Small business is taking a lesson from big-business HR: outsourcing can save money.
The tech guy in charge of the PCs and phones at Pretium Capital Group used to be a junior financial consultant with no formal IT training. The arrangement worked fine when the Huntsville, Ala., financial consulting firm employed only three advisors. But two years ago, as Pretium hired more people and its Windows NT network grew more complex, the shortcomings of relying on part-time, amateur tech support became evident. “It was very difficult because [IT support] took more and more of his time, and there were more advanced things that we wanted to do but couldn’t,” says Keith Lowe, a principal of the firm.
Yet with only seven employees, Pretium couldn’t justify hiring a full-time IT manager. The solution to the company’s too-big, too-small dilemma was entrusting daily network maintenance and troubleshooting to an outsider, StreetLight Information Technologies of Huntsville. The company handles everything–hardware repair, software upgrades, password resets, help desk–freeing Lowe and his fellow consultants to concentrate on dispensing pecuniary advice. “By outsourcing to StreetLight, we get access to some really smart people who understand the technology and can fix it or do whatever,” Lowe says.
The “O” word is no longer taboo in small IT departments, whispered behind closed doors by managers fearful of dissing permanent staff. Taking a page from the human resources playbooks of large corporations, small- and medium-sized businesses (SMBs) are leveraging the strategic and financial advantages of reaching outside the company for IT assistance.
Cost cutting has long been a prime driver for outsourcing; for small, growing companies like Pretium, or for those with cyclical revenue flows, farming out software development or network management beats watching handsomely paid employees play Counter-Strike in their cubicles when the work pace slackens. Running a lean, responsive operation is even more crucial in today’s unforgiving economy. But IT outsourcing is increasingly becoming a long-term strategic tool for SMBs, a means to focus on what the company does best–and a way to lift the yoke of routine maintenance from the necks of employees, or tap into expertise that it otherwise couldn’t afford.
According to IDC, spending on IS outsourcing by SMBs in this country topped $10.7 billion in 2002, increasing almost 7 percent over last year despite widespread malaise in the IT sector.
“What we’re sensing is that the complexities of running the business are the drivers,” says Frank Casale, CEO of the Outsourcing Institute, an outsourcing association and consulting firm based in Jericho, N.Y. “Cost savings are now just a given. Now everybody is saying, ‘What else have you got, Mr. Service Provider?'”
There are two basic approaches to outsourcing: Hire an outside firm to take care of various IT functions (PC configuration, application management, Web site maintenance); or augment your permanent tech staff with consultants working under contract.
Leave it to the experts
The bold, visionary approach involves farming out big chunks of your IS domain–or the whole thing–to an IS outsourcer such as StreetLight, Baltimore, Md.-based TEKsystems, or Ajilon Consulting.
Ajilon, a multinational based in Towson, Md., offers a “total IT outsourcing solution” geared to SMBs that either can’t or would rather not run a productive, cost-effective IT department. For a monthly fee, Ajilon consultants will write, test, and maintain software; manage databases; design and update Web sites; and staff your help desk. Corporate partners furnish additional services such as managed hosting and offshore programming.
In a world in which top-flight IT confers competitive advantage, more and more smaller companies have come to realize that it’s often smarter to entrust at least some aspects of network operations to specialists, says Bob Ryder, vice president of Ajilon’s outsourcing practice. “Increased focus has come to the forefront because of the way information technology has to be dovetailed into strategy,” he says. “I definitely see a tier of the midmarket stepping up and saying, ‘You know, we can really focus on what we do well if we offload segments of these things that other people do better.'”
Then there are those alluring cost savings. Outsourcing lets IS managers modulate workflow and take advantage of an outsourcer’s ability to spread salaries, administration, office space, and other expenses over a broad client base. By time-sharing, you pay only for tech talent you actually use.
In a survey of Outsourcing Institute members last summer, focusing on core competencies and cutting costs ranked almost equally at the top of a list of reasons to outsource. Yet CEOs and CTOs at many small firms still resist the notion of outsourcing IT. “The biggest objection that we’ll hear initially is that they don’t want to lose control, ownership of those kinds of things,” Ryder says. “There’s a lot of pride in what they do.”
