Market & Sourcing

Managed Capacity – flexible IT sourcing

by Dr. Jakob Rehäuser

Managed Capacity is a flexible procurement method in IT sourcing: It comes close to the on-demand idea, is very flexible and also suitable for commissioning agile teams.


When engaging IT service providers, most companies use staff augmentation, fixed-term projects or managed services as a contract model, but there is a dilemma in the external procurement of IT experts: How much capacity will you really need? To supplement classic methods, we are therefore increasingly using the "Managed Capacity" approach in client projects. This makes it easier for customers to coordinate actual requirements and assignments more closely.

Managed Services vs. Managed Capacity

With classic Managed Services, the customer orders a service and is focused on the output: are service levels met, does the timeline match? The client does not instruct the sourcing partner how to deliver the service, as long as the sourcing partner complies with the agreed service level. Managed Capacity, on the other hand, is "time & materials in disguise" because the responsibility for the result still lies with the client. For example, the latter orders ten experts from the sourcing partner and assigns them tasks via a small service catalogue. As a rule, the group looks after a defined section in the existing application landscape, such as the implementation of enhancements, changes, smaller functions and features.

In addition, the degrees of freedom are greater with managed capacity than with direct commissioning: the customer does not tell the team how to complete a task, nor are skill profiles such as senior consultant defined. With Managed Capacity, the sourcing partner is responsible for providing the right skills for a task.

What are the advantages of Managed Capacity?

Managed Capacity, unlike Managed Services, offers great flexibility. The customer can ramp up or down capacity as needed with one month's notice. Depending on the contract, it may be possible to scale down to zero, but some providers require a minimum purchase volume. A flexible ordering process allows the client to respond more quickly and augment their own bottlenecks more effectively.

In combination with a tier pricing model (see our blog post on tier pricing), declining prices for Managed Capacity can also be negotiated over years and the higher purchase volumes, for example in conjunction with a managed services contract, improve economies of scale. It is also possible, for example, to have two price lists for procurement from India and Europe, for example, if the provider offers nearshore and offshore.

Managed Capacity offers:

  • A high degree of flexibility and reliability of supply,
  • Responsiveness to market price dynamics,
  • Price/daily rate stability over the defined period,
  • The possibility of alternative shoring,
  • Responsiveness to technology developments/changes, and
  • The absence of a role landscape


Managed Capacity and agile projects

Managed Capacity is particularly suitable for procuring experts for agile projects. The competencies of the team can be tailored specifically to the upcoming sprints. For example, monthly capacity planning can cover two sprints - if more or less manpower is subsequently required, the demand can be adjusted relatively quickly. Fewer unused hours means reducing full-time staff and externals booked for a long project duration.

Managed Capacity in the sourcing ecosystem

There are no automated mechanisms in scoping and contracting; Managed Capacity can be used on its own or in combination with a Managed Service relationship. Moreover, even with a unified pricing model, both routes can be taken independently. Before transition, it is always useful to create a small service catalogue for the provider. In addition, all technologies, applications, development methods, tools and programming languages which the external experts should master, must be listed. This enables the service provider to plan which skills portfolio it must have on hand.

Performance measurement via conventional service levels is no longer required with Managed Capacity, because the customer remains responsible for success. However, the client can monitor the quality of the services: does the work of external personnel suit, are the right skills being hired, how many incidents occur? These questions can indicate whether the sourcing partner is providing the optimal resources. In the case of managed capacity, however, the sourcing partner cannot be held liable in the form of a penalty model.

What are the drawbacks of Managed Capacity?

The downsides of Managed Capacity are relatively manageable. Occasionally the model is introduced as part of a supplier consolidation, for example in a joint contract with Managed Services. Here there may be some over-promising by the new provider to win the deal. However, it will always take time for the provider to get all the required resources on board - which is why there is sometimes a crunch in the start-up phase.

In addition, the transition can cause friction in the client organisation: new contact personnel on the provider side, knowledge transfer and different communication channels cause stress. As a rule, the new partnership takes months until the cooperation has adjusted. Of course, this is true for all changes in the supplier landscape.

Dr. Jakob Rehäuser

Dr. Jakob Rehäuser

Dr Jakob Rehäuser has been working as an IT management consultant in renowned organisations for more than 25 years. His main areas of expertise are IT sourcing, vendor and contract management as well as IT governance.