Executive Summary:

The nature of most projects, especially in the Information Technology space, are often complicated and require a great deal of coordination and resources to reach the objective. Due to the ever-growing demand for custom project solutions driven by corporate initiatives, many companies are seeking out the help of IT Managed Service Providers to offer guidance and support to their projects. According to Statista.com, the Managed Services market worldwide in 2018 was $173.4 billion in annual spend. By 2023, it is projected to reach $296.38 billion. The main appeal of outsourcing aspects of a project to a third-party provider is based around risk and liability. The purpose of this paper is to explore both the benefits and disadvantages to outsourcing, the relationships that vendors hold in projects, the risks involved and present the business case for employing a Managed Service Provider to assist in projects, varying in size and complexity.

 

Introduction

As the technology world gets more complex and consumers demand more out of companies in extremely competitive spaces, there is more of a need to stay ahead of your competition by leveraging technology. Within this growing industry, more and more companies are taking on new initiatives to help offer better customer experiences, automate mundane functions and streamline business processes. Most companies usually do not have the resources or expertise to carry out these projects, so Managed Service Providers (MSPs) are playing a larger role to assist by offering their outsourcing services, now more than ever. From a financial and management standpoint, taking on project endeavors is certainly a risk for any company. If the project is not executed well, the probability of the project being a failure increases significantly which is a large liability. MSPs also offer contingent support services, so the liability of managing short-term contractor employees is also the allure of an outsourcing model. There is often a cost-savings associated with the outsourcing model which makes it an easier decision for most companies to make but as much as it is good about MSPs, there are also potential negative aspects, especially when a symbiotic relationship between the requestor and provider does not exist.

 

The Make vs. Buy Decision

A common question that arises when a company decides to pursue a new venture is the Make or Buy decision. On the one hand, investing one’s resources (“the make”) to a project offers a higher deal of control, but that, of course, is under the assumption that you have the resources available. On the other hand, an aspect of a project minimizes one’s degree of control, may cost more but for the most part, you are promised industry knowledge to conduct a project (“the buy”) successfully. There are many other factors involved in the make or buy decision outside of those above. Some of the other factors to outsource include lack of expertise, limited capacity, procurement, and inventory considerations, and brand preferences. Some of the factors to pursue a project internally include unreliable or incompetent suppliers, greater quality assurance, and political, social or environmental reasons. (referenceforbusiness.com)

Just like any other project, which is inherently unique in nature, many positions need to be considered when making this decision based on what is best for the project and the organization. For example, one of the longest standing services offered by MSPs is Break/Fix support which entails a reactionary support service where when something breaks, an MSP will go out and fix it. Although this model is still used today, the reactionary nature is not conducive to some companies who cannot afford the downtime that is associated with the loss of connectivity (Peretson, 2011). Companies now need to get ahead of the possibility of technology failures to ensure they operate with little to no downtime. Additionally, if a smaller company experiences very few technical issues because of their fairly straight-forward environment, they might not need someone on a full-time basis. The same principle applies to infrastructure-based initiatives such as cloud support. Companies like Amazon Web Services (AWS), offer a “pay-as-you-go” service which charges a customer for only the amount of support or server space they need, which offers a great cost-advantage over the self-supported and maintained model. (aws.amazon.com) In addition to these support models, application development, security, network monitoring, and virtualization services are also large product offerings of MSPs. (CRN.com)

 

The Risk of MSPs

In any project, a very common topic is risk management. Projects contain many unknowns that need to be identified and planned out to include a reactionary measure to mitigate a risk’s effect. One of the main risk factors involved in working with MSPs is the contractual agreement side where both sides (buyer and seller) are both at risk. In a paper written by Bouchaib Bahli and Suzanne Rivard, the risk of outsourcing is explained through the framework of transaction cost theory and agency theory. As explained in the paper, “transaction theory is based on two behavioral assumptions” which are

  • that humans have cognitive restrictions of completely evaluating the consequences of every decision, and
  • that humans inherently tend to act in their self-interest. “IT suppliers may lie about – or exaggerate – their capabilities to use their knowledge advantage to sell IT resources to clients who have little experience” (Bahli and Rivard, 2003).

These two human behaviors expose the customer to the risk of acting without extensive due diligence performed. Factor in time-sensitive decisions and reactionary projects and these consequences magnify. Agency Theory is like transaction cost theory but assumes that “each party in the relationship has their profit motive,” (Bahli and Rivard, 2003) which causes a discrepancy in goals while in any ideal relationship, each party should act with their counterparts best interests in mind which causes conflict.

