Managed Services: First-Rate Benefits of Third-Party Hosting
Successfully deploying any enterprise software is challenging, and business performance management (BPM) is no exception. Projects routinely come in late and over budget due to problems with the technology, resource allocation, and user training, or because shifting priorities lead to scope creep. One simple way to manage these challenges and reduce the software's total cost of ownership (TCO) is to use a third-party hosting provider rather than installing the application in-house.
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The concept of hosted software is not new. Companies have been using external data processing services for payroll and human resources, ERP, and market analysis for years. But several things have changed in recent years to make a hosted environment more appealing for performance management software. For one, the current generation of Web-architected BPM applications makes outsourced versions more robust and easier to deploy than ever before. For another, data encryption and firewalls have alleviated many of the traditional security concerns around hosted financial data. Lastly, the remarkable growth of on-demand software in general has increased the appetite for solutions that speed up return on investment.
Benefits of Externally Managed BPM
Technology spending can typically be sorted into three broad areas: software, hardware, and IT staffing. Of these categories, software most directly impacts business processes. Hardware and technical staff are the means by which software is delivered to meet the needs of the end user. In a traditional deployment, a significant amount of money is spent on hardware and staffing, which leaves little money for software (only about a third of the IT budget, in my experience). In the outsourced model, software costs are usually about the same as they are for in-house installations, but the vendor gains economies of scale in terms of hardware and staffing costs, which frees up more of the budget (as much as 75 percent) for software.
How does a hosting provider achieve such dramatic economies of scale? By having its staff focus on one performance management product, unlike IT employees in the typical company, who wear many hats and support many different software systems at once. Customers of a service provider gain the inherent benefits of shared utilization of specialized technology resources for operations, maintenance, and upgrades of hardware, software, and networks.
Another plus of using the expertise and infrastructure of a company that specializes in deploying performance management software is that the software can get up and running more quickly than if the customer were deploying it in-house. This allows the company implementing BPM to focus on its use of the software rather than on the details of implementation of the software. Reducing implementation time also decreases the chance that the project will suffer from scope creep. Improving a project's time to value increases its chances of success and positive return on investment.
At one time, using hosted software equated to using a standard version of the software. This is no longer the case. Most BPM products now have Web-architected versions that are highly customizable to user requirements. Benefiting from economies of scale, service providers can offer enterprise-grade applications to companies of almost every size. A small, fast-growing company can access powerful BPM solutions right away, then scale up the number of users and performance as they need it.
One more benefit of using an external service provider is that it enables a BPM customer to better forecast and plan for software spending. Having a reliable monthly fee for usage makes for more reliable budgets. Monthly fees are set for contract terms lasting anywhere from six months to three years. Consistent levels of support are ensured with a service level agreement (SLA) that stipulates which services will be performed without incurring additional costs. Many contracts include financial penalties to the vendor if the services are not performed. One key performance measure is system uptime; guarantees can range from 99 percent to 99.999 percent, depending on the provider. If a vendor fails to live up to the system uptime metric in its contract, concessions are made to the client.
The Flavors of Managed Services
There are several ways to approach outsourced software; which way is right for a given BPM customer depends on its specific business needs. Each type of service requires the service provider to possess a different degree of expertise and involves a different level of reliance on the vendor (see exhibit 1). The four basic types of managed services that companies might turn to for help with their BPM systems are:
Disaster recovery. Many midsize and large companies use external vendors to protect their critical applications for business continuity. They run their enterprise applications in a co-location facility, where they often manage their own applications -- including replication, backup, and monitoring systems -- but run the applications on the external vendor's hardware. This option gives the customer company a high degree of autonomy and control over their systems but saves them the expense of building and managing their own data center. Using a managed services provider only for disaster recovery requires customers' internal staff to have expertise in the BPM applications they're running. Its primary reduction in the software's TCO comes from the shared services hardware environment.
