Science & Technology

Managed Capacity-Pricing based Information Technology Outsourcing Model

Managed Capacity is a pricing based information technology outsourcing model. A full description of all the information technology outsourcing models is captured in another article on this site.

In Managed Capacity, the customer buys a certain quantity of person-hours or person-days from the vendor at a pre-negotiated rate.

In certain situations, these are also bought as a certain number of seats in a designated development centre of the vendor.

Salient Features

The salient features or key characteristics of the Managed Capacity model of information technology outsourcing are as given below:

  • This model has a maximum limit on the amount that can be charged to the customer.
  • It is very effective in situations where the nature of work is likely to change or different types of work are required at various phases during the tenure of the outsourcing contract. But the final outcome of all these pieces of work will be pre-defined and definite.
  • Critical success factors include accurate definition of scope and a definite estimate of the work-load.
  • Vendor need not track the work being completed through timesheets, but the utilization of project resources is to be conveyed to customer.

Example

A medium sized investment bank has outsourced all Application related work to an Indian information technology vendor at its facility in Pune, India. The type of work includes application development, testing, implementation, support and maintenance.

The bank has bought 70 seats at a pre-negotiated rate of USD 4000 per seat per month.

This facility will effectively work as an extension of the bank’s IT department. The bank has the flexibility to utilize and staff the centre as per the demands of the projects that it has undertaken.

At the start of the engagement, for the first 6 months, the bank utilized close to 50 seats for development work and the remaining 20 for testing, support and maintenance of other applications. After 6 months, an application that was being developed went live and the bank reduced the development staff from 50 to 40, and 10 of the staff from the development team was moved into support and maintenance of the application that had gone live.

Pros and Cons of Managed Capacity model

Pros

  • This model facilitates better budget control and financial planning for the customer.
  • This model also enables the customer to buy a portfolio of services and skills from the vendor organization that in turn provides the customer a lot of flexibility in managing its own IT department functions.
  • Ramp-ups and ramp-downs of project teams are easier to manage.

Cons

  • It is often difficult for customer to track resource utilization.
  • Customer cannot monitor resource movements unless resources are named and tracked on a regular basis.

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