says Schonenbach. "You need to spend enough time
together to create a mutual understanding."
The biggest risk, however, is that the client will continue
to treat a managed services arrangement like a staff
augmentation project, failing to give the supplier the
flexibility required to deliver the promised savings. These
relationships also require strong senior management
support in the initial phases. "It can't be a bottom-up type of
engagement, because there's too much resistance to this
kind of change," says Schonenbach.
Managed services make most sense in operational areas,
like application maintenance. Application development,
however, may not be a good fit, because these are often
one-off projects rather than ongoing processes.
While still in the early days, there have been a number of
large deals in this space in Europe, says Schonenbach.
CEO, Trestle Group
"Everyone is looking to
see how effective
managed services will be
for both parties."
2. Betting on Business Outcomes
When it comes to outcome-based pricing, outsourcing
customers are increasingly interested in business - rather
than basic technology - results. "It gives everyone a chance
to benefit from that linkage of the value of what's paid to the
vendor to the value that the client receives," says Ben Trowbridge, the founder and Chairman of outsourcing consultancy Alsbridge. "If you can get those two to sync up, it's just
It's a challenge for both buyer and seller to define what
those outcomes are prior to signing the contract, but early
adopters and BPO providers are hard at work in this area.
Providers who already have a business processing auto
claims, for example, have a distinct measure of what it takes
to process an insurance claim. "They've got a situation
where they control the outcomes and it's easier for them to
control the prices," says Trowbridge. "And everyone understands the metrics and pricing structures."
That's not often the case. In an environment where
clients want to move the procurement process along as fast
as possible, some are reluctant to give bidding vendors the
time to figure out individual business-outcome-based
pricing. And a vendor with 100 customers may not want to
take the time to develop distinct outcome-based pricing for
The client needs to take the time to make sure it wants to
head in this direction; the provider needs time to get the
metrics and pricing right. "Sometimes the desire is there,
but the metrics just aren't available," says Trowbridge.
Other times, business-outcome-based pricing just makes no
sense - say, if you're buying 100 images of server capacity.
44 CIO Straight Talk
Founder and Chairman,
"It takes a sophisticated
seller and buyer to
understand the outcomes.
Both have to want to do it,
and both have to want to
devote the time to do it."