Reputable outsource providers strive to allay security fears–can I trust a hired gun with my data?–by vetting consultants, signing non-disclosure pacts, and erecting defenses (high-test firewalls, AES 128-bit encryption, keyed access to off-site facilities) that far exceed the capabilities of most small companies.
Keith Lowe had no problem relinquishing day-to-day oversight of Pretium’s precious servers and PCs when he saw how much money he’d save by contracting with StreetLight. He estimates that he pays the company one third of what one capable IT technician would cost. Lowe also realized that, aside from the benefits of strategic focus, outsourcing would eliminate high turnover, the bane of small-business IT departments. “It’s really hard for an IT professional to have an interesting career working for a financial services or law firm–you’re [seen as] overhead,” he observes.
Pretium pays StreetLight a monthly fee based on the number of devices–servers, PCs, notebooks, printers, firewalls–covered under the one-year service agreement. New hardware and services can be added at higher cost by modifying the agreement, which contains performance guarantees standard to the industry. For example, Pretium can cancel its contract if StreetLight’s off-site help desk doesn’t respond within five minutes 95 percent of the time, and rectify the problem within 60 days.
A little help here…
Feeling a bit queasy about handing over the IT reins to an outsourcer? Then consider supplementing your permanent staff when needed with consultants working on contract.
According to a 2001 study of outsourcing habits by the Yankee Group, over 51 percent of SMBs in the United States subscribe to this hybrid model. IT staffing firms or “body shops” cater to IS managers seeking to ride the roller coaster of fluctuating demand while retaining direct control of development projects and daily operations.
Mike Child, CTO of HPC Interactive (HPCI), an online publishing firm based in suburban Atlanta, relies on several IT staffing firms, including Matrix Resources of Atlanta and TEKsystems to lend a hand with Web development. Rapidly growing HPCI maintains a permanent IT staff of 25 for operational support, Web design, database maintenance, and quality assurance. But when the launch date for a new Web site looms, the well of available talent often runs dry.
“The demand of the business exceeds my capacity, so the choice is to deliver later, or bring additional resources on to deliver sooner,” Child says. He adds that he’s more comfortable contracting with an established IT staffing firm than hiring a freelancer off the street. Staffing companies interview and test applicants, take care of tax filings and other paperwork, and often will bear some of the cost of replacing a contractor who doesn’t perform as advertised. Signing on with a body shop is a lot like hiring a lawyer or accountant: You’re billed an hourly rate that rises in proportion to the scarcity of the talent in question. IT staffing contracts typically aren’t as long or as stringent as those for managed, function-oriented outsourcing. If a Matrix or TEKsystems consultant disappoints, Child can terminate the contract with two weeks’ notice, as if he or she were a regular employee.
Outsourcing vs. in-house
Hang on a minute–considering that IT salaries have dropped across the country, and formerly picky software engineers and Web developers are happy to take any job they can get, doesn’t it make sense to staff internally rather than pay high up-front consulting fees?
Well, yes and no. SMBs that can provide steady work for clearly defined positions such as CIO and network administrator will probably get more for their money by hiring in-house. HPCI’s Child has converted several contractors into permanent employees over the past two years after doing the math: Consulting fees for database administration run $80 to $100 per hour–over $160,000 annually. But he can hire a full-time DBA, benefits included, in Atlanta for less than $100,000.
For firms such as HPCI that regard IT as their core competency, bringing key positions into the fold also helps to maintain the brain trust; itinerant consultants inevitably take significant intellectual capital with them. But for episodic work such as software installation or Web development, outsourcing is usually preferable to hiring new employees who weigh down the bottom line once crunch time passes. “It all has to do with the duration of the engagement,” Child says. “The shorter the duration, the more money you save with outsourcing or staff augmentation.”
Outsourcing contracts have shortened over the past two years, an indication of the reluctance of companies to commit to any IT project, large or small. In 2000, the average staffing contract at Matrix Resources ran for a year, says Don Palmer, vice president of company sales. Today most of the firm’s contracts end after six months. But there’s no sign that CEOs and IT managers are abandoning outsourcing in an employers’ labor market. A nationwide survey of recruiters and hiring managers last fall by the IT jobs site Techies.com found a roughly even split between permanent and contract hiring. And not one of the 1,100 companies canvassed by the Outsourcing Institute said it would bring outsourced projects back in-house when their current outsourcing contract ends.
