Overview

The global IT services market, including hardware and software maintenance, consulting, systems integration, outsourcing and training, is undergoing phenomenal expansion. Outsourcing and applications hosting is a rapidly growing segment of this market, due in part to changing perceptions about those services. Companies are increasingly considering outsourcing as a competitive tactic, rather than just a cost-cutting measure. Strategic benefits that may contribute to a company's decision to outsource include faster returns, reduced technology risk, enhanced ability to exploit emerging technologies, instant scalability, reduced infrastructure and operating costs, and, underpinning all of these, the ability to refocus corporate energies away from IT and toward core business competencies.

Globalization and rapid technological innovation are helping to drive this trend. And developments in the outsourcing / hosting industry itself are also fuelling increased interest from business. Changes in how providers design and deliver their services are eroding some of the more prevalent barriers to outsourcing, including issues of control and data security.

This paper provides a brief discussion of the current outsourcing market and the reasons most often cited by businesses in favour of strategically outsourcing segments of their IT operations.

What They're Outsourcing

According to the Information Technology Association of America / (IT AA), specific information technology services that analysts have traditionally marked as prime candidates for outsourcing include:

* Operations at data processing facilities, from basic facilities to network services
* Software application development, maintenance, and management
* Business recovery and disaster recovery services
* Desktop and help desk services
* Program management services
* Telecommunication and network operation

As businesses continue to leverage web-based technologies and the Internet, this list will likely become increasingly dominated by web-related hosting functions, including web-site hosting, application hosting, and intra- and extranet hosting services.

"Reasons companies may be driven to outsource their intranets and extranets include the need to change applications to handle increased links to suppliers and customers and raising bandwidth requirements from new applications such as teleconferencing over the web." -Information Week 11.17.97:!

As IT is applied to more and more mainstream and industry-specific business functions, and as the rate of technology change continues to rise, businesses will find it harder to sustain the expertise and infrastructure necessary to stay ahead of the technology curve. But as outsourcers become more flexible in their services, businesses will have an increased ability to selectively outsource new functions
without complete re-engineering of their internal IS departments.

The Case For Outsourcing

Faster time-to-market, streamlined processes, improved productivity, better customer service-the benefits of applied IT are recognized competitive advantages. But the long process of planning and implementing an internal solution can compromise those benefits. Choosing and purchasing applications and hardware infrastructure, hiring staff, performing appropriate evaluation, testing and debugging, and addressing
Instant scalability of bandwidth and performance

Issues related to rollout-including training and corporate cultural issues-all those tasks can require months or years to complete; ages in technology terms. Outsourcing provides businesses a way to skip many of these steps. With debugged, pre-tested infrastructure and staff in place, outsourcing can provide the means to avoid long implementation delays and get out in front of the competition.

Reduced technology risk The speed with which new technologies, protocols and standards are introduced makes nearly any IT investment a risk. Outsourcing provides businesses with a way to continually access up-to-date technologies without risking instant obsolescence or continual reinvestment -all of which makes an outsourced IT solution a more sustainable business advantage.

Improved responsiveness Business strategies today must be extremely dynamic and responsive; and so must the IT that supports those strategies. Outsourcing enables quick response not only to new infrastructure needs like bandwidth or storage, but also to new strategic orientations. Adding or changing an application, tool or capability can be accomplished quickly and non-disruptively when a company does not have to be concerned with the addition, reorganization or removal of infrastructure and staff.

Transfer of staffing responsibility According to an Information Week" survey of 400 top-level IS managers conducted in September, 1997, network administrators, database administrators, and systems administrators are among the job titles in shortest supply. Hiring and maintaining qualified staff in IT fields is recognized as a major and growing problem for businesses. Training, 40lk, flexible hours, office space and equipment, career advancement, stock options, signing bonuses, competitive salaries-in a sellers' market, hiring and keeping good IT staff requires ongoing investment. Outsourcing insulates a business from those costs as well as the risks involved with losing key personnel.

The 10 occupations with the fastest employment growth, 1996-2006

Employment change, 1996-2006 (Numbers in thousands of jobs)
"[These occupations are) expected to be the top 3 fastest growing occupations and among the top 20 in the number of new jobs as computer applications continue to expand throughout the economy."

Access to emerging technologies

Few businesses can afford to keep up with the moving target of the "latest" technology. Yet getting a few steps behind can be a serious competitive disadvantage. Outsourcing allows businesses to enjoy much higher levels of technology refresh, without continual investments in new technology. In addition, new features and services become easier to roll out. Without having to independently evaluate, test, debug and develop expertise in a new technology area, the trial and adoption is significantly simplified.

