How top companies are making the most of managed services

Recent PwC research on the practices of top-performing companies reveals that many share a powerful attribute: they partner with managed services providers to close capability gaps and support strategic advantage in ways that go well beyond old-school, cost-focused outsourcing arrangements. To get a clearer picture of what these leading companies are doing, PwC developed a four-level maturity model for companies’ approach to managed services partnerships (MSPs). Level one businesses have no MSPs at all; level two businesses use MSPs solely to reduce operating costs; level three businesses use the partnerships to close capability gaps; and level four businesses use MSPs to gain strategic advantage—for example, to respond to opportunities and threats or to keep pace with changes in technology. 

As the chart above shows, level four companies outperform less mature ones by a significant margin, as measured by a performance premium metric that combines the effect of profit margin and revenue growth in industry-adjusted terms. The research suggests that a more mature approach to MSPs—often in conjunction with broader participation in business ecosystems—can boost innovation and speed to market. Climbing that maturity scale requires strategic clarity, without which management teams may struggle to develop a coherent and useful approach to MSPs. But focus, while crucial, won’t be sufficient. Companies must also be wary of failure modes relating to organisational culture, high transaction costs and the effective use of technology.

1. Cultural change. Companies that have a culture characterised by a not-invented-here disposition or by general resistance to change may lack the willingness to trust external partners with crucial elements of their strategic advantage, thereby limiting the company’s MSP potential. To counter those tendencies, management should look for ways to disrupt the status quo—for example, by using zero-based budgeting to subject fiefdoms or investment areas to more scrutiny. This can encourage fresh perspectives on which activities might be given to MSPs. 
2. Friction and transaction costs. Companies with high transaction costs—the time and resources needed to conduct business inside and outside the organisation—can be slow to sign off on decisions, allocate budget, and act on strategic objectives, making them less able to work effectively with MSPs. Conduct an internal audit to measure the extent to which the company’s decision-making and resource allocation are being slowed by paperwork, duplicative reporting requirements, muddled governance and other sources of friction.
3. Technology basics. As technology continues its relentless penetration, it’s ever more important to take a clear-eyed view of where the company is on its technology journey. The company might be still addressing costly and outdated IT systems, applications and infrastructure, or it might have yet to make the most of application programming interfaces. MSPs can help with these basics, to be sure. But the further a company gets along the path towards cloud-nativity and other hallmarks of tech transformation—including, ultimately, having a forward-looking plan for leading-edge technologies like generative AI—the greater the potential to use MSPs in a more mature way.