Abstract
The IT Service Management market is ripe for a transformation driven by AI. ITSM has reached an impasse between the quality delivered by 3rd-party service providers versus the costs. This is compounded by long-term contracts that trap companies in an endless negative cycle of poor customer satisfaction and contract disputes. If you haven’t already done so, it is time for you to build your off-ramp and articulate an AI strategy for ITSM.
Typical IT Service Management Contracts
Most companies that use IT Service Management (ITSM) to support their end-users, do not build ITSM capability internally. Instead, they spend a large amount of money on 3rd-party contracts, leaving ITSM expertise to “specialists.” Many of these contracts are long-term, leaving the company reliant on external resources to keep their own end-users happy. This works some of the time, but all too frequently there are problems resulting in poor quality of service and inefficiencies. Listed below are some common ITSM contracts and typical contract-terms.
| 3rd-Party Contract | Typical Duration | Comments |
| Managed Services | 3-5 Years | High onboarding costs, SLA driven, subject to volume-based cost escalators |
| ITSM Platform | 3-5 Years | Volume discounts predicated on longer-term contracts |
| Infrastructure and Hosting | 1-3 Years | Increasingly consumption-based pricing |
| Reporting and Dashboarding | 1-2 Years | Typically, BI Tool-based and also included in some ITSM platforms |
| Professional Services | 1-2 Years | Consulting and integration efforts |
What is the spend on ITSM Contracts?
Let’s be honest, ITSM is a complex area, and the price tag is large whether you build this capability in-house or outsource it. The annual spend on ITSM can range from 10-25% of the entire IT budget. In my experience, almost half the ITSM budget is spent on Managed Services and a quarter (25%) of the ITSM budget is spent on platforms and infrastructure.
Let’s do some math… Assume a mid-tier company with revenues around $2 Billion. A typical IT budget for such a company would range from 2 – 4% of revenue. Assuming the mid-point, the IT budget for our theoretical company is roughly $60M. This would mean that our theoretical company would spend $9M on ITSM. Taking this further, our company would spend almost $7M on IT Managed Services, ITSM platforms, and infrastructure.
One might quibble about the specific percentages, but in reality, we are talking big money! To top this, these obligations are multi-year with large switching costs.
Is this a bad deal?
While the cost of ITSM is quite large, they would probably be larger should companies decide to insource this function. Imagine a paper manufacturing company investing in building IT Service Management skills… It would not be a natural fit. Such a company would not maintain focus on capabilities that are non-core to their major revenue drivers. And yet, given the cost implications, such a company ought to invest enough in the ITSM function to extract the maximum value out of the 3rd-party providers. Unfortunately, this is seldom done well. Most companies rely on contract generalists to negotiate and modify ITSM contracts and there is rarely a continued focus on quality of service. Action is only taken when end-users are unhappy or there are operational implications to poor service management.
The coming market disruption
The stalemate between poor ITSM service value delivered and the reliance on 3rd-parties is about to be broken. Context-aware AI and agentic models are about to burst on the scene and disrupt the dominance of 3rd-party MSPs and ITSM Platform companies. AI tools will deliver the same or better quality of service at a fraction of the current costs. And they will provide companies with the ability to manage IT Services without the need for “experts.”
As with other market changes, there will be winners and losers. The market disruption will affect both third-party providers as well as client companies that are unwilling or unable to make the change.
What’s Next?
AI is completely upending the IT terrain. The AI wave is already reshaping ITSM. The companies preparing today will win tomorrow. Are you ready to take the first step? Explore more insights about ITSM strategy and costs on our QuantumVision-AI LinkedIn Page or visit quantumvision-ai.com to learn how AI can transform your ITSM strategy. You can also sign-up for a demo of our ITSM product or apply to be a Beta customer on our website.
What other approaches can help mitigate the negative effects of rapid change? I’d love to hear your thoughts or experiences.
Sai Balakrishna
Managing Partner & CEO
📧 info@quantumvision-ai.com
🌐 www.quantumvision-ai.com
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