Can managed services fit in a digital services model?

New digital models are disrupting managed services and leading enterprises to question their value going forward.

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The new digital business models are fundamentally disrupting the time-tested managed services model. As service providers introduce extreme automation into their service portfolio, enterprise customers tend to ask an important question: “Why do we need a service provider to exercise this function? Now that we’ve automated out 40-80 percent of the FTEs, wouldn’t we be better off owning the remaining people and locating them closer to the business?” 

The disruption of digital models challenges fundamental assumptions of the managed services model.

Every mature service provider has a strong desire to find managed services work that spans multiple years. It provides a steady of book of business they can rely on and invest in. It also gives them a constant presence in their customers’ businesses, allowing a service provider to better understand and respond to needs as they occur. From a client perspective, having a service provider that understands the business and is available to respond to needs without having to go through a large learning curve is also extremely beneficial. Thus, the managed services model is a win-win for both parties.

Digital is changing that picture. The extreme automation at the heart of digital service models eliminates the execution arm but retains the thinking, analytical component of a process. Historically, this component is the part of the business that many enterprises have been reluctant to relinquish to a service provide. Hence the question about whether the enterprise or a service provider should manage that component.

This is not the only factor disrupting the managed services model. An entirely new delivery model is evolving in which highly productive cross-functional teams drive the environment. Google believes that a programmer equipped with the right acceleration tools and capabilities placed into a highly automated environment can be 10 times more productive than the average programmer. That’s extreme growth in productivity.

Furthermore, the cross-functional teams structure changes the alignment between IT and the business. Teams focus on creating business value rather than executing functional responsibility. It is not likely that these new delivery teams will be located in offshore factors focused on functional expertise. They will be persistent teams, often onshore close to the customer’s business. The enhances team members’ productivity because they have traveled a steep learning curve.

Clearly this poses a huge challenge to a managed services business. This model is based on the benefits of a leveraged offshore team operating out of a factory environment focused on functional excellence. Digital models using cross-functional teams closely aligned with the business challenge this fundamental assumption of how the model delivers value.  

The question that naturally arises next is: Does this disruption mean we won’t have third-party providers of managed services? I believe the answer is no. I believe there is a vibrant role for service providers in running these environments. Having said that, as the managed services model evolves, it likely will look quite different from the existing delivery model.

No, I don’t think managed services will go away; providers just need to find the right fit. The shift from factory to a persistent team is at the heart of the struggle to understand and capitalize service models in the new digital environment. I believe it is also where we’ll see the emergence of the opportunity for ongoing managed services. I’ll watch this space carefully. But for now, it appears managed services are heading down the path I just outlined.

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