Companies Look to Application Management Mega Contracts for Operational Improvement

by Dominique Raviart

Application Management (AM) has undergone many changes in recent years, moving away from T&M to SLA-based provisioning, from on-site to factory-based delivery, and overall becoming much more industrialized than in the past. In addition, Indian vendors have changed the rules of the AM game with their low-cost, process-oriented and certification-heavy offerings, as well as by their ability to provide low-cost staff augmentation services. And this transformation is not going to end any time soon.

NelsonHall's latest ITO study reveals that transformation of AM services is continuing apace, with clients now awarding much larger standalone contracts than in the past that not only include AM but also bundled application development and systems integration. Because of their complexity, the number of people involved, the technology diversity and the level of change management required, those contracts will be increasingly difficult to manage and will required increased governance.

Clients are looking for three key benefits from AM services:

  • A rebalancing of spend through application maintenance cost savings: via implementation of best practices, industrialization and labor arbitrage. Clients are aiming to rebalance and lower their maintenance costs to fund new projects in application development and systems integration
  • Use of larger contracts to achieve operational improvement: clients are looking to large AM contracts to lower their involvement in day-to-day operations, spend less time on scaling up and down resources, re-skilling personnel and certifying their delivery centers. They are willing to leave more of the operational work to a vendor and focus more on strategy and on application urbanization
  • Increase scope of AM contracts from pure AM to application development and systems integration projects embedded into a framework agreement to achieve improved vendor management: clients are aiming to lower and rationalize the number of vendors, while maintaining access to a pool of vendors with the relevant skills and increased price competition

This does not mean that AM is an easy activity. Nevertheless, interested clients can now learn from the experience of early adopters. They are interested in how to maximize co-ordination between vendors, how to retain and transfer knowledge, and how to define relevant risk and reward pricing mechanisms.

Another key topic of interest to clients is the level of transformation to be included within application management contracts. AM contracts can be good vehicles for introducing investment into areas such as application modernization or SOA-inspired rewriting. However, transformational AM contracts also have pitfalls, including client lock-in, lack of competitive pressure on vendors and high levels of subcontracting.

The new ITO study entitled 'Application Management Assessment and Forecast' is published within NelsonHall's ITO program and covers the following key topics:

  • The Changing Shape of Application Management
  • Buy-Side Requirements
  • The Rise of Application Services from Indian Vendors
  • Market Size and Growth
  • Vendor Market Shares
  • Vendor Positioning
  • Critical Success Factors

For more information about accessing this report and NelsonHall's ITO subject matter experts, please contact Rob Hughes.

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