Due to the shifts in global demographics, growing awareness of environmental issues among the general populace and policymakers alike, as well as the maturing of technological advances, the traditional concepts of ownership, consumer choices, interpersonal communication, or even hardware-software relationship have changed drastically. When the push for greater regulation intended to ward off the effects of those changes is added to the mix, the resulting picture may be quite bleak – one in which organizations often find themselves struggling to adapt and chart the correct course. It is in this context that managed service (MS) arrangements may be considered as one of the most effective ways in which mature organizations may refine their operating models to meet the demands of doing business in the third decade of the 21st century.
Rooted in IT, tailored to business functions in an increasingly digitally enabled enterprise.
Suffice to say, MS is not a new phenomenon. Managed services have become somewhat of a buzzword recently, yet the concept and the underlying premise are hardly new at all – the IT industry has made inroads in the area long before any other applications were considered feasible.
Modern MS has taken its principal design cues from the managed IT services of the early 2000s, which in turn have evolved from the various IT consultancy / support providers riding the wave of the rapid spread of PCs and network integration becoming possible throughout the 1990s. The key benefits of cost saving, high availability and quality are equally as relevant in areas other than IT, though. What makes MS appealing nowadays is its ability to answer the fundamental needs of the business by providing the benefits made available by new technologies while being easily aligned with the modern push for strategic business transformation.
“In nearly all industries, the expertise needed to differentiate a company and win in the marketplace is much more complex than it was in the past. If a company wants to be better than anyone else at something relevant to its customers, its specialists must be more efficient, technically proficient, and creative than ever before.”
Paul Leinwand and Cesare Mainardi,Rethinking the Function of Business Functions, (Harvard Business Review: February 2013), available on-line: https://hbr.org/2013/02/strength-focus-and-corporate-cThus, the fundamental premises of turning an in-house business function to a managed service setup are scarcity of resources and lack of the prerequisite expertise to make the required pivot to meet business and regulatory demands.
Managed Service as a tool of transformation
As complexity of data-intensive business processes mounts on what is seemingly a daily basis, managed services are becoming an increasingly more viable option for organizations seeking to transform their business models, including revamping their core internal processes to stay competitive and compliant.
One of PwC’s recent studies captures the opinions of the CEOs from around the globe that reflect this very sentiment. Some seasonal disruption due to the pandemic’s impact notwithstanding, the executives’ top qualms have remained the same throughout the last couple of years: they are apprehensive of the global economy’s condition, troubled by the impact of regulatory pressure and perplexed by the opportunity-risk mix presented by the advent of new technologies. The year 2020 and its wake brought health crises into the mix and placed it high on that list of factors making running businesses increasingly more complex.[1]
Fig. 1 Top threats to organizations in 2021, PwC 24th Annual Global CEO Survey
At a fundamental level, the organization seeking to cut down costs, increase productivity or reposition itself in the market needs to re-think its business model in light of the context it operates in. Whether deliberately designed and executed or innately fulfilled by the core business activity, business models are, fundamentally, a composition of four elements:
Key processes – the repeatable, scalable activities carried out in both managerial and operational planes of the business that generate value to the customer.
Key resources – the mixture of human, physical, technological and intellectual resources that is used to generate value to the customer
Customer Value Proposition – the product/service offered to the customer as a solution to their underlying problem
Cost structure and revenue stream – a model explaining how value is generated by the business for the business during the core business activity[2]
Excellence in one of these pillars is not enough to warrant success of the organization. Powerful business models combine all four of these elements for a synergic, complementary setup.
Managed Service – Trusted partners over high-performing vendors
Take the Financial Services industry, for instance. Due to the growth of the digital economy, the velocity of customer acquisition and transactional activity volumes for financial institutions are skyrocketing. So is the financial crime risk connected to the increasingly global market reach and unrelenting creativity of bad actors. AML Compliance is a case in point here – strict enforcement of AML laws produces an upward spiral of fines, with 2021 highly likely to meet an unprecedented amount of USD 2.2 billion in fines issued by regulatory authorities.[3]
Banks are struggling to keep up, with AML services (e.g., Know Your Customer (KYC)) being fragmented, highly labor-intensive and often inefficient. Coordination is difficult, duplication of work is commonplace and the ability to timely detect actual red flags is limited due to ambiguous procedures and systems. A first step that is often taken to improve the effectiveness of internal AML processes executed in silos is through harmonization: an exercise aiming to define a single way of working through creating standardized procedures, processes and mobilizing staff responsible solely for the service in question (e.g., KYC).
Another level of transformation is when such uniform services are then transferred to a specialized, centralized internal unit within the enterprise through a lift and shift initiative. In addition to enhancing the synergies between the processes (e.g., onboarding, periodic review and transaction monitoring), which are now carried out by the same unit, such a centralization strategy increases the ability to bring costs down even further through better resource allocation, capacity planning and aligned technology solutions. However, what remains unchanged is the challenge of ensuring that this centralized unit grows in line with the business demands, the significant resource pool is upskilled, processes are continuously improved and technology solutions maintained to support the operations. The financial institution is still responsible for making it all work.
To battle this, banks are turning toward outsourcing (also offshoring) to cope with the ever-increasing regulatory burden. For a specified fee, the vendor takes over a specified portion of the operations from the main entity and executes the processes. The risk ownership remains with the bank, the costs are brought down, a degree of flexibility is maintained while the complexity and operational burden is contracted out, guarded by the Service Level Agreements. To a certain extent, this may very well be the sufficient future-state. However, a mature organization seeking to gain the competitive edge or transform its business model may find an outsourcing situation too limiting.
This is where modern MS truly shines. In a managed service situation, the MS provider becomes a trusted advisor and takes a holistic approach to the entire business model in evaluating what kind of changes or dynamics between the four elements mentioned earlier are required in both short- and long-term perspectives. This varies greatly from an outsourcing situation in which an outsourcer becomes responsible for a narrowly defined process scope and has little incentive to consider improvements beyond meeting the minimum service performance level constraints set in the outsourcing agreement.
Technology plays an important part, too, with the MS partner often coming in with proprietary solutions while also assessing the enterprise system architecture to find ways in which efficiencies can be had through integration, automation and aligned development support (DevOps). To reiterate, a managed service may be considered as a premium service for demanding organizations which have considered and explored other operating model options and concluded that they don’t meet their needs. To go the extra mile, the organization needs to select an experienced provider that would engage and collaborate with the in-house resources to find optimal solutions.
[1] PwC 24th Annual Global CEO Survey; PwC https://www.pwc.com/gx/en/ceo-agenda/ceosurvey/2021/report.html#people-productive
[2] PwC owned analysis
[3] Stephen Morris, Anti-money laundering fines surge as watchdogs impose tougher penalties, (Financial Times: August 2021), https://www.ft.com/content/7144ff53-5a17-477b-ab75-4f4a88b94fd2