A managed services or fixed-fee outsourcing model for application development and maintenance can ultimately yield major savings for IT organizations that embrace it.
A well-planned managed service delivery contract for application maintenance can yield a 25 to 45 percent cost reduction over staff augmentation in the first year alone, according Steven Kirz, managing director with outsourcing consultancy Pace Harmon, with many organizations seeing 50 to 75 percent savings after five years. Likewise, when IT organizations move from a time-and-materials approach to fixed-fee deals for application development, they can cut costs in half, according to Kirz.
Many large companies, however, continue to work with their outsourcing providers in man-hours mode. “The reason most development projects aren't fixed fee is that the client hasn't spent enough time or effort figuring out what they actually want built,” says Kirz. In addition, staff augmentation may make more sense for IT shops that are pursuing agile development processes.
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