Managed services fails to deliver: IDC study

Some organisations experienced cost increases under their managed services providers.

Some managed service providers are not fully meeting the total cost of ownership (TCO) and return on investment (ROI) expectations of their customers, according to an IDC study.

The study, Managed Services and Why Choose a Telco: A Snapshot of Australian Business, found that 23 per cent of 100 Australian IT managers and decision makers surveyed have incurred an increase in costs under a managed services provider.

“That’s one of the highest figures in the entire region of Asia-Pacific — it’s higher than New Zealand, and the only place higher is Malaysia. Everywhere else, like Singapore for example, it's at 5 per cent,” said IDC Australia associate research director Dustin Kehoe.

“Some C-level [executives] want [ROI/TCO] within three months, six months, and most want it definitely within nine months… 44 per cent are saying costs have increased or costs have stayed the same. That means only 56 per cent have achieved cost savings.”

Kehoe said a “misalignment” and not being “realistic” in expectations are the main reasons for why cost reduction goals are not being fully met. He said it could be the doing of both the service provider and the customer.

“There’s some kind of misalignment between what [the vendor] is selling as a service provider and what the customer’s expectation is,” he said.

“It’s very difficult to deliver, even if you put it all in the cloud, any project that has, for example, a TCO metric of less than six months return. The way that most providers are able to map around this is to [decide on] a realistic time frame of a few years and within specific metrics."

However, this misalignment could be the customer's fault, according to Kehoe. He said that if price is the only criterion or one of two criteria an organisation uses to select a managed services provider, then this could potentially be a flawed model.

"In the short term it’ll give you the best price, but there are so many hidden costs behind that," he said. "If it's all about the transaction and price and squeezing your suppliers, then you will pay because the moment something breaks, the moment that you need to move, add, change delete… that’s when you are locked into a contract and the supplier plays the game of taking the money back.”

Despite the fact that nearly half of respondents had not achieved cost savings with their managed services provider, the survey showed that 75 per cent of respondents will increase their spending on managed services or spend the same amount in the next 12 months.

Kehoe said that investment in managed services is going to continue because IT departments recognise that they need to start freeing up their time to focus on innovation rather than ‘keeping the lights on’.

“IT is getting more and more complex and the more you hand off to a trusted provider the more things you can do strategically to focus on other areas,” he said.

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Mike Lovick


This study certainly supports my experience managing relationships with a range of tier 1 “managed service providers”.

We have all experienced the gap between the providers’ sales pitch, and the reality of their delivery, and the resulting detriment to these relationships. In the worst cases, relationships that had the potential to be platforms for significant innovation, value-add and revenue growth, become battles of attrition in which neither party reached anything like the potential, or even the expected, business benefit.

I recognise that delivering managed services at this scale is hard, particularly for telecommunications providers. The Telco’s need to understand that, from the customers’ perspective, they now “own the network”. The customers’ retained organisations have less and less operational and technical leadership capability and Telco’s are expected to step up with both operational and thought leadership – but it is not typically happening. Only when they do that will Telco’s find ways of delivering more customer value from the telecom assets that they deploy/manage for this class of customer.

I see issues in the siloed way the delivery models are often constructed. If the Telco owns the customers’ environment then they need to have a far more integrated approach to support/management and ongoing development of it.

In addition, it is essential to bring a different type of leadership to these accounts, with the right levels of authority and buy-in from the providers’ executive. A more much more holistic approach to these accounts is required.

Ultimately enterprises are looking to their strategic outsource and managed service partners to add value across a wide range of business challenges – not just the immediately contracted services. This presents a huge opportunity for the service provider community which have often addressed/solved many of these same challenges internally – The problem is that the conversations in the clients’ executive suite often struggle to rise above the noise generated by the disappointment around the core services.

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