As the pressures of today's economic climate intensify, manufacturing companies are challenged to fundamentally redesign their operating models to survive and succeed. This is particularly true when it comes to their information technology (IT) and supply-chain operations. A growing array of "managed service" alternatives have emerged that can significantly reduce costs and improve productivity. But, matching these alternatives to specific business requirements will be essential for your organization to successfully achieve its objectives. The macro-economic challenges facing manufacturers are daunting. Natural disasters and geo-political forces have combined to drive up gas and other raw material costs, as well as distribution expenses. These forces are having a belt-tightening effect on IT and other aspects of corporate budgets. As a result, the major IT research firms, including Forrester and International Data Corp., have reduced their forecasts for corporate IT spending over the next two to three years. (See "IT Buyers Curb Their Enthusiasm ..." and "Forrester Research Forecasts Significant Drop in IT Spending In 2007" for additional insights.) Given that two-thirds of IT staff time is generally spent performing mundane system and software maintenance or reacting to daily problems, most companies need to adopt more cost-effective methods to manage their IT and other primary business operations. THINKstrategies believes these trends will force manufacturing companies to leverage managed services to meet their business objectives. THINKstrategies defines managed services as a packaged, "pay-as-you-go" solution provided by a vendor, or managed service provider (MSP), which assumes responsibility for specific IT or business function on an ongoing basis. Managed services generally fall into three categories: IT management, application management and business management. The MSP monitors the availability of the technology, identifies problems, and either rectifies them or notifies the enterprise customer's in-house staff so they can resolve them. In addition, managed application services eliminate the hassles and additional costs associated with deploying and maintaining various applications. These applications can range from messaging and calendaring to customer relationship management (CRM) and sales force automation (SFA). Managed email services generally include basic mail server access, plus a variety of security services such as anti-spam, firewall, spyware and virus protection. There are also a myriad of managed business application providers -- led by Salesforce.com -- with web-based, "hosted" services to satisfy CRM, SFA, human resource management (HRM) and other enterprise software requirements. The advent of managed services to address each of these areas illustrates how all of these functional categories have become commoditized. As a result, various MSPs have been able to build "multi-tenant" delivery capabilities to satisfy the needs of a cross-section of corporate customers. As manufacturers evaluate these managed service alternatives, they must make a series of strategic decisions.

• First, they must determine which of their internal IT, application and business management skills are truly "core" competencies that they cannot relinquish because they represent critical, competitive advantages. Manufacturing industry examples might include technology services that support build-to-order processes, vendor-managed inventories that support lean manufacturing techniques or enterprise resources planning (ERP) systems that are tightly integrated with manufacturing execution systems that proactively manage human capital (i.e., flexible staffing relative to cyclical business requirements). Those functional capabilities that don't fall into these areas are clear candidates to be replaced, or "out-tasked" by a managed service alternative.
• Second, they must determine how many MSPs, as well as how much control and vendor management, they can handle without jeopardizing the quality of IT and business services delivered to internal users and business partners. Some manufacturers may feel they have the in-house resources to contract with multiple best-in-class MSPs that deliver specific IT, application or business management services. Other manufacturers may feel more comfortable selecting larger providers that can meet many of their management needs. While their individual services may not be best of breed, the larger providers' solutions are generally sufficient to satisfy manufacturers' basic requirements while reducing the vendor management challenges of contracting with multiple providers. Generally speaking, larger manufacturers have the internal staff to manage and integrate the services of a greater number of MSPs than smaller manufacturers. However, the law of diminishing returns will kick in when a manufacturer of any size attempts to contract with more MSPs than can be easily managed and whose services can be effectively integrated.

While no rating system of the various MSPs or standard checklist to guide manufacturers through the MSP evaluation process exists, here are a set of common sense steps that can help IT and corporate executives evaluate prospective partners:

• Corporate History: How long has the MSP been in business? (Survival is a good message of success in this market.)
• Financial Stability: How solid is the MSP's financial status? How large is its revenue base? Is it profitable? What is its cash flow? What is its corporate status -- privately held/VC backed, publicly held, IPO pending, etc?
• Market Penetration: How large is the MSP's customer base? How fast is it growing? Does the MSP have an installed base of manufacturing sector customers?
• Customer Satisfaction: What are the MSP's customer renewal and defection rates? What proportion of customers buy additional services?
• Strategic Alliances: What is the caliber and number of the MSP's business partners?

The good news is manufacturers have plenty of managed service alternatives to achieve their business objectives. The challenge is taking an impartial look at your internal capabilities and selecting the right MSPs to complement your core competencies. After determining their IT, application and/or business operation requirements, manufacturers should document their needs in a RFP, along with a set of service level objectives (SLOs) or expectations for the MSPs. It may be necessary to use an independent firm to help determine a realistic set of SLOs based on an objective evaluation of current performance levels. THINKstrategies recommends that manufacturers contract for managed services in an incremental fashion. This means testing or piloting IT, application and business services in an isolated segment of the organization before rolling out across the entire operation. It also means adopting these services in a sequential fashion to ensure that they perform properly on an individual basis before they are expected to interact or integrate with other internal operations or external managed services. This step-by-step approach will minimize potential risks or disruptions caused by improperly migrating to a managed service. It will also permit you to determine how comfortable your organization is relying upon a third-party to manage your IT, application or business operations. Jeff Kaplan is the managing director of THINKstrategies, a Wellesley, MA-based strategic consulting firm. Jeff can be reached at jkaplan@thinkstrategies.com.