Calculating your return is no simple matter

Recent research by the Gartner Group showed that managed services could cut the cost of running a Microsoft Exchange Server by up to 40%. That’s a tempting figure, but how easy is it for your company to achieve – and demonstrate – those kinds of savings from a managed service?

Measuring the value and benefit of a managed service can be complicated. One common problem encountered is that many companies like yours cannot measure accurately what the managed service they deploy costs, or they make errors when trying to measure what it costs. Conventional service level agreements (SLAs) can be inappropriate for this task.

Says Simon Walsh, Director of Client Services at Computacenter: “A typical barometer might be measuring the speed at which customer service calls are answered, and a managed service might reduce that from 23 seconds to 18. But what the business cares about is how many calls were resolved and how happy the customers are. If it takes longer to answer a call but it’s resolved quicker then I’m happy.”

You may also find it a challenge to separate the benefit of a managed service from the benefit of the application or service being provided. But even if this was a painful process, once you’ve made that separation, calculating return on investment (ROI) becomes relatively easier.

If you’ve engaged your IT department to perform a cost-benefit analysis on managed services you should consider four key elements: costs avoided, costs incurred, hard benefits and soft benefits. Calculating the costs avoided through a managed service includes any cost that would be created if your company ran a service or application internally. This would include software licences and hardware, but there are other, less obvious, costs that should be considered.

“When you use a service provider, you avoid all kinds of associated IT costs, from the time spent installing and supporting a service to the cost of back-up, physical space for servers, additional anti-virus and security software and training,” says Michael Fisher, business development director at service provider Cobweb.

Some costs involved in running services internally might not be related to IT at all, adds Alan Rodger, a research analyst at Butler Group. “Keeping any service in-house involves HR, payroll, pension, training and administration costs,” he says.

These costs should be carefully compared with those incurred from a managed service. Most obviously, this will include the monthly fee for the service, but it’s important to consider the peripheral costs involved in managing a managed service.

Ivor Canavan, vice-president EMEA, CSC, says: “You have the costs of selecting a supplier and drawing up contracts, legal fees and the cost of management time. We also often see cases where companies put other projects on hold while they are starting a managed service, and that can impact on productivity or delay the benefits expected from those projects."

Benefit analysis
Once the cost of a managed service has been calculated, you should look at the benefits of the service in question. Broadly speaking, these should be split into two distinct areas: hard benefits and soft benefits. The hard benefit of a service is the value that can be put on any improvement in-service offered, particularly if there is a SLA in place. “If you’re getting 95% availability today, but a service provider can offer you 97.5%, then that will have a dollar value to your company,” says Aspective CTO Robin Skinner. “Maybe it’s about how many more sales you can process, or how quickly you can turn calls around, but it should only be included if you can quantify the benefit.”

Increasingly, IT departments are factoring the effectiveness of a managed service into ROI calculations. You should not place too much importance on whether the application that you are using was available; the key is how quickly the application responded to your needs and whether this time was acceptable to you and your business. Measuring the effectiveness of a service involves matching performance against key business goals: how quickly are service requests dealt with, or how often are problems resolved within one hour?

Softer benefits can be more difficult to quantify, but could focus on the value created by freeing IT staff from routine maintenance tasks. For example, a member of staff may have a flash of inspiration at a time when typically they would have been running an internal service. Such things are extremely difficult to quantify but it’s a soft benefit attributed solely with a managed service.

A more common benefit of managed services is a reduction in risk, because a managed service allows companies to benefit from the expertise and reliability of a more sophisticated service. A service provider could theoretically afford to have a great number of different anti-virus systems and apply patches immediately because it can share the cost across hundreds of customers. A single company can’t hope to match that and that, precisely, is the return on the bottom-line.