Based on these two theories mentioned above, four main risk scenarios need to be mitigated. This includes:

  • “lock-in” which is when one party cannot exit a contract without a loss of its time, money or resources to get the project or service back to steady-state with a new vendor.
  • Costly contractual amendments which assume an additional cost associated with having to alter the contract whenever it is necessary. Since most projects contain a certain number of unknowns, these amendments happen often.
  • Unexpected transition and management costs which can be stemmed from an unsatisfactory level of service usually caused by insufficient support personnel.
  • Disputes and litigation which are tied to the costly fees associated with a lawsuit (Bahli and Rivard, 2013).

All of these risk categories are associated with most contractual engagements but because the Information Technology field contains so many unknowns and environment pressures/factors these consequences intensify in cost and effect. To mitigate these agreed upon terms, most contracts or statement of works (SOWs) include assumptions that hold both parties liable to holding up their end of the bargain and service-level agreements (SLAs) that usually incur some financial penalty if the service quality falls outside of what is agreed upon.

 

The Relationship between Vendor and Customer

The relationship between a vendor and customer, in theory, should be as symbiotic as they come. Vendors need the customer to support their profitability and need cooperation in order perform their service as agreed upon, while customers need the vendor to ensure the proper resources and services are being devoted to the project for its success. As highlighted by the risks above, there are many consequences to choosing a subpar vendor but also consequences for disengaging from the said vendor. Because there is a certain amount of commitment involved, it is advantageous for both parties to work together to hold each other accountable to become better for the greater good of the project. The basis for any good relationship is trust, and this characteristic is what makes projects successful. As a trusted partner, a customer can feel at ease knowing that the vendor has their business’s best interest in mind. As much negative risk, there is involved in buying outsourced services, the benefits are apparent. In Deloitte’s 2014 Outsourcing and Insourcing Survey, some trends identified were that “vendors’ service offerings are continuously evolving to fulfill customer needs” and “the regulatory and legislative landscape will likely to continue to influence outsourcing decisions and to retain the flexibility to change direction rapidly for complex services, is key.” (Deloitte Survey, 2014) These trends are complemented by the current state of who is using outsourcing services and how often. For example, network (voice) support, 61% of respondents are currently outsourcing while 14% plan to outsource. In the application development space, 57% of respondents said they are currently outsourcing and 22% plan to outsource.

Additionally, for data center support, 51% of respondents current outsource and 26% plan to outsource. (Deloitte Survey, 2014) There are obvious reasons for managed service requests highlighted by the high volume of usage rates mentioned above, and as MSPs gain experience and are held to a higher level of service accountability, the service quality and innovation can only trend upwards.

 

Conclusion

The decision to engage in support activities with a Managed Services Provider is something that must be analyzed with the intentionality of business support in mind. As there are many risks involved in this relationship, based on transaction cost theory and agency theory, buyers do have to ensure that they make the best decision for the business. Although many risk scenarios exist, many mitigation techniques can be applied to minimize the financial consequences of them occurring. This should not take away from the fact that there is a growing demand for outsourcing services in the Information Technology field, especially considering the need for expertise and resources while endeavoring in complicated and costly projects. As a customer, it is essential that you choose the correct vendor to meet your technology needs and once a vendor is chosen through due-diligent considerations, it is important that you are open enough to view them as a partner to ensure the greater good of the project is in mind.

 

Bibliography

Bahli, Bouchaib, and Suzanne Rivard., 2013.“The Information Technology Outsourcing Risk: A Transaction Cost and Agency Theory-Based Perspective.” Journal of Information Technology, Sept. 2003, pp. 211–221., doi:10.1007/978-3-319-52651-5_3.

“Deloitte’s 2014 Global Outsourcing and Insourcing Survey.” Deloitte.com, Deloitte, Dec. 2014, www2.deloitte.com/content/dam/Deloitte/us/Documents/strategy/us-2014-global-outsourcing-insourcing-survey-report-123114.pdf.

Kuranda, Sarah, 2014. “Top Five Functions Outsourced To Managed Services.” CRN, www.crn.com/slide-shows/managed-services/2014/06/04/top-five-functions-outsourced-to-managed-services/cxcjwKJdXlBYL8QRqa4Tx3/8/index.html.

“MAKE-OR-BUY DECISIONS.” Reference for Business, www.referenceforbusiness.com/management/Log-Mar/Make-or-Buy-Decisions.html.

“Managed Services Market Size Worldwide 2017-2023 | Statistic.” Statista, www.statista.com/statistics/590884/worldwide-managed-services-market-size/.

Peretson, Robert, 2011. “Managed Services The Win-Win Model for Your IT Support Success.” MSPBusinessManagement.com, MSP Business Management, docplayer.net/4230386-Managed-services-the-win-win-model-for-your-it-support-success-by-robert-peretson.html.

“Pricing.” Amazon, Amazon, aws.amazon.com/pricing/

 

Author: Michael Lesce, Program Manager at Insight Global

Mr. Michael Lesce is a Program Manager at a Managed Service Company, Insight Global. He manages a portfolio of over $1 Million of revenue annually, specifically in the Infrastructure space.