Defining Managed Services

Since blogging on the topic of the services spectrum, a few folks pinged me regarding a tighter definition for managed services. This is a timely conversation because TPSA is currently recruiting companies to participate in our first benchmark study for Managed Services.

Previously, I defined managed services in the following way:

Managed Services:  Paid to Operate. Services designed to help a customer manage their technology environment on an ongoing basis. Provider does not take direct ownership for customer employees or capital. Contracts are time based and often include target service level agreements. Pricing can be fixed or activity level based.

This definition is very simpatico with other definitions that exist in the public domain. For example, Wikipedia entry on managed services provides the following definition :

Managed Services is the practice of transferring day-to-day related management responsibility as a strategic method for improved effective and efficient operations. The person or organization who owns or has direct oversight of the organization or system being managed is referred to as the offerer, client, or customer. The person or organization that accepts and provides the managed service is regarded as the service provider.

Typically, the offerer remains accountable for the functionality and performance of managed service and does not relinquish the overall management responsibility of the organization or system.

PC Magazine encyclopedia also provides a definition:

An umbrella term for third-party monitoring and maintaining of computers, networks and software. The actual equipment may be in house or at the third-party’s facilities, but the “managed” implies an ongoing effort; for example, making sure the equipment is running at a certain quality level or keeping the software up-to-date.

Ok, so multiple sources are in agreement on the general definition of Managed Services. But apparently that is not folks are asking me for. There seems to be a lot of confusion between what exactly constitutes that something is a managed service as opposed to a professional service or an outsourcing service? I think there are five quick a dirty attributes service providers can use to determine what type of offering they have on their hands. These attribute are summarized in the image for this entry:

Let’s go through these five attributes:

Customer Objective: When a customer brings in technology consultants for a project, they need something designed and integrated. When a customer decides they want to outsource their IT environment, they want the vendor to own all the headaches. When a customer signs a Managed Services contract, they want the vendor to operate a specific IT process in an optimal, best in class fashion.

Economies: Professional Services engagements are a one to one affair. Yes, consultants can take their experience from customer to customer, but they deliver that value one customer at a time. In Outsourcing, the economies occur when the vendor takes all the different IT departments and activities and consolidates them. Managed Services create the unique advantage of providing a standard service offering to multiple customers.  

Differentiator: For Professional Service projects, customers are paying for expertise.  The more unique or valuable the expertise, the more the customer is willing to pay. In Outsourcing, customers want cost reduction.  The more you can save them, the more attractive the outsourcing option becomes. For Managed Services, the differentiator is not just cost savings but the belief that the vendor will be providing a best in class approach for the area being managed. This is why industry best practices such as ITIL become relevant when positioning a managed service. It may seem counterintuitive that a service offering would be positioned around the fact it follows a common industry standard, but the following press release provides a concrete example:

Sprint Announces Adoption of ITIL® Framework for Managed Services Customers

CA’s Process Maturity Assessment Confirms That Sprint Embraces ITIL Best Practices

Pricing: Professional Service engagements are priced per project. They can be structured as time and materials or fixed price. Outsourcing deals are structured over multiple years. Managed Service contracts are not short term projects but they also do not need to be structured over 3-5 years to be profitable. In other words, Managed Services contracts are structured somewhere in between. They can be priced per transaction, per system, or per time period.  

Measurement: Finally, PS engagements are measured on their ability to achieve project milestones on time and on budget. Outsourcing relationships are evaluated by their ability to truly reduce IT costs. Managed Services are measured on the ability of the vendor to deliver within target service levels. In other words, is the vendor managing the process more effectively than the company did when they managed the process themselves?


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