Instant scalability of bandwidth and performance

"Outsourcing not only provides... the opportunity to "leapfrog" entire generations of technology, but also it ensures continual technology refreshment as outsourcing contractors make productivity investments in systems and equipment. [For organizations} not in the IT business, the process of productivity-driven systems renewal is difficult, if not impossible, to sustain. Outsourcing provides a way out of this dilemma, allowing customers to leverage the benefits of advanced systems while refocusing staff and budget resources on core business activities." -Source: ITAA

Growth of the user base, the addition of new applications or capabilities, expanding data-all those factors make planning for future bandwidth and performance needs tricky. Especially with internet applications, users (often customers) simply will not wait, so staying ahead of bandwidth needs is critical.

Infrastructure outsourcing provides businesses access to instant scalability of both bandwidth and performance-tapping as needed into provider resources that are capable of meeting their needs many times over.

Reduced infrastructure and operating costs

"Topping management agendas for IT spending this year are training, network storage, operating systems upgrades and network hardware. " -Information Week, 01.05.98 (j

Purchasing and maintaining hardware and software, upgrading and maintaining that hardware and software, paying staff to operate and manage IT systems-those costs are significant and ongoing. Outsourcing puts those cost burdens onto the providing company, where they can be spread among many customers.

"The primary test for determining whether an activity should be outsourced is its complexity and distance from core competencies. If an activity is highly complex or subject to frequent changes while being distant from a core competency, then it can be outsourced. For most organizations, intranets and extranets are neither simple nor a core competency, which makes them prime candidates for
outsourcing. "-Information Week, 11.17.97

Renewed focus on core competencies

Perhaps the most fundamental justification for outsourcing-in any industry-is that it allows the outsourcing business to focus time, energy and resources on core competencies: the things that set it apart from its competition and for which its infrastructure, culture and staff are best suited. In addition, outsourcing allows for each business function to be managed by experts in that field-ensuring that "best- of-breed" resources are applied to each task rather than the diluted resources of the organization. For example, as businesses look increasingly toward electronic commerce solutions, concerns like security, registration and payments, and internet-based technologies become critical business concerns. But unless it is your business to stay up to date on these issues, doing so only detracts attention from your core competencies.

CASE IN POINT: WEB SERVERS

Simply deploying a web server requires considerable know-how in areas outside the focus of most businesses, including:

* Internet server hardware
* Internet server software
* Internet security
* Internet connectivity
* System operation and administration
* Backup, recovery and backup power supplies

Changing approaches help overcome obstacles

Businesses that choose not to outsource after examining it as a strategic option do so for a variety of reasons, including a desire to maintain complete control over IT functions, concerns over data security, and the difficulty of making accurate, convincing cost comparisons between outsourcing and "DIY." Increasingly, changes in the outsourcing industry and changing attitudes toward outsourcing in general are helping to overcome those barriers.

"The use of third-party IT services will evolve from a pure balance sheet decision to a fulfilment vehicle for strategic business and IT needs." -Meta Group, 09.25.97

Greater choice and greater control

Outsourcing is no longer an all-or-nothing issue. Customers can choose to outsource or out-host strategic subsets of just about any IT function, without handing over the keys to the entire data center. Outsourcers are providing more tailorable solutions and are being more responsive to businesses that want to remain involved in their IT solution. The availability of tools for remote management and monitoring are helping to address this issue-providing customers an online link to their system or usage status at any time.

Outsourcing as a competitive strategy
For many businesses, the elaborate analysis necessary to accurately compare the costs of internal implementations to outsourcing is becoming a moot point. Uptime, bandwidth, security and data protection--outsourcers usually have resources and expertise in these areas that simply cannot be matched by most organizations in-house. Companies are seeing the value of outsourcing in terms of improved services and competition rather than one of cost reduction.

Conclusion

IT outsourcing vs. DIY is a choice nearly every business with even a modest level of technological sophistication will face at some point. There are valid reasons to support either choice. But clearly, as the rate of technological change and the importance of IT to overall business competitiveness continue to increase, outsourcing will remain a valuable and feasible business strategy.

Sources:

1 ITAA Publication: Meeting Federal IT Needs Through Outsourcing
2 InformationWeek, November 11, 1997, "Outsourcing-Case For Intranet Outsourcing.
3 InformationWeek, November 3,1997, "Staffmg: Short Supply."
4 Bureau of Labor Statistics 1998/99 Occupational Outlook Handbook
5 ITAA Publication Meeting Federal IT Needs Through Outsourcing
6 InformationWeek, January 5,1998, "IT spending in 98: full speed ahead."
7 lnfon1lation Week, November 17, 1997, "Outsourcing-Case For Intranet Outsourcing," quoting Frank Casale, executive director and founder of the Outsourcing Institute
8 META Group, Services & Systems Management Strategies, September 25,1997, File 647

This article was published by Interliant. For more information check on www.interliant.com