Many enterprises turn to external service providers for application-related services. Forrester Research surveys show that between one- fifth and one-third of large companies in the US and Europe use external service providers for each of a number of categories of application services. Established services include staff augmentation for software development projects, application outsourcing, maintenance and support, testing and quality assurance, and newer forms of provision such as software-as-a-service. Forrester estimates the European market for these services at more than $40bn (£32bn) in 2008.

Too many companies focus on the time and effort involved in delivering these services, rather than the outcomes required, when negotiating contracts with providers. Worse still, the cost or price benchmark is too often the most important yardstick for the initial selection of a service provider. These numbers have their uses, of course, but by themselves they give very little indication of the value for money achieved.

One of my colleagues, Bill Martorelli, has recently investigated the potential benefits to companies from a more outcome-led approach to negotiating. He calls this the managed outcome model, and describes it as “an application development and/or maintenance relationship based on defined outcomes and priced on a fixed-bid basis”. This relies on defining the service relationship in terms of deliverables, service levels, and price, rather than according to the number of resource hours or days committed.

Enterprises stand to reap significant benefit from transferring more work to the managed outcome model. Payoffs include a one-off cost/benefit boost from moving work across from internal processes to those of the service provider.

Additional advantages may include more effective knowledge retention through the provider’s more industrialised knowledge systems, avoidance of lengthy and challenging negotiations over appropriate levels of effort under time-and-materials contracts, and a more defined approach to innovation and business value delivery through building these goals into the expectations placed on the service provider.

Of course, this change of approach involves challenges, too. Not least of these will be winning the internal debate inside the buyer company about loss of control or increased risk from handing over day-to-day service management to the provider. What’s more, some internal stakeholders may not find the benefits from the changed approach so obvious. And, of course, the internal change management  involved in the transition from one approach to the other for the buyer company can be tough to execute on a day-by-day basis.

So where should companies considering this transition make a start? Forrester’s research indicates that large opportunities ¬ like a major application development project ¬ work best. For the provider this means more scale of work, which makes it worthwhile for the supplier to take on the risk of working on a fixed-price basis. For the client, it means more potential cost savings.

Martorelli also recommends that buyer companies should favour opportunities that can be well specified, and where historical data exists. It may seem obvious, but in practice too few firms embark on a service engagement with a clear set of outcomes defined upfront. If it is possible to specify the requirements clearly, then the chances of a managed outcome approach succeeding are that much higher.

Please visit www.forrester.com/computinguk where several key studies on this topic are available to Computing readers free of charge.

Andrew Parker is research director at analyst Forrester Research