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The Outsourcing Continuum, Part VI: Making the Decision

By Mike Scheuerman

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Outsourcing is a business decision that weighs the strategic plans for the company against the resources required to accomplish those goals. Determining the appropriate resource allotment for any particular goal involves considering both tangible and intangible costs to achieve the goal. For example, if your goal is to increase market share in a particular market segment, then you may commit more resources to the development of product enhancements that appeal to that market segment―as well as, increasing the marketing and sales resources that target that market.

In this case, you may have your internal staff direct the efforts of outside organizations to print and distribute new sales literature. You might also have an outside engineering firm work on the product enhancement under the direction of your product development management team. In each of these cases, you have a tangible cost for getting a particular piece of work accomplished. You also have an intangible cost related to the quality and timeliness of getting the job done. Of course, you can do all the work internally, but unless you have the right people with the right skills, your product quality and time to market may suffer. The intangible cost would be a missed market window.

The same kind of logic applies to outsourcing your IT infrastructure. Are you going to commit your IT resources to building and maintaining servers and networks or do you want them working on things that help the company meet its strategic goals? The answer to that question obviously has to do with why you are in business. Most companies are not in the business of providing IT infrastructure support. IT is simply a means to an end. So, why not consider letting someone else do the work of supporting your networks and focus your IT staff on business process enhancement and managing the outsourced work.

Questions you should ask when making the outsourcing decision:

Business Strategy

Here the goal is to move toward an environment where infrastructure is supported by outside service experts while maintaining the business critical elements in-house. If, for example, you are deploying a new custom software application that will do great things for the business there are several elements of the project that might be outsourced. You might contract to have some of the programming done by outside vendors, while maintaining project management control in-house. You could have the servers that the application runs on managed by an outside firm. You might even think about building the entire application on a platform such as the ones provided by SalesForce.com, Google, or Amazon.

The point is that your technology strategy should be focused on providing business value rather than infrastructure management.

Developing a strategy that puts critical elements of technology in the hands of others is a little scary. That kind of strategy requires that your IT team develop a new set of management skills to ensure you find and manage the right partners. The technology team will have to gain more insight into the company’s business processes and strategy, a greater understanding of the service levels needed, and a better way to perform vendor due diligence investigations.

The IT team is no longer strictly in charge of technology, but rather of ensuring that everyone in the company can get their job done. The competitive edge is not in the technology but the application of the technology in innovative, cost-effective ways.

IT Value vs. Cost

Making the switch to concentrating on the "Information" in Information Technology will be challenging for many of today’s IT managers. They have always worried about the speeds and feeds and less about how the equipment under their control provides good value. Infrastructure management is necessary but not sufficient to provide business users and managers with the information they need to make critical business decisions each and every day.

The challenge to implementing this model is developing a true cost model of IT services so a reasonable comparison of costs and goals can be achieved. Today, the cost of IT is calculated largely on the personnel costs and the capital costs of the assets that IT provides. In truth, the opportunity costs of not providing more effective utilization of people in the business units is unaccounted for (this assumes, of course, that IT does improve effectiveness). The cost of not being able to determine the state of the business in a more timely way is left out of the equation. And the cost of decisions being made with incomplete information is missed. The cost of system down time is also largely ignored.

If, for example, you had 40 people making $25/hour and your systems were down just .5% of the time, it would cost you $43,800 per year. Putting real dollar figures to intangible items is difficult, but the risk to the business is too high not to make an educated estimate.

Most business managers never think about the technology they use every day and how lost they would be without it. They are concerned about the cost of the technology and what it lacks. These are real concerns. But, if business management can step back and think about IT as a utility they will begin to see that trying to keep the IT infrastructure running is like buying and maintaining your own power plant. You wouldn’t do that because you can’t justify the cost.

You use the power to run your business and focus on the things that make your business successful, you don’t worry about buying coal to keep the power plant running. IT should be viewed the same way, it is an information utility. The real value comes from the information that is generated by the plant, not in the electricity flowing through the wires.

Outsourcing Value

Step back and look at what you’re doing. By now you’ve outsourced your payroll so people get paid the right amount on time. You have outsourced your sales process management to somebody like SalesForce.com or Microsoft Office Live. Why aren’t you outsourcing the other pieces of business process, like support, to somebody who knows what they’re doing? They have the experienced staff to solve problems quickly. They can help you put together a disaster recovery plan. They can help you protect your valuable information from theft and hackers. Your IT staff with limited knowledge and resources cannot do that no matter how smart or hard working they are. Get them some help.

One caveat, don’t outsource and forget. You need to manage an outsourcing partner just as you would an employee. It’s an important part of your company and you don’t want to just let somebody else make all the decisions when they don’t sit in your seat. Will outsourcing save you money? Maybe not directly, but when you calculate the lost opportunity costs of inefficient business processes, late development projects, time lost due to lack of skill or time or knowledge, the outsourcing decision will look a lot better.

Mike Scheuerman is an independent consultant with more than 26 years experience in strategic business planning and implementation. His experience from the computer room to the boardroom provides a broad spectrum view of how technology can be integrated with and contributes significantly to business strategy. Mike can be reached at mike@scheuerman.org.

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