The FTE Labor vs. Managed Services Decision

Industry buzz says companies can realize more value via outsourcing by moving away from the FTE or contract labor model and opting instead for managed services. The FTE model is dead, they say. But don’t believe everything you hear.

The managed services model in outsourcing sounds great. It beckons with reduced costs and the benefit of service levels. You can buy it “as a service” in a predictable fashion and perhaps even pay for it on a usage basis.

Sounds wonderful.

But let’s take a deeper look. The perception of value in managed services is countered with limitations. Because the service must remain stable, the service description can’t change. What it provided yesterday is the same as what it will provide tomorrow. But there’s a sting in that stability.

In volatile environments — where there are significant shifts in process and what the provider is doing — the service description becomes volatile. For example, application development environments, as well as application maintenance environments, are inherently unstable. The result of this instability in a managed services deal will be an unhappy customer, either because the service no longer fits their needs or because it is necessary to issue a change control — which often leads to the service provider changing the pricing structure to accommodate the change in service. Even small changes over time build up to great frustration.

Where volatile environments and change are part of the equation, the idea of having predictable pricing through managed services is just an illusion and the customer buys something that doesn’t exist. Even worse, the customer may be locked in to the managed services contract and thus feel like a hostage.

The situation isn’t good from a provider’s perspective either, as it has to deal with an increasingly unhappy customer base.

The more change that the buyer requires in the managed services model, the more the buyer and provider get out of alignment and can become adversarial.

The FTE or contract labor model is much more flexible in reallocating resources to address changing circumstances. But that doesn’t mean that there isn’t a vital place for managed services in outsourcing.

When making the decision, buyers need to keep in mind that managed services are best suited for areas that have a stable and predictable service in terms of functionality. Companies that inappropriately apply managed services to environments that are too volatile will become very frustrated.

Thus we believe the stories of the death of the FTE service model have been exaggerated. It’s not dead and it’s unlikely to die or completely replace the FTE model because it meets a very fundamental need.