On Growth

Get on the AMS Bandwagon

Applications managed services (AMS) has been gaining a lot of traction lately.

• By Mike Harvath
• May 01, 2010

Applications managed services (AMS) has been gaining a lot of traction lately. If it isn't top-of-mind for you, it should be, because it could well be the next profitable frontier for IT services firms targeting the small- and mid-market space.

What I'm talking about is applications managed services and not infrastructure managed services. The distinction between the two is akin to the distinction between the skeleton (infrastructure) and the circulatory, nervous or respiratory organ systems (applications) that make up human anatomy.

Much as organ systems keep a body functioning, applications keep a corporation going. Keeping those applications nourished, protected and maintained is where corporate America is throwing buckets of money.

Customers' main pain points now are shrinking IT budgets and the growing complexity of IT infrastructures. The preferred solutions to these conundrums are outsourcing and managed services.

AMS is the magical elixir that IT services executives have to embrace to benefit from this trend. Being the best at AMS is a surefire path to growth and profitability. Winning the trust and confidence of companies looking to outsource requires specialization. [For more on specialization, see Harvath's March 2010 column, "A Year for Leadership." -- Ed.]

Doing this right is a boon for you and your clients. For you, it's the prospect of higher earnings through new revenue derived by having the specialized expertise that allows you to attract those companies whose benefit is higher earnings derived by reducing costs associated with practices not in their core competency.

When evaluating companies' readiness to take advantage of the trend in AMS, we stack IT services firms into three broad classifications according to a specific set of metrics: market leader, follower or laggard.

In our view, market leaders are focused both on a market and its associated technology, are ranked first or second in that market, and have a revenue breakdown of 20 percent advisory services, 50 percent technical services and 30 percent AMS. A good goal for a market leader is to increase its AMS revenue allocation to 40 percent.

A laggard, on the other hand, would have a 100 percent technical focus, be a generalist and have an "anything for a buck" attitude toward revenue allocation.

Building an AMS Practice
So, what will it take to build your AMS business? Right off the bat, you'll have to know that it's not an insignificant investment getting an AMS operation up and running.

Unlike the traditional route to professional services, in which you can sell ahead and then hire to the opportunities, in AMS you'll have to start with a much higher fixed cost. The service has to be in place at the point-of-sale, because once you sell it, it'll be too late to build the infrastructure.

In our experience, the cost of this investment is in the neighborhood of 2.5 percent of your revenue to model this program over a six-month period. It's another 5 percent of revenue to staff the program and roll it out the first year. It'll take six months of planning and one year of implementation to get the business unit rolling and profitable. That's the hard news.

The easier news is that once you get this up and running, you can reasonably expect a one-year return on investment once the unit is profitable, after which you can realize gross margin contributions for your AMS offerings to be about 15 percent higher than your core offerings, which is why the attraction is there.

We have a pretty good handle on the mechanics of building an AMS offering, and a thorough grasp of the issues with which you'll have to contend. Oddly, for us, that's the easy part. Where we find ourselves working the hardest is acting as an AMS lightning rod, getting executives to get on this bandwagon. We see too many executives seduced by the short-term appeal of low-hanging fruit who have not yet committed themselves to giving AMS the priority it deserves.

That's too bad.

Next Time: How big of a company can I afford to buy?