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Value-driven Application Management Services

The difference is in the results.


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IT landscapes today are large and diverse, trending toward more complexity, not less. That complexity has become costly – with 65 percent of IT dollars now spent maintaining existing technology.1 To control spending, many companies created new, specialized functions dedicated to managing applications and infrastructure. These have become prime candidates for outsourcing, driving explosive growth in the Application Management Services (AMS) marketplace. Gartner projects enterprise application outsourcing revenues to reach $87 billion in 2013. 2 Which is all well and good except for one problem.

The history of business is filled with stories of new ideas that come back to bite companies–unintended consequences that can ricochet through the value chain like bullets. They’re called revenge effects – and you can find them all over the outsourcing marketplace. To the extent that you’re supporting applications through a low-cost labor pool that’s isolated from the business, you can expect huge opportunity costs. Performance improvements in efficiency, knowledge transfer and automation can all suffer. Inertia can swamp agility. And you can sacrifice the value of innovation.

The problem usually starts with low expectations. Traditional AMS can create a divide between applications support and the rest of the world. Even worse, the support function gets moved to denominator of the value equation, where the measure of success is cost reduction through labor. So when you finally do get around to looking for improvements, the people and resources aren’t in place to deliver. Organizations then end up shuffling talent, hiring consultants, relearning and rebuilding. And the practical knowledge needed to respond quickly to changing business demands is hidden in the heads of a floating labor pool, out of reach except at prohibitive cost. Even worse, when improvements actually do happen, they’re usually thrown onto the pile of outsourced applications for someone else to manage. Old assets then get disconnected from new assets and the cycle continues. The minute an existing application enters a stable state, it’s put out to pasture with a “keep the lights on” mentality. The message to your organization is unmistakable: Anything that is already implemented is “old.” New assets go un-leveraged. 

Another part of the problem is the nature of the traditional applications outsourcing business model itself. For the most part, AMS providers have a strategic interest in pure labor arbitrage. Stable processes and more utilization make contracts more profitable over time. Change is a cost, not an opportunity for improvement. Even when implementation and management are bundled for procurement purposes, there’s no inherent motivation to help customers reduce the cost of ongoing maintenance. When your business depends on throwing an army of cheap talent against every problem, innovations that might shrink the army will be generally unwelcome. In response to this challenging environment, forward looking IT organizations are starting to view applications management not as an isolated element in the technology lifecycle, but as a capability that must be tightly linked to continuous IT improvement and business innovation. That is the essence of Value Level Management (VLM).

1 The State Of Enterprise IT Services: 2009, Business Data Services North America and Europe, Forrester Research, November 2009.
2 Forecast Analysis: IT Outsourcing Services, Worldwide, 2008-2013, 3Q09 Update, Gartner, October 2009

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