The average IT organization spends 75-80% of its resources on maintaining/managing the applications/infrastructure. Typically, the majority of their management’s attention is spent on operational and tactical activities but not strategic planning. Not only that, the IT organizations will also have to ensure consistent quality of the service delivery to the end users, customers and business in order that there is a proper ROI. The figure1 gives the economic dimension discussed above.

Attrition, end user competencies, cost factors, complexity of application landscapes and speed of business change add to the pressures on the IT. Organizations have to focus on core areas of the business while struggling to find a balance to meet customer demands, improving on operating margins, making sure the business runs efficiently. Business is also constantly marked by change and increasing economic and market pressure. Business leaders therefore are looking for Service providers who give excellent service delivery at manageable costs – so that they can focus on their core business needs centering on customer delight.

This makes Managed Services (and Application Managed Services in particular, being the focus of study for this article) an obvious choice for Organizations. Outsourcing of non-core business (of applications) helps lower the total cost of ownership, since almost 3/4th of the IT Budget goes into maintenance, this would directly result in cost savings, the saved money can be used to focus on other organizational improvement areas.

According to Meta Group®: Application management is an enterprise strategy for controlling costs and improving operational efficiencies and Decision to use service providers for application management is driven primarily by business issues, not by perceived deficiencies in the ability of the IT organization.

The Service Providers on their part need to ensure excellence in Service delivery in order that the Customer gets value for money. The providers on their part have to deal with intense competition, knowledgeable customers who are global in nature, and also have to struggle with internal efficiency issues, staff attritions, customer demands on low costs and high quality. Despite all these various issues – the service provider is (still) almost always expected to bring cost savings to the customer and in a recurring fashion.