Some time ago we came across an interesting article in the Minneapolis Star Tribune written by Isaac Cheifetz, the newspaper's Business and Technology Trends columnist.
Mr. Cheifetz was ruminating about Warren Buffet's "value investing” philosophy at the time he was writing a piece on outsourcing. In a spark of insight, he recognized that the Oracle of Omaha's philosophy on value investing could be applied to outsourcing from a corporate point of view, or what he came to call "value outsourcing.”
Now, in our own spark of insight, we take this Buffet/Cheifetz philosophy one step farther and apply it to managed services from an IT services perspective, in what we'll call "value managed services.”
We've segmented five tenets of this philosophy. First, we offer Buffet's philosophy on value investing; second, Cheifetz's interpretation for corporate outsourcing; and last our interpretation for IT services firms.
TENET ONE
Buffet on value investing
- Invest in businesses you understand. Focus on the business fundamentals of straightforward industries.
Cheifetz on value outsourcing
- Understand it, then outsource it. Outsource only functions whose processes you understand. Outsourcers do something you can do, only more efficiently, because of a special focus or economies of scale.
Revenue Rocket on value managed services
- Specialization is the route to the razor-sharp focus that gives customers and prospects the confidence that you have the expertise to do more efficiently what they can't do or choose not to do.
TENET TWO
Buffet on value investing
- Analyze the fundamentals. Make investment decisions on the underlying long-term performance of the company, not short-term trends or indicators.
Cheifetz on value outsourcing
- If you can't measure it, don't outsource it. Evaluate the total cost of the function, whether done internally or outside. Avoid the temptation of using the cost savings of outsourcing to avoid the hard work of process optimization.
Revenue Rocket on value managed services
- Manage to the metrics. If it can't be measured it can't be managed, so make certain that you have both the internal and external metrics in place to insure consistent delivery. Give us a call for a list of the Metrics That Matter.
TENET THREE
Buffet on value investing
- Buy at a significant discount. No matter how rigorous your value assessment, there will always be unforseen complications.
Cheifetz on value outsourcing
- Don't outsource for the sake of change Like any useful management innovation, outsourcing can be a valuable tool or a thoughtless substitute for strategic action. If you are going to outsource based on cost efficiencies, there should be substantial savings involved—along with a sizable margin of error as a hedge against the unexpected.
Revenue Rocket on value managed services
- Excel at delivery. When IT services firm deliver what they promise, on-time and on-budget, the win rate for new projects from current customers is 80%. The key to delivery excellence is having trained delivery consultants, a quality assurance program and project incentives.
TENET FOUR
Buffet on value investing
- Invest for the long-term. A good company, bought at a favorable price, will continue appreciating in value.
Cheifetz on value outsourcing
- Outsource strategically, not tactically. There should be a market-driven strategy for outsourcing. Also plan to retain control of functions that harbor critical information. An outsourcer is responsible only for satisfying a SLA, nothing more.
Revenue Rocket on value managed services
- Embrace the Full Lifecycle Services Model. Build your AMS business around the three-legged stool of Advisory Services, Technical Consulting and Maintenance and Support that the market is demanding.
TENET FIVE
Buffet on value investing
- Bet on people. Focus on the executive team and corporate culture. An owner/manager is more likely to focus on long-term profitability rather than short-term manipulation of financial performance.
Cheifetz on value outsourcing
- Bet on people. Make sure you have sophisticated executives planning and negotiating your outsourcing agreements. Outsourcers make their profits by negotiating complex agreements with contract changes for additional or reduced resource requirements.
Revenue Rocket on value managed services
- Bet on people. Make sure your people know how to craft profitable Service Level Agreements, which are vastly different than the standard time and material based agreements. Poorly constructed SLAs can be deleterious to your delivery model and your financial health. We can help construct the right kinds of SLA's.
Just what is the value of Applications Managed Services to you and your clients? The numbers are impressive.
- For your clients: They can be looking at a 10%-15% savings in year one and up to 50% of the maintenance spend over 7 years.
- For IT services firms: You can be looking at gross margins of 65%+ and an increase in your valuation by as much as 25%.
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