In-House or Outsource; SMBs Reevaluate Their Options

By Adam Stone | Posted January 30, 2004

As Ashish Paul has talked to small-business owners over the years, he has evolved a simple theory as to why entrepreneurs contract out their technology-driven functions.

"They want to own the customer, they want to own the revenues. But they don't want to own the IT function, which fortunately can be entirely outsourced," said Paul, president of outsourcing specialty firm Cincom iOutsource.

There is ample evidence to back up Paul's observations. In the year 2000, some 54 percent of IT services purchased in North America were outsourced, according to the Gartner Group research house, which predicts that number will rise to 59 percent by 2005.

What's driving the trend? On the one hand, small business has become increasingly dependent on technology-driven solutions for everything from accounting to human resource management to inventory functions. At the same time, a number of technological advances continue to make it easier and cheaper to contract out these functions.

Intuit for example has taken its outsource payroll offerings and made them available on the Web. In doing so, the software maker has made outsourcing a far more compelling offering for small businesses. Not only can a business owner now view and manage employee compensation via Web-based applications, but the outsourced offerings also make it possible to give employees access to their personal information — retirement plans, vacation days and so on — without putting an added burden on management.

"You see that in a lot of your human resource benefit areas," said Peter Ross, director of sales for outsource payroll at Intuit. "You are able to do your purchases, your travel. There are a lot of things where small business can turn to the Web to make it easier."

In fact, the availability of services over the Web is one of the prime factors driving the outsourcing trend. The whole phenomenon of the application service provider, or ASP, has been a boon, especially for niche markets where the cost of specialized software can challenge the financial resources of many smaller firms.

In many cases, "outside hosting of some applications can save the expense of buying a $10,000 server and hiring a full-time employee to run it," said Chris Neal, research director at Sage Research.

The widespread availability of secure broadband connectivity has pushed down the price of ASPs. At the same time the cost of mainframes and other infrastructure has come way down, making it possible for outsource providers to deliver services at a lower cost. Further, some of the big providers such as IBM and Oracle now offer pay-as-you-go pricing for their services, "so you have a minimum that you pay to start off, and beyond this you pay more as you grow," said Paul.

What are we outsourcing? "It is all the things that are very important to an organization's operations, but they are on the periphery of what makes an organization tick," said Stanley W. Mandel, and executive professor at Wake Forest University's Babcock Graduate School of Management. Take for instance IT security. "You have to have it, but having a great firewall is not what it going to drive the success of your business."

Neal points to the help desk function as another area for potential savings. Few small-business owners want to keep a full-time IT troubleshooter on staff to handle problems with employees' desktops. Better to let the pros take care of it on an as-needed basis. The same holds true for network monitoring and maintenance. Anything that alleviates the need for additional IT staff is a potential target for outsourcing.

Then there are the big-ticket items that can help to drive growth, such as a sophisticated database to track and manage customer contacts. This might be beyond one's reach as a purchase, but it becomes affordable in the ASP model, with the advantage that upkeep of the system falls to the ASP provider, rather than to one's internal IT staff.

Still, outsourcing is not a panacea. If for instance one were to contract out the payroll function, it would be important to think about the kinds of information one was ready to share. In sharing HR data with employees, "you have to understand what your workforce is like. Do you grant access, how much access to you allow, and what information do you want to have out there?" said Ross.

Finally, there is the security consideration. Are there secure IT-outsource solutions? Absolutely. But that does not help everyone to sleep easy.

"Businesses across the spectrum have mixed feelings about that," said Neal. "When I hear people say they don't want to outsource something, more often than not it is for security reasons. They just don't trust another provider to have access to those systems."

Do you have a comment or question about this article or other small business topics in general? Speak out in the SmallBusinessComputing.com Forums. Join the discussion today!

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