The Hidden Tax that Comes with Traditional Application Management Services (AMS)

The Hidden Tax that Comes with Traditional Application Management Services (AMS)

The model for traditional application management services (AMS) is broken. It’s dated and complex with a time and materials contract structure and a “man-hours” billing system.

While the model was originally provisioned for issue resolution, the reality may lead to a continuous, almost unwitting client accommodation of large and growing numbers of billable hours for incident handling. The result? Client issues can remain unresolved while AMS providers grow revenue through scope creep and make-work.

This occurs due to a misalignment between AMS provider goals and a client’s evolving operating model and business goals. AMS services are optimized when both providers and clients want the same thing: the fewest open cases possible, resolved as quickly as possible with the highest skill available.

Such a model has been developed: a highly integrated AMS + enterprise software support catalog predicated on issue resolution, not billable hours or scope creep. In this approach, AMS services have converging layers that are tightly integrated with ITIL Levels 2-4 support, with no embedded ERP vendor dependency. Support teams solve issues, and are contractually incentivized to do so as quickly as possible with the goal of preventing future incidents.

For enterprises who engage with integrated AMS:

  • Issues are resolved quickly and efficiently
  • Support is simplified, with no manufactured project work
  • Operational productivity is improved; operational drag is reduced
  • Team members are evaluated and compensated on client satisfaction
  • Budget, resources, and time savings unlock precious capital

Overview: The AMS Tax

When IT decision-makers shop for traditional application management services (AMS) with price as a criterion, it’s critically important to also include value in the equation. And, baking in penalties may just be a band-aid. As many organizations discover — and some too late — they are not the same thing. Importantly, a pure focus on price can lead to cost overruns with a traditional AMS support model.

If value is not assessed prior to an AMS contract, and if success metrics are not integrated, enterprises can experience a significant unanticipated financial burden: the AMS ‘tax’ — an unspoken cost incurred by an organization’s IT support model and service delivery.

The AMS tax is a lose/lose predicament where organizations overpay for AMS labor that does not deliver optimal value. And it’s sometimes self-inflicted, often resulting from engagement in a traditional AMS support model built on a metric other than issue resolution, the gold standard in enterprise software support services.

Three Traditional AMS Approaches that Lead to the AMS Tax

–         Pay-by-the-Ticket: with this variable-price model, AMS providers are paid annually for the aggregate number of hours worked across all tickets being serviced. Compensation is a function of predictable labor hours rather than achievement, and issue resolution and service quality are not factored in. There is no incentive for providers to work quickly or efficiently. Instead, the AMS provider’s own incentive is to maximize revenue by increasing the number of open tickets and working on them slowly to amass billable hours. With this model, providers may merely fix rather than resolve problems that they know will recur — and that they know are related to other problems — in order to accrue more billable hours in the future.

–         Bank of Hours: with this fixed-price model, AMS providers are paid for an agreed-upon set number of hours per year. This approach is “use-it-or-lose-it” for clients, as all hours are billed for the time period whether they are worked or not. As with the Pay-by-the-Ticket model, issue resolution, service quality, and efficiency are usually not factored into compensation. The AMS provider’s own incentive is to try to increase the bank of hours, perhaps by addressing issues slowly. This model includes overhead in the need for client oversight, which can be time-consuming and labor-intensive. It also often employs lower-skilled staff so that cases take more hours to complete than they would with a more highly skilled team.

–         Dedicated Support Team: with this fixed-price FTE model, AMS providers are paid an agreed-upon annual fee for an agreed-upon number of dedicated team members. As with the other two traditional AMS models, compensation is not based upon issue resolution, accuracy, or solution permanency. Backlogs can occur frequently. The provider’s own incentive is usually to keep the dedicated unit employed, complete with the original number of team members or more, if possible, addressing issues but not necessarily resolving them. With this model, clients “have who they have” on the team, and the team members “know what they know.” If a team member takes a vacation, there are no pinch hitters. If expertise from lower-skilled staff is lacking, providers will generally lobby for more team members and an increase in the annual fee.

