Many companies tap the global market of IT services to access large pools of technology talent. Some rely on IT service providers for more than 50% of their technology workforce. But leaders recognize the strategic importance of technology and increasingly favor higher ratios of internal technology talent. Despite that trend, external vendors continue to offer advantages. They help companies access a broader array of talent, reduce costs and provide flexible capacity. Organizations have an opportunity to improve the effectiveness of these IT services by using a contracting model better suited to operating with Agile teams.

When retaining IT service providers, most organizations usually follow one of three contracting models: staff augmentation, fixed-deliverable projects or managed services. While each of these models may still be useful in certain circumstances, managed capacity is an alternative that better aligns with Agile principles, such as valuing customer collaboration over contract negotiation.

In a managed capacity model, the vendor provides a persistent pool of talent, typically in the form of Agile teams that possess the required cross-functional skills and experience. The customer sets priorities for the teams and ensures that an internal product manager has responsibility for outcomes, not the vendor. That’s important because the product manager has the trust of the organization and a deeper understanding of trade-offs. A managed capacity model is also more flexible, because the product manager retains control over the scope of the work. If changes arise, there is no need to amend the contract.

The model also has advantages for IT service providers: It eliminates the time and cost of responding to incremental requests and change orders. The customer’s product manager retains accountability for scope, priorities and outcomes while setting clear expectations for the IT service provider.

To ensure that these managed capacity arrangements are productive, contracts typically limit team member turnover and allow customers to exit the contract if they are disappointed with their vendor teams’ effectiveness.