Deloitte Debate: Should Companies Move to 'Value' Level Agreements When Outsourcing Applications Management?

What:

"Should You Step Up to Value-level Management in Applications Management Services?"

Who:

Janet Foutty, principal, Deloitte Consulting LLP

Larry Calabro, principal, Deloitte Consulting LLP

Craig Hodgetts, principal, Deloitte Consulting LLP

Paul Roma, principal, Deloitte Consulting LLP

When:

Available immediately

Where:

www.deloitte.com/us/amsdebate

Details:

For years now, Applications Management Services (AMS) have been all about cost, driving down the expense base through offshore labor arbitrage. Further cost reductions, however, are getting hard to come by. So, too, are new innovations and process improvements. Fact is, when applications are supported through a low-cost labor pool that is isolated from the business, efficiency, knowledge transfer and automation all tend to suffer. To remedy this, some companies are shifting the focus from service levels to value levels. But, is this a wise decision?

"A better approach is to shift to a focus on business results and outcomes -- not just service levels," said Foutty. "This requires an AMS delivery model designed from the ground up to uncover value opportunities and implement improvements throughout every phase of the application lifecycle. Think of it this way -- if the real value opportunities begin to emerge when an application stabilizes, why would that be the time to put that application out to AMS pasture?"

Foutty noted that in practical terms, the difference between a service-levels approach and value-levels approach rests on choices about what to measure. For example, tracking the rate of billing accuracy and improving it from 95 to 98 percent has much more value impact than tracking how quickly a call center answers the phone.

Calabro, Hodgetts and Roma join the debate with perspectives for IT management and ERP, and a specific view on healthcare sector:

• IT Management. Beyond cost and scale, the value-driven approach can provide a vehicle for enabling business results — allowing for resource fluctuations, distribution of risk and a full blend of specialized skill-sets that need to be accessible at any time by the organization.

• ERP. Effective contracts require incentives tied to both business value and services levels. At the high end of the value scale, the simplest and most basic metrics may be grounded in company earnings or stock price.  As a more practical matter, however, activities tied to specific operational improvements may make more sense.  These include such variables as time-to-close, outstanding payables, and reporting accuracy.

• Healthcare. Like other sectors, health care companies moved to an AMS outsourcing model to cut costs primarily.  But, what about other benefits, such as infrastructure improvement?  In the best case, you may get a year of value-oriented results from your vendor -- and when you move on to the next thing, they will likely do so as well.  If you're paying someone to do X and hoping for Y, you're going to get X.  It's about accountability.  If you're not holding your AMS vendors accountable for anything beyond cost savings, you're missing half the boat.

To view Deloitte's points and counterpoints regarding Applications Management Services and related issues, please go to www.deloitte.com/us/amsdebate.

This topic is one in a series of Deloitte Debates that examine pressing business issues from multiple perspectives. New debate topics are added weekly. To view the full library of Debates, please visit www.deloitte.com/debates.

Deloitte will also conduct a related webcast March 11, at 2:00 p.m. ET, "The New Battlefield for Innovation: The Strategic Importance of Applications Management and Industrialized Solutions."  To register for the webcast, please contact John La Place at [email protected], or +1 212-492-4267.

About Deloitte

As used in this document, "Deloitte" means Deloitte Consulting LLP and Deloitte Services LP, which are separate subsidiaries of Deloitte LLP.  Please see www.deloitte.com/us/about for a detailed description of the legal structure of Deloitte LLP and its subsidiaries.