The AMS Tax: Too Much Rework and Artificial IT Backlogs

Too much rework:

  • This is largely due to AMS providers’ lower-cost and lower-skilled staff, which traditional AMS models seem to reward
  • Lower-cost staff may not take the most efficient routes to issue resolution — while they have skills for upgrading new software, different skills are required for supporting heavily customized environments
  • Lower-cost staff requires many more hours — and funds — to resolve issues, mitigating or eliminating the benefit of the lower rate
    • Example: a project completed in 1,000 hours by $40/hour staff is twice as expensive as the same project completed in 200 hours by $100/hour staff
    • Ironically in this case, the CIO pays more for lower-cost staff without knowing why a 200-hour project is being billed at 1,000 hours
  • Some lower-cost staff “come with revolving doors” where they must move to other clients after a year, leaving IT teams to onboard new, lower-cost staff all over again

Artificial IT backlogs:   

  • Many lower-cost staff are learning on the job as incidents and issues pile up, a situation seemingly rewarded by traditional AMS models
  • Many changes that need to be made permanently are instead repeatedly made situationally
  • Many other changes are made not because they are needed, but because they increase billable hours and revenue while the backlog grows

The AMS Tax Effect: An Opponent of Value Creation

Major IT priorities these days include reducing costs and increasing value — value to the business and value to customers. Paying AMS providers for unnecessary, expensive rework and scope creep rather than issue resolution undermines these priorities, as does having AMS projects used as a training ground for junior-level providers logging learning curve hours.

It’s tough to get caught in a vicious cycle of costly busy work, which continues until something stops it or slows it. For example, if an organization has 30,000 AMS support issues each year, and 300 monthly incidents are due to a bad interface from one application to another, the provider who identifies and addresses the root cause to make those monthly incidents go away forever creates value. The provider who can’t (or won’t) due to a lack of incentive (as is the case with many AMS providers) becomes a cost center.

How to Avoid the AMS Tax

Avoid or eliminate an AMS tax by using an integrated AMS + enterprise software support model. This controlled cost model helps enterprises create value and is efficient-driven by expedient solutions rather than continuous labor hours. Here’s how one Rimini Street client did it:

Case Study: How One Rimini Street Client Eliminated the AMS Tax

Diversified U.S. energy company partners with Rimini Street for AMS, reinvests savings into security automation and cloud services.

• $20.5 billion U.S. publicly traded diversified energy company
• Large SAP user for Finance, Human Resources, Payroll, Treasury, Business Objects, CRM, SRM, CLM, Ariba Cloud, Concur Cloud, and many other modules

Client Business Priorities
• Deliver consistent quality growth to top revenue line, sustain dividend growth
• Stay ahead of the competition by adopting industry transformational trends
• Introduce renewable energy including solar, wind generation, batteries, etc.
• Re-calibrate distribution centers, energy systems to be more responsive to progressive technology

Partnership with Rimini Street
• Originally partnered with Rimini Street for Support for SAP
• Subsequently partnered with Rimini Street for integrated AMS + Support for SAP
• AMS staff had to be compliant with the Department of Energy’s 10 CFR PART 810

Value Expanded Beyond Support
• Rimini Street moved from supporting the SAP modules to running the systems
• Replaced a ten-year incumbent AMS provider, beginning with a 16-week service transition period
• Highly skilled, application support engineer as team lead, backed by global team of highly skilled technology experts
• Immediate operational value delivered by the Rimini Street model:
– Shut down IT support call centers to reduce operating expenses
– Introduced security password reset automation tool
• Shifted time and investment focus to:
– Security automation
– Public cloud
– Getting data in and out of the ERP without upgrading

A Model for Avoiding the AMS Tax and Resolving Issues with Transparency – Delivering:
• Incident volume sheet is reviewed regularly with IT leadership
• Addressed hidden backlog to eliminate Ariba incident handling via email versus logging into AMS queue
• Resolved security automation issue through Rimini Street expert training and knowledge transition sessions with Client
• Decreased password reset/access issues, previously accounting for nearly 36% of incidents within a 6-month period
• Currently managing fewer than 100 incidents in the queue
• Dedicated security team drives accelerated turnaround time for security tasks
• Average of 96% overall security task closed SLA, while ensuring compliance with Client security policies