Managed Services - How Managed Services Can Help IT Departments Deliver Greater Value and Flexibility

Introduction

Some organisations look towards outsourcing to assist them in achieving their business objectives, and some prefer to retain the delivery of IT services in-house. However, Butler Group is seeing an increasing number of organisations not only using outsourcing to complement the services they are delivering in-house, but also implementing a multi-sourced model - that is, having a number of different providers deliver various aspects of IT requirements.

Large enterprises, in particular, are bringing back the 'mega-deal' - these are long lists of outsourcing requirements, but within these lists are smaller sets of requirements, many of which can be individually delivered through Managed Services. Essentially, where once characterised by the 'one-stop-shop' approach to outsourcing, large and enterprise-class organisations are requesting the delivery of more discrete Managed Services, which overall is a more effective sourcing strategy.

This is not to say that outsourcing is solely the preserve of larger organisations - both Small to Medium-sized Enterprises (SMEs) and Small Office, Home Office (SOHO) organisations are also regular users of Managed Services. Managed Services Providers (MSPs) deliver and manage network-based services, applications, and equipment to customer organisations. They deliver their services as a one-to-many or one-to-one service; the former service being used by multiple customers, and the latter having a dedicated service between provider and customer. Payment for both of these services is generally on a usage basis; for example, the number of desktops supported, or the number of transactions processed.

It is important to note that the key difference between IT Managed Services and strategic outsourcing is that the latter often involves the transfer of assets - both technology and staff-related - to the third party. This Managed Services Report does not cover outsourcing in this guise, nor does it cover project-based outsourcing.

The Managed Services model should enable effective MSPs to maximise the efficiency and quality of their offerings, due to their narrow focus on an area that can be improved iteratively. Along with the economies that can be derived from operating on a larger scale, Managed Services should be available at a lower cost than the customer organisation could achieve itself, thereby increasing value for the customer organisation.

However, it is not all a bed of roses, and undertaking the use of Managed Services can constitute a risk to an organisation. This is because it can create a dependency on skills from outside the organisation, and thus the extent of this risk should be quantified. If core, value-adding business processes and applications are outsourced to a MSP, the consequential loss of control over available resource levels (if they are not guaranteed) could result in a loss of organisational flexibility.

Contracts for Managed Services are typically shorter than those for strategic outsourcing. The latter can often be created to run for between seven and ten years, whereas Managed Services contracts can run for as little as 12 months, and for up to five years. The reason for this is the one-to-many delivery model which enables the service provider to achieve a shorter payback period for the service offered. Even with a one-to-one delivery model, it is still a shorter payback period than if the service had to be created from scratch for a new customer - the one-to-one model takes the basic service and modifies it for that particular customer.

Business Issues

Organisations must undertake Managed Services as part of a considered sourcing strategy, rather than just to alleviate a single pain point. Sub-optimisation - the reality of implementing a solution or service for short-term gain - can be detrimental to the overall effectiveness of an organisation. If one considers, for example, some of the 'siloed' IT environments that many organisations are now battling with, many of which came about as a result of autonomous decisions in individual departments, then the sourcing strategy argument becomes very persuasive. If a Managed Service is autonomously procured for a discrete service that affects perhaps just one or two departments, then the use of this service could have a knock-on effect within the IT department, e.g. in updates to other business IT systems. In other words, using a Managed Service to solve one pain point could create a multitude of further pain points - not the desired outcome. Thus, it is important to only use Managed Services as part of an overall organisational sourcing strategy.

This leads us on to the fact that as with outsourcing in general, any use of Managed Services should have commitment from all levels in the organisation, not just the individuals and departments that are affected. Essentially, this is part of the overall organisational outsourcing strategy - if board-level commitment has been achieved, then there is a much greater chance of the individual elements of that strategy being successful.

Managed Services principles apply across most verticals, and these principles include:

• The ability to save costs through the use of a third-party provider.
• The customer organisation has access to best-of-breed functionality that it may otherwise not be able to afford.
• Rather than worry about delivering services that are not its main area of expertise, the customer organisation can concentrate on its core competencies.
• The MSP will ensure that the customer is making optimal use of the service to which it is subscribing.

It is not, however, a case of finding a MSP to deliver a particular discrete service (or set of services) and believing that the responsibility for that service has been handed over to the third party - the management of a Managed Services agreement should not be left to chance. Organisations need to understand that they need to commit time, effort, and money to managing these contracts, and this is usually undertaken by having an in-house management team.

An in-house management team will manage and control all aspects of outsourcing agreements, including Managed Services. The role of the management team encompasses involvement in vendor selection and renegotiation (when the end of the contract is nearing, or there is a business need to renegotiate during the contract term). Furthermore, it will be directly responsible for vendor management, monitoring the delivery of the service, managing any changes to requirements, collecting metrics as regards adherence to the SLA, and providing both an exit strategy and an exit manager.

Leading on from the use of an in-house management team, we believe that the control issue is very important when looking at the business issues surrounding Managed Services. Unlike some of the more traditional outsourcing arrangements, particularly where staff and assets are transferred to the third-party provider, a significantly higher degree of control is retained by the customer organisation when using Managed Services. This is because it is a smaller service, representing perhaps just one or a small number of IT services delivered on a one-to-many model, allowing the customer to use the service in the way it feels is most appropriate. However, we should not forget that one of the roles of the MSP is to ensure that the customer organisation is making best use of the service, so it will be appropriate to take into consideration points raised by the MSP.

Technology Issues

Service Level Agreements apply across all of the different types of Managed Services. SLAs are an important business and technological element of Managed Services, and will specify the exact service that the customer organisation can expect from the MSP, including the stated maximum amount of downtime, escalation procedures, and service delivered.

