Pendulum Swings Back: Insource Your IT To Save Money
from the and-so-it-goes... dept
It’s kinda funny how various “trends” in IT get taken so far that they reach the point where finally people realize the extreme might not have made sense. For years, “outsourcing” was all the rage and it made a few companies an awful lot of money. While many warned that outsourcing something as critical as IT could lead to unintended consequences, many execs swallowed the kool-aid and did deals without thinking through all of the consequences. This isn’t to say outsourcing IT never works. In many cases, it does. But it seemed to be taken to such an extreme that that you knew eventually the pendulum would swing back the other way.
So here we are with articles popping up about how a company has saved millions of dollars by “insourcing” its IT and taking it back from an outsourced provider. Of course, the more cynical among you might suggest that the trend towards outsourcing was pushed mainly by consultants who made their money making those deals work — and the trend in the other direction may be equally pushed by those same consultants looking for new business. The real story, of course, is that depending on the business and what a company is trying to do, there are always pros and cons to outsourcing or keeping IT in-house, but the claims of miraculous savings in either direction tend to overstate the benefits while ignoring the downsides.
Filed Under: insourcing, outsourcing
Comments on “Pendulum Swings Back: Insource Your IT To Save Money”
the common loser..
Whatever decision is made the common loser in any dramatic change is usually the customer.
More so this happens with outsourcing when 1st/2nd level support is setup in countries that have little experience with technology of any sort and then have to try and deal with an already ‘hot’ environment. It can take years for the inexperienced outsourced team to even get settled into processes that allow them to handle the new business and culture attached to it…most fail to even come close yet the savings speak otherwise.
until the profits stagnate too!…then talk turns to bringing things back onshore.
Whatever happened to plain old striving for efficiency through process improvement? rather than profit chasing…
insource via saas
I think much of this is the result of a higher acceptance of hosted services , such as sales force, netsuite and the multitude of email hosting and cleansing companies. Its perfectly viable to build a SMB infrastructure that has email, acccounting, CRM, voip, all in a hosted environment without any heavy hardware or IT staffing investment.
seen it, done it
I’ve seen some of these “soup to nuts” outsourcing deals that are structured for the sole purpose of making a lot fo money for the big IT outsourcing company. Generally they have complex SLAs that the entire process is designed to meet easily, weather things work or not is a different story.
Hosted services had a similar problem in the past, but it is getting better. But if you look at the base price of a lot of these hosted services, it makes you wonder how they can turn a profit, or if the idea is to gain millions of customers, you’ll have enough who need/want your more expensive and profitable offerings.
No surprise to me..
As an IT person, I always wondered how execs felt outsourcing saved money. In many cases, the outsourcing company hired the internal staff. So now you not only pay for the people and equipment, you must pay a nice profit margin to the outsourcing company.
Re: No surprise to me..
Take a company that spends say $100k/yr in staff and other things for its support department. Consulting firm comes in and says they can do it for $75k/yr. The big wigs of that company are too busy trying to figure out how to get that extra $25k/yr into their own pockets to realize that chances are:
The people the jobs get outsourced to are probably not getting paid as muc.
The people the jobs get outsourced to are probably not as qualified for the needs of the company they are supporting.
Chances are with that support department outsourced there are some expenses that will have to be covered by some other means that requires money. Meaning they will have to use some of that extra $25k/yr.
Thing is corporate big wigs’ eyes light up like Christmas tress at being told they can save money because it more than likely means more money in their own pockets (usually in the form of a bonus for finding a way to cut costs).
The IT dept. I work in got evaluated by way of a survey (sent to bank employees) and a review of our spending by some consultants. Part of their findings was that they claimed we could cut our costs by up to 75% (or some insane number). When asked how we could do so they had precious few actual answers and the few they did offer were shot down by the fact that implementing those answers would compromise security (and this is a bank mind so security is nothing to joke about here) or require us to pay for another solution in order to make up for features/functions their cost saving answer would take away.
I worked for a contract IT company that supported one of the largest consumer goods companies in the world, before and after it outsourced the entire IT organization. I can tell you without a doubt that there may have been a savings – but at the cost of the quality support, accountability, and especially customer service.
I will say up front that I work for an outsourcing company. Our bread and butter is application and desktop hosting through terminal services. We target small to medium-size businesses, as they are the ones who outsourcing can largely benefit. Big business is better off running their own IT in-house, because they can afford to fire all the trained staff that can handle their systems. Many small businesses cannot afford lots of high-tech staff, so we save them money by providing the technology they need, as well as the trained technicians who know how to handle it. Not only does that save them money on staff, but they don’t have to have non-technical execs sit and worry about technology, meaning they can focus on their own business. Basically, we provide the value of technology to companies who are not in the business of technology, and we’re as much of a staffing solution as we are an IT hosting provider. Depending on what kind of company we’re talking about, they stand to gain a lot by hosting their systems with us. And of course there are pros and cons to every solution, but don’t think for a minute that outsourcing is hands-down a bad idea (unless you’re outsourcing to India; we’re in the USA, upper midwest). It all depends on your situation.
It all comes down to final costs in the end.
The total cost of employee – including salary, benefits, office space/supplies/support, etc. maybe $200 an hour.
The total cost of an Consultant – fixed rate of say $150 an hour.
Easy to do the math here.
I have worked at places where the cost difference was as different as $2. The Consultants worked out to $2 cheaper than the staff after the total costs of everything was taken into account!
The Consultants are typically all very experienced and work like dogs. The regular staff typically know nothing or very little compared to Consultants. The reason Consultants are there is provide expert services for the short term. The goal for the company is to have the Consultants eventually transfer knowledge to your staff. This way long term maintenance can be done in house. The thing is this long term maintenance is guaranteed cash flow for the Consultants. So when maintenance come about a wise
Consultant will price themselves just below the total cost of the client.
