Managing the Managed Services - Part 2

In Part 1 of this series, I defined a managed service, shared potential benefits and a brief overview of the key components of a successful managed service. In this article, I will share some practical considerations of implementing managed services.

Complexity of implementing a managed service

Implementing a managed service can be extremely complex – managing by outcomes can be difficult for teams and may require a lot of education and change management. Companies that have co-sourced extensively can consider this model to look beyond labour arbitrage and determine new areas of value generation and outsourced portfolio optimisation.

Instituting change is always a complex phenomenon especially when teams that are used to managing people are asked to manage vendors by deliverables and review work by outcomes. The occasional escalations about the skill and experience level of resources may get raised no matter what is the nature of engagement. Since the complexity is very high, the transition to managed outcomes is recommended to be gradual and done in a phased manner to reduce risk.

Design the transition into managed services to be gradual

Service providers will not typically agree to share risks and to SLAs unless they have better visibility into historical volumes, peaks, and lows, and understand the scope from ownership perspective. That is the core reason that most annuity efforts start as Time and Material (T&M) nature contracts. As the vendor gains experience and has better visibility into the effort, they are more willing to accept the financial and delivery risk.

Both sides (client and vendors) need time to understand the implications and ensure readiness to operate in a managed service model. As a best practice, organisations should not sign outcome-based contracts unless there is sufficient incentive and benefits are clearly evident. As a practice, it is advisable to introduce a pre-managed service phase that formalises the readiness required to move into managed services. A gradual transition approach will help clients with developing better trust and confidence on vendor delivery. The pre-managed services phase can be run like a project with specific deliverables:

• mutual understanding of drivers, value and benefits
• establishing scope boundary – size, scale, stability and volumes
• establishing data capture, SLA and performance mechanisms
• instituting formal governance and reporting
• establishing demand and capacity/charging models
• demand assignment and prioritisation mechanisms
• defining future state and continuous improvements roadmap
• ensuring vendor accountability, leadership and commitment
• negotiating incentives including productivity improvements
• establishing employee training and transition plans

The value levers in managed services

Outcome- and service-based contracts require structuring around outcomes and service delivery instead of resources. The focus should shift to optimising processes rather than being on the quality of resources assigned to projects. Managed services can essentially be your first team towards portfolio optimisation as it can open up lot more value-generation possibilities.

Labour arbitrage is only a small percentage of savings that firms can generate from outsourcing. More savings can accrue from process improvements, automation, consolidation, resource and technology pooling and freeing up of day-to-day oversight when efforts can be managed by outcomes.

Best practices

Implementing managed outcome models without proper readiness can lead to several issues; establishing balance between provider delivery competency and stakeholder expectations would be essential.

• Establish management support. Top-down support is important to drive conversions. Effort owners may resist the level of effort and change required to move into managed services and ignore the value they may be able to generate and sustain in the long term. The other need for top-down support is to transition displaced employees for exit or into more strategic initiatives.
• Keep the focus on value, maturity and readiness. Focus on clearly articulating the value from managed outcome engagements and make sure agreed outcomes drive towards win-win and are not one-sided. Establish mechanisms to: (1) establish business case that book value up-front; (2) review provider estimates to validate assigned capacity; and (3) track value generated to determine improvement areas in execution. Managed services direction will ask for increasing execution maturity and will establish a common understanding of estimation techniques and processes.
• Manage expectations. Even though vendors may be engaged for some time, their efforts may have been just directed to understand and run the operations (more likely what they agreed contractually) and not necessarily to optimise and generate value.
• Establish a consistent process. Work with your providers to evolve a process to transition efforts into managed services. Providers need the time and ownership to baseline various aspects of engagements before they can accept accountability.
• Evolve performance mechanisms. Evolve the SLA framework and other performance mechanisms that reduce delivery risk, enhance value and change behaviours.
• Implement informal workshops. Conduct educational sessions and trainings for effort teams to understand managed outcomes so that they can understand and apply what it means for them. Be prepared to address typical questions and evolve a FAQ and best practices documents. Typical concerns related to control, demand predictability, process and change management can be captured as part of these artifacts. Once you have some success, make sure those are showcase to broader teams.

Gaining maturity in managed services is a journey and can contribute towards deriving greater value from outsourcing initiatives.