Baseline requirements should be identified as part of a SLA so that all parties know and understand the service to be delivered. Measurement of the service needs to be defined, along with the detail of any thresholds to be applied. If there is no method of measurement identified, then there is unlikely to be agreement between the two parties as to whether or not the promised level of service has been achieved. However, although a SLA should be monitored to ensure that the service being delivered is the same as that which was promised, it is important for both parties not to be swamped by metric data, and this will help customers manage costs more effectively when compared to business needs.

Penalties are an important element of a SLA - if the Service Provider is not given an incentive to deliver the service (particularly in longer-term contracts) then the effectiveness is reduced (along with the confidence of the customer). This could be applied in terms of an incentive for delivering the service, rather than penalties for not delivering, but one or both of these must be incorporated.

In this Report we have broken down Managed Services offerings into a number of categories, and the following shows examples of the technology considerations for each:

• Desktop management: Before organisations consider managed desktop services, it is important to conduct a review of what assets - hardware, software, and licences - it holds. This will have the benefit of being able to consolidate and refine, e.g. only holding licences for software being used, leaving the Managed Services provider to come up with value-added benefits.
• Server management: Although server management is essentially a technology-driven service, standardisation in market offerings should not lead customers to neglect business requirements in sourcing server management.
• Network management: This is not a one-size-fits-all service, and at some point the MSP might well be expected to assist in bringing about change in the network environment, and this should be expected to involve a number of stages - consultation, design, engineering, and implementation.
• Security management: Security policy is the essential integration between the organisation and the security infrastructure, and should be a foundation of a managed security service.
• Applications management: Applications are not a commodity, and many of them are strategic assets. Applications management is, therefore, a quite different type of service to other Managed Services in terms of customers' decision factors about service providers - in particular, the primacy of the cost consideration can often be subordinate to whether value-adding knowledge and experience can be made available.
• Storage management: As one of the key technologies underpinning service management, storage is a challenge to manage effectively, in terms of balancing workloads among applications competing for computing and storage resources.
• Mobile management: An effective managed mobile service must address the entire lifecycle of a wireless solution. Services should encompass deploying, configuring, securing, tracking, supporting, and retiring mobile applications.

Overall, the maturity of Managed Services in the different categories varies significantly. For example, Managed Security Services are one of the most rapidly-growing services, but there is still some confusion about what exactly is covered by different offerings. Technologically, the customer organisation must be clear about its requirements and on its understanding of what the various providers are offering before committing to any agreement.

Market Issues

The marketplace for Managed Services is still quite fragmented, with some sectors expecting low growth or even remaining static, whereas others have high growth forecasts.

Network, voice/data convergence, and security services are the highest growth markets, being driven by the need to roll out next-generation networks and secure them (a key activity for many organisations), in order that they are subsequently able to attain the many business benefits. However, getting there is not a well-trodden path, and Datamonitor estimates that half of outsourcing spending in the network and voice/data convergence domain is likely to be dedicated to network consulting and integration - in other words, professional services which enable a client to migrate to a next-generation network, including designing network architecture, planning for architecture evolution, and integration of disparate corporate networks.

Security and privacy outsourcing is a key piece of next generation network roll out. These include business continuity services, and are also attracting high rates of growth, at roughly 15% per annum through 2010. Spending on security is relatively inelastic when compared to other IT domains. Interestingly, securing communications networks is among the highest growth domains within security services, indicating a strong link between growth in spending on network voice/data convergence and security. The focus on security is yet more important when implementing a next-generation network, fuelling this growth further.

Almost 40% of organisations are likely to outsource aspects of their infrastructure in the next two years. Datamonitor's research shows strong interest in outsourcing infrastructure in the next two years, across the range of technology, and that network and voice/data convergence, and storage, are the key priorities. However, there is significant potential for growth in outsourcing within all infrastructure areas covered by Managed Services, despite the fact that cultural issues can often be an inhibitor to usage.

We have found during our research for this Report that services requirements are converging across technologies, and are likely to continue to do so in the future. Advances in infrastructure technologies are constantly enhancing the capabilities delivered to owning organisations and their customers, and in many cases are becoming a close foundation layer for business capabilities. However, the same advances also bring about changes in requirements for dealing with each area of infrastructure, and it is noticeable that requirements that were formerly isolated can now merge with others, and some can migrate to one or more different areas of the services matrix.

The converging trend will have an effect on market offerings and vendor positioning, and require increased flexibility from both customers and vendors. It is unlikely that sales activity will lose momentum during this transitioning period, provided that customer organisations are adaptable to these changes, and the MSPs can evolve requirements that are appreciated by third-party advisors to companies looking at Managed Services and outsourcing, as well as the customer organisations themselves.

Conclusions

Butler Group believes that the use of Managed Services will increase significantly over the next five years. This is supported by the fact that organisations of all sizes are today making more intelligent sourcing decisions, enabling the procurement of discrete services to be as part of an overall organisational sourcing strategy. Indeed, organisations are being encouraged to think more strategically when it comes to outsourcing and thus Managed Services.

The benefit of increased business and financial flexibility, through the reduced need to commit to a long period of involvement with a single supplier, can make the proposition attractive to SMEs and larger organisations alike, although the importance of commitment from all levels within the customer organisation should not be forgotten. Furthermore, customers need to spend time, effort, and money to support their Managed Services contracts, through the provision of an in-house management team - Managed Services is not a 'hire-and-forget' option.

Ultimately, Managed Services can provide benefits and deliver added value to public and private sector organisations alike, but only by being properly prepared can organisations hope to realise these benefits.