Two IT models
If your organization thinks IT is a commodity and not a strategic operation, (‘ve had CFO’s tell me IT is the same as electricity, so why should he care where he gets it from) then outsourcing is absolutely the way to go because it does save money. the downside is you usually get less customization, control, security and quality. Which is fine for these organizations.
On the other hand those who view IT as something strategic that provides an advantage over competitors, absolutely keep it in house (they even call it their IP). They usually pay more for highly skilled staff but, they get what their monies worth.
In the end do you go out to eat every night and pick off the menu, or do you hire a chef.
“The real story, of course, is that depending on the business and what a company is trying to do, there are always pros and cons to outsourcing or keeping IT in-house”
And that’s really the crux of the matter. Large companies outsourcing their IT to other large IT management firms may be a practice on the dwindle, but the opposite is true when talking about the small/mid firm outsourcing to the small/mid IT management firms, that practice is becoming increasingly more common. And there’s a good reason why: if the IT management firm has the proper tools, it IS cheaper and just as effective as having an internal IT staff.
Without getting into specifics about our company, we have invested heavily in IT management technology that allows us to remotely support small and medium sized companies to the tune of having one engineer for every hundred or so of our customer’s users. All of our agreements, whether it’s for full desktop/server/network support, or one of the parsed out services like managed BDR, managed SPAM blocking, managed email archiving, etc., all include onsite SLA’s, all you can eat phone/email/web portal tech support, 24×7 monitoring and maintenance, patch management, and more. How is this possible?
Two reasons. First, we use enterprise level IT management technology, in this case Kaseya. It allows us to do a ridiculous amount of work in an automated fashion. The other reason is that we work small, and we work locally. 90% of our customers are a couple blocks away, so our SLA’s aren’t difficult to maintain, and these companies never have more than 100 users in their offices.
For an avg. SMB company, let’s say a single network that includes 25 desktops and 3 servers, we’d charge somewhere in the neighborhood of $1500/month for all of the above, depending on a few optionals (End point protection, SPAM service, Email hosting, etc.). That’s $18k/year for a dedicated team of engineers a couple blocks away, one which doesn’t take any sick days or vacations. Or they could go out and hire a single qualified engineer for $45k/year to start, plus benefits, plus sick/vacation time, plus risk that the engineer finds a different job and leaves, etc. etc. etc.
For SMB, outsourcing to a small, dedicated company truly is the only smart way to go….
The issues with IT inefficiency generally comes in two flavors:
Tactics without Strategy
Strategy without Tactics
Unless you have a plan to overcome whichever problem applies to your company, in-sourcing or out-sourcing doesn’t matter.
People who claim that outsourcing can never work and is always more effective are basically saying that they can’t manage vendors. It’s the execution that’s the issue.
Some organizations are better at the execution than others and that plays in the CBA.
In other cases, corporate IT has become so large, opaque, entrenched with fiefdoms that outsourcing is the fastest way to break up the old empires and remove the entrenched people who will only slow down rapid changes.
Other arguments against outsourcing lack perspective. I’m sure we’ve all seen poor corporate help desk who think they have the monopoly on their services. They don’t realize that they have to compete to satisfy their users otherwise someone will start looking at their costs and what they provide. There are certainly cases where IT departments has put themselves out of a job for not being competitive.
These perspectives come mainly from very large corporations with large IT shops.
(And, by the way, mainframes *are* [still] more cost effective than bunches of little “servers”.)
Sometimes it Fits, Othertimes not so Much
I also work for a company that offers managed services, and it does make sense for small to medium sized businesses since you end up paying less and you get a lot more for your money. When it comes to tech support you can measure a tech by the number of environments they’ve worked and the variety of problems they have solved.
If you have a tiny company that only has ten people in it and a single server, you could pay $20,000 plus benefits a year for someone who has tier 1 tech skills to try to support your staff or you could go with a hosting solution that would cost closer to $6,000 a year and give you access to people who have been working in the field for twenty years. In this kind of environment the choice is obvious.
For large enterprises with hundreds of thousands of users, multiple geographic locations and a mesh of servers hosting makes less sense since you can already exploit your own economies of scale as much as a hosted IT firm. This way you can also keep and train your own team of engineers so they know the users and the environment which makes security a lot tighter as well. Finally as an added bonus to brass can make sure that their IT staff stays in line since they are only a shout away.
The joke among it folk at my employer is that as we outsource – money is saved. Then as the same function is insourced – money is saved. In source and out source multiple times and eventually it will be free!!!!!!!
Fix vs. Variable
So much of the decision to in-source vs. outsource boils down to fixed costs versus variable costs. Unfortunately, a company can be more nimble to customers and responsive to Wall Street by outsourcing.
My office recently switched back to insourcing our IT after a few years of outsourcing. We found that it was just not practical and cost efficient to use outside help for IT and its been wonderful having them back. That being said, our office does still feel that outsourcing does have its place. We still use a telephone answering service to outsource our calls and absolutely love it. We feel it makes office procedures more efficient and has also helped us cut costs on employees and supplies.
For us it works
Our office switched back to an in house IT Department rather than years of outsourcing. We feel it’s more cost efficient to have them in-house. Furthermore, our servers are maintained and if there is a problem we have someone there immediately.
We host a blog, Hype or Ripe, where IT leaders share their opinions by voting if a topic is “ripe” or just “hype.” Seeing all these comments on this article, I thought you might be interested in seeing the poll on “Are Data Center Professionals Using Outsourcing to Meet Capacity?” http://www.ict-log.us/8IpEC