There is much interest to evaluate converting staff augmentation engagements to Managed Services. Generally defined as a third party running a service for a company with agreed measurable outcomes, Managed Services promises to deliver greater cost savings and efficiencies by allowing the supplier more ownership of a process. Utilization of staff augmentation delivers benefits as well including a flexible workforce and access to expertise for short engagements. Should organizations completely move away from staff augmentation, the practice of “augmenting” resource gaps with external resources? What are the advantages and disadvantages of either model? What are the risks inherent in these approaches?
Brickred Systems advocates that staff augmentation and Managed Service models are not mutually exclusive. Staff augmentation will always be necessary in a dynamic environment. Organizations that find the right balance between staff augmentation and Managed Services will benefit by being able to focus on their core competencies.
Staff augmentation evolved from a necessity to address short-term resource constraints, budgetary pressures and headcount limits. This practice served the organization best when skills were required for immediate and short-term engagements. IT and operation managers utilized external resources to fill internal resource gaps while avoiding hiring people into fixed positions. When the project was complete, the external resource would no longer be on the manager’s budget. This model worked well until staff augmentation started to be viewed as a long-term solution. Projects were completed, however, the external resource’s contract was not terminated. As the external resource gained knowledge of internal systems, processes and people, he or she became valuable, if not indispensable. When one project ended, he or she was redeployed to the next project and continued as a contractor with the company for any number of years. The continued growth in staff augmentation (tens of billions of dollars, globally) is due to a number of market factors, including the profusion of professionals preferring to work as independents, steadily declining rates, seemingly never-ending margin pressure facing most companies and corporate policies restricting hiring. Nevertheless, staff augmentation, from a budgetary perspective, only works when an external resource’s contract runs for a short period.
Managed services clients look beyond traditional outsourcing criteria or hiring short term contractual staff to get the longer-term benefits they expect from a solutions partner. The key is to look beyond the initial savings proposition and ask “what’s next.” A traditional Managed Services model allows an organization to outsource the management, operations and delivery of processes effectively to lower a business’s total cost.
Managed services are the extra help that will save your day. With managed services, you’ll be free from necessary, but time-consuming tasks. You’ll be free to focus the right people and resources on the right things. Your strategic initiatives will fall into place all while increasing efficiency and productivity.This makes the model an attractive long-term strategy. The pricing structure, based on regular monthly billing around service levels and volumes, rather than per diem fees associated with staff augmentation, ensures that costs to the business remain within forecast. The reduced volatility in costs supports accurate and predictable budgeting.
Managed Services deliver more in the way of cost savings on the basis that the relative increase in costs as the business requirements grows and the service expands are significantly lower than the costs involved in further augmenting staff numbers and skills due to economies of scale, labor cost arbitrage and flexibility with staffing.
Typical Managed Services savings are because of following:
Pay only for the actual use of the service
Optimized value-add use of internal resources
Continuous Service Improvement (CSI) and efficiency gains over time built in
Reduced risk due to business volatility directly driving service demand
Supplier has flexibility with staffing engagements and with utilization and management of resources.
There are other reasons why a Managed Services model is advantageous in current market conditions. Perhaps the most attractive for the company is that the supplier assumes the risk of transition and future operations based on an agreed, committed scope and tenure.
Managed Services Reporting and SLAs
Any service should be continuously measured and reported, whether in a staff augmentation environment or a Managed Service. Managed Services reporting offers advantages by enabling a relevant and transparent end-to-end view for the end customer with a built-in focus on service performance improvement.
Key Issues with Staff Augmentation Measurement
Very limited and incomplete reporting is provided to the company’s users in general (mostly only upon special request or escalations from the business side)
Users are unable to associate their experience of the E2E (end-to-end) service with the service reporting provided (which is usually simply passed on in form of KPIs provided by the external supplier)
Business impacts are not accurately reflected in the current reporting
Reporting provides limited value in driving the right service debates and stimulating Continuous Service Improvement (CSI)
Reporting tends to be IT-centric and component-based (not business service focused)
Service Performance Indicator Model
There is a rapidly growing trend towards a more mature and relevant reporting paradigm – one that no longer focuses only on KPIs that are not measurable or relatable by the end customer. Based on the inherent alignment of business incentives in a Managed Service, service reporting becomes more focused and provides greater value to all parties involved.
For Managed Services, the approach of the Service Performance Indicator Model is driven by what the internal customers expect (requirements), which shapes a common and shared understanding of the outcomes that all parties (supplier, IT and the internal business customer) want to achieve.
The company (buyer of the Managed Services) and the supplier (provider of the Managed Services) describe the scope of work, the pricing model and the KPIs for control in their Service Level Agreement.
The SLAs also describe in detail, which KPIs underlie and drive a specific SPI (Service Performance Indicator). The SPI is the relevant indicator the customer can understand and relate to for the experienced quality of the service provided. It is also the only performance indicator the customer will receive in the agreed upon reporting intervals.
Comparing the Models
If an organization is involved in a staff augmentation engagement, transitioning to a managed services model can yield all of the benefits of flexibility and skill access it seeks, while overcoming the major disadvantages associated with staff augmentation described above.
The essential difference between the two models is that under a managed services model, the provider is committed to delivering an “outcome” at a defined price versus an “input” as under the staff augmentation model. An input is simply the performance of an activity with no commitment that the activity will result in the desired outcome. The managed service model drives a measure of value based on planning, as the organization must define the requirement on a service and performance criteria basis.
Pricing is tied to the outcome. Should the service requirement diminish or disappear, the associated costs react in kind. This provides the “scalability to demand” often sought in a staff augmentation model, but scalability that is tied to service.
Linked to managed services is a service commitment. Under the staff augmentation model, the only service commitment is hours of work. Under the managed services model, the provider assumes all of the risk of meeting the service commitment. The value creation is huge. As the provider assumes the delivery risk at a fixed cost, the provider is highly incentivized to establish productivity measures required to meet the service commitment. This manifests itself in the implementation of tools and processes, as well as extensive documentation, as the provider cannot afford to risk not meeting the service commitment by relying on individuals.
Documentation and process rigor also allow the service provider to move work through a global delivery structure with ease. Through the application of documentation, tools and processes, the service provider is able to deliver services reliably with fewer, more productive resources. The managed services model therefore is structured to deliver a commercially viable, low cost service offering to the organization.
Staff augmentation has its place in an IT department’s arsenal. Even in a managed services model, staff augmentation is often utilized for selected services at specific points in time. However, when staff augmentation becomes the de facto operating model for an IT organization, it constitutes an ineffective form of outsourcing that involves high cost, low commitment and high risk. IT departments utilizing staff augmentation in this manner should recognize that they are already “sourcing externally” and should seek to adopt a true managed services model to maximize value.