Raising the bar
Casale of the Outsourcing Institute predicts that SMBs will become more adventurous as a rebounding economy increases demand for IT services, following the lead of their Fortune 1000 brethren into Internet and e-commerce infrastructure, training, imaging services, wireless devices, and data storage. “Many organizations are just more comfortable [with outsourcing],” he says. “They’ve done the low-risk stuff and it seems to work fine, so they’re kind of moving the line over.”
Analysts expect more mid-sized firms to outsource offshore–post-9/11 xenophobia and regret over domestic IT unemployment notwithstanding. The savings are just too compelling to ignore: Ajilon claims that it can slash the cost of software development and management by up to 65 percent through an alliance with Vested Development Inc. (VDI), an offshore outsourcing provider with ISO 9001-certified facilities in Russia. Currently, 40 percent of VDI’s customers are SMBs.
One indication that IT outsourcing–along with general business process outsourcing–has achieved wide acceptance is the emergence of a new title in the corporate lexicon: chief resource officer (CRO). The Outsourcing Institute recommends that companies create the CRO position to establish and manage outsourcing relationships company wide. Three years ago, what manager would have admitted to being in charge of rendering employees superfluous?
Tread lightly into outsourcing
Thousands of companies offer every conceivable IT service, from basic help-desk support and network management to sophisticated application development and data mining. But only a handful may address your company’s unique mix of IT needs, suit your budget and culture, and demonstrate the ability to grow with you into new technologies and markets. Happiness in outsourcing depends on finding the right vendor, and negotiating a contract that both parties can live with at least for a few months. “If you take the right steps in the buying phase, you have a very high probability of outsourcing success,” says Bob Ryder, vice president of outsourcing for Ajilon, a large IT services firm. “Conversely, if you don’t take the right steps in the buying phase, there’s almost no chance of pulling the thing back on course. It’s just ugly forever.”
Some tips on beginning a beautiful outsourcing relationship:
Get what you ask for
Many small businesses outsource in crisis mode, farming out IT functions or calling a contractor when something breaks or becomes unmanageable. A smarter approach is to view outsourcing as a means to a strategic end–sharpening company focus, cutting costs, shortening time-to-market, leveraging critical expertise. The scope of the work and its objectives should be spelled out in your request for proposals (RFP)–a tool that can help resolve differing opinions on priorities and goals.
Picking the right vendor
Network with other IT professionals and outsourcing consultants to identify candidates for your short list. Does the company have the necessary bandwidth, and is it interested in the modest billings your RFP represents? Smaller IT services companies often have a better feel for the IT needs of small businesses. Whatever its size, the provider should be able to demonstrate return on investment in its presentation–how the project will reduce costs or boost productivity.
Tad Richard, vice president of technology development for Intellicisions, a strategic consulting firm in Cary, N.C., advises SMBs to follow up on client references, and get to know not just the sales guy but the project manager and developers who will actually do the work. “It’s as important to have a good working relationship with the outsourcing partner as it is for that partner to have technical expertise,” he says.
Doing the deal
The contract or services agreement is where the rubber meets the road; every line should be scrutinized for the spirit and letter of the outsourcing deal. The ideal contract is short-term and flexible, giving you the freedom to make adjustments as your IT infrastructure and business conditions change. Is pricing performance-based, with penalties for failing to meet service standards–common for ongoing maintenance contracts–or is it strictly based on time and materials? How can the service agreement be modified to cover additional PCs and servers, or extra services such as database administration?
After sealing the agreement, assign one or more internal staffers to manage the partnership. No outsourcing deal can work if its various components–human as well as technical–don’t function smoothly within your existing IT framework. Constant communication goes with the territory, says Frank Casale, CEO of the Outsourcing Institute, an outsourcing association and consulting firm: “An outsourcing relationship is like any other relationship: it can get better, or worse, depending on the attention you give it.”