I often get asked whether managed service is just hype and nothing but glorified “time and material” (T&M) in a different guise. Usually we understand a managed service to be measured, and paid for, based on a pre-defined effort and output for the work in hand, as opposed to T&M which is a simple calculation of the amount of time taken multiplied by the rate card value, plus the cost of any materials consumed. The simple answer is that it is hype if it is not done properly.
Take the example of data warehousing, i.e. the combining of data from multiple sources into one comprehensive and easily manipulated database, in the retail and financial service industries. These sectors have traditionally used T&M-based data warehousing services but have gradually realised the need to move to a managed service model to help contain costs as these industries feel the growing impact of regulation. Here are the steps I advise my clients to follow when moving from a T&M-based model to a more effective and efficient managed services model in the data warehousing space.
Moving to a managed service model requires a change of mind-set. Planning for the transition should only begin once this is fully appreciated and stakeholders are aligned with the decision.
Begin by planning an intermediate transition from a T&M to an estimation model-based service, rather than jumping direct to a managed service-based system. Using an estimation-based model involves asking the supplier to define the input required (e.g. in estimated time) for a defined output. Then you can think about the steps you will need to take to move to a fully managed service to allow you to document and discuss them with all stakeholders and suppliers. Be wary of some suppliers becoming defensive and attempting to use the contract to wriggle out of a move to a managed service at this stage.
ISG has a standard playbook which contains parameters to assess fit for a move to managed service. Questions that need to be answered in the affirmative to determine whether it is suitable for your business include:
- Is the service environment relatively stable? I.e. are there a limited number of tickets or changes to the data warehouse?
- Are the requirements fairly well defined and understood? I.e. do both the business and IT teams understand the contours or the data warehouse?
- Can the market and/or your organisation define clear units of work for the service? I.e. is a business requirement accurately broken into technical components which are subsequently broken into effort estimates, which can be costed or priced?
- Is the service provider’s underlying cost base relatively fixed and static? I.e. would an additional unit of requirement/change require the provider to bring in new capacity to service the requirement/change?
- Are the expected future volumes fairly static? Or is the business predicting a lot of changes/requirements over the next couple of years due to market changes or M&A activities?
- Can the defined outputs be mapped to charges? I.e. can the requirement be split into its technical components to facilitate transparent costing?
- Does the vendor have end-to-end responsibility/accountability for the service? Or does the supplier need to do a lot of “handshakes” with other vendors to deploy the requirement?
- Are there a relatively small number of potential variables in relation to units of work? I.e. each requirement is affected by a limited number of variables that impact the number of technical components required.
- Is your organisation relatively mature in the way it procures the service(s)? For example, you don’t have to undertake a new request for proposal to handle a new requirement and you can flex capacity among suppliers without disruption.
A central tenet of moving to a managed services model is to look for ways to improve productivity so that you achieve the same level of output for a reduced effort. Collaborate with your service provider to understand how your business demand impacts on their effort required to maintain and manage the data warehouse. Based on this knowledge you should be able to stabilise and standardise business demand and leverage the supplier’s economies of scale. Only after completing these steps should you proceed towards a managed services model.
Flex service levels where necessary to allow the service provider to balance supply and demand. This will allow you to understand if the service levels are fit for purpose. Test if the service levels work from an end-to-end perspective with the wider technology supply chain.
Finally, during the course of your negotiations, ensure you don’t sacrifice a good working relationship for a reduction in costs. In the data warehousing world, amongst others, this could negatively impact the service you receive.
In the data warehousing space incremental change is good. For those organisations that are already partway along this journey standardised elements, such as off- the-shelf data marts, can be used provided the end user, i.e. the business, understands the implications. It is essential that a move from T&M to a managed service be carried out with the business in mind at all times.