In the late 90s, as the internet came of age as a place where real business could take place, we started hearing of a new way of consuming software: Application Service Providers, or ASPs. Why install and maintain software on your server if you can connect to mine where it’s always available and updated. Spare yourself the grunt work and hit the ground running.
Was that the birth of Cloud Computing? It may have been. But was that Cloud Computing? Certainly not. What we came to recognize as cloud services is a set of services orders of magnitude more complex than what ASPs offered us in the early days.
Today, we hear more and more about Managed Services. As a category, it stands in close proximity to the familiar concept of Outsourcing. Are Managed Services, like cloud computing, a dramatic evolution, or a point of departure? I would argue that Managed Services are the latter, a very different way of approaching a similar problem faced by the enterprise.
What are they?
Outsourcing and Managed Services are two popular strategies that allow organizations to delegate specific functions to external providers. While both approaches involve the engagement of external parties, there are distinct differences in terms of scope, control, expertise, cost structure, and the nature of the relationship.
What they have in common
Outsourcing and Managed Services are priced in a similar fashion. Both are often structured as contractual agreements where the client company pays a predetermined fee or rate for the services provided by the external party. This can help in budgeting and cost control and allows the client company to have predictable expenses and avoid large upfront investments.
Both models excel in scalability and flexibility, enabling organizations to adapt to changing business needs and technological advancements. Outsourcing and Managed Services providers offer scalable resource pools that should easily accommodate fluctuations in requirements, whether it’s scaling up during periods of growth or downsizing during lean times.
How do they differ?
Outsourcing typically involves contracting an external company to handle specific non-core or peripheral business or IT functions. This can include activities such as customer support, network maintenance, accounting, or manufacturing.
Managed services primarily focus on the ongoing management and support of specific systems or processes. It works in closer proximity to management and acts as its operational arm. Its performance will be measured by the direct impact it has on the value chain.
With outsourcing, the client company often has limited control over the operations and decision-making of the outsourced function. The external provider assumes responsibility for managing and executing the tasks.
In managed services, the client company maintains a higher level of control and oversight over the outsourced function. The provider operates within defined parameters and under the guidance of the client.
Outsourcing is typically sought when the client company lacks the resources in a particular area where expertise requirements can vary. The focus is on augmenting capacity while leveraging the capabilities pool of the external provider.
Managed services providers are chosen for their specific expertise in a particular business process. They are expected to possess deep domain knowledge and to stay updated with the latest industry trends. More critically, they are required to translate higher level business requirements into plans for execution.
Nature of relationships
While outsourcing can involve long-term relationships, it often focuses on specific projects or functions. The engagement may be more transactional in nature, with less emphasis on ongoing collaboration and development.
Managed services are typically structured as ongoing partnerships between the client company and the service provider. It involves continuous support, collaboration, and regular communication to align IT strategies with business goals.
Service Level Agreements (SLAs)
SLAs are more common in traditional outsourcing arrangements, as the focus is primarily on meeting project objectives or delivering specified outputs. Delivery metrics and response times need to be carefully formalized.
Managed services metrics are much more ambitious. They are often governed by overall business goals, which should describe outcomes that can be frequently measured in financial terms. Managed Services providers aspire to have a much more symbiotic relationship with their clients than traditional outsourcers.
A leap forward
While Outsourcing can be suitable for specific projects or non-core functions, Managed Services offer a superior approach to value-based endeavors. The ongoing support, expertise, long-term partnership, and cost-effectiveness provided by managed services providers make them a more reliable (and just as economical) source of productive resources in areas where quality and knowledge are critical. Beyond simply hiring out, Managed Services aspire to have a more transformative impact in the operational makeup of the enterprise. Owners and managers can focus on steering the ship while looking for specialized teams capable of operating in more careful coordination with the big plan.