Many of ISG’s clients are beginning to look at application-based pricing as an alternative to traditional managed services contract pricing.
Application maintenance contracts that fall under the ambit of managed services typically follow a pricing approach in which the entire application portfolio is linked to the full-time equivalent capacity required for the ticket baseline volume (e.g. incidents). Any price variation is a result of a change in the ticket volume or a change request.
The major drawback of this traditional model is that the pricing is based on the scope of work and doesn’t take into account application-specific service requirements or application lifecycle aspects. Additionally, this approach links pricing with effort rather than output.
Today, enterprise clients are gradually shifting to a pricing model that is based on application pricing.
- Application-based pricing assigns a price tag to each application in the overall application portfolio based on the cost of maintenance, complexity and the service category associated with that application.
- The cost of maintenance is a function of service scope. Service scope includes one or more of the following: corrective maintenance, preventive maintenance, perfective maintenance (technical refresh), adaptive maintenance (functional enhancements), service requests, administration services (roles/user), application operations (application-facing SAP basis), decommissioning services (archiving), and integration services (source code master).
- Application complexity can be gauged by an application portfolio assessment, including operational criticality, business process area, technology type, functional complexity and volatility of an application. Additionally, the pricing also looks at application lifecycle issues like Hypercare.
The service category is essentially a priority level assigned to an application through tier-based classification, such as gold, silver and bronze. It typically addresses which service levels are applied, SLA values, and service credits based on business criticality.
The growing popularity of the application-based pricing model can be attributed to the following five characteristics:
- Predictability: Defined year-over-year application-based pricings means IT budgets can be planned with more certainty.
- Transparency: Awareness and understanding of the ratios between prices and service requirements can be aligned more closely with business needs.
- Independence: New or updated business needs are covered by pre-defined price adjustments without need for price negotiation.
- Market-conforming prices: A market price indication supports negotiations and leads to a fair price/performance ratio for all applications.
- Cost savings: Clients can realize a cost savings of 10-30 percent compared to the traditional pricing approach.
Moreover, this approach mitigates price fluctuation risk, transfers price risk from the service recipient to the service provider, promotes intensive root cause analysis (RCA) and problem elimination, reduces number of incidents and lowers the risk of application failure in the long term.
ISG expects a majority of enterprise clients to opt for application-based pricing for their future managed services deals. Contact us to learn more.
Associated Insights
ISG SIC 2019 - Application Pricing Trends in an Increasingly Agile World - James Burke
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