Traditional outsourcing solutions are geared towards large
corporations, but managed service provision uses the Internet to
offer the cost benefits of outsourcing to everyone
Received wisdom has it that in times of economic difficulty the IT
outsourcing industry benefits. This is because outsourcing is a way
of reducing salaried headcount and accounting IT costs to deferred
capital expenditure, which helps cash-flow.
However, the outsourcing option has largely been the preserve of
large corporations because the professional service organisations
that offer this capability work to a business model that assumes a
certain size of contract and type of service.
This often means a facilities management service, typically
involving the less glamorous side of IT such as systems management
and the testing of an application.
Until recently, this has meant a supplier taking over a business'
existing IT infrastructure, renting or buying floor space from the
company, and hiring some or all of the firm's IT staff.
Alternatively, the supplier would subsume the client's IT operation
entirely into one of its own facilities and put its own staff to
work on providing the client's day-to-day operations.
Both of these models have been used for many years by service
providers such as EDS and IBM Global Services.
However, a cheaper form of outsourcing is now emerging, thanks
largely to the Internet - managed service provision (MSP).
The Internet is changing the traditional outsourcing model. Before
the rise of the networked economy, a managed service was provided
on a traditional "outsourced" basis.
This meant the service provider would either situate personnel on
the client's site for significant periods of time or relocate a
client's IT operations to its own site.
For some users, there are a number of downsides to this approach.
It can be a time-consuming, highly expensive endeavour involving a
major cultural adjustment on the part of the client. It is also
unsuitable for smaller organisations or those that experience
frequent rapid change.
However, the Internet has made possible a new distribution model
for managed services, which is being pioneered by companies such as
Loudcloud in the US and Jefferson County in the UK. This new model
negates the need for the supplier to take over the existing IT
infrastructure of the user company.
Either the user can have remote access to the service provider's IT
infrastructure, or the service provider accesses the client's site
remotely, either via the Web or a virtual private network.
Basically, the MSP market is a new delivery channel for
application, system and network management services.
In fact, many MSPs compete with the professional service arms of
software suppliers such as Computer Associates, Hewlett-Packard and
Tivoli, which sell systems and application management software on a
licensed basis.
Yet these software suppliers regard MSPs as partners rather than
direct competitors. This is because MSPs deliver the same
functionality as software houses, but in a way which most do not
yet choose to offer - distributed and remotely managed over an IP
network.
MSP can be more cost-effective than DIY. The decision to use an MSP
involves the classic "rent versus buy" calculations for software,
which were first raised by the bureau services market.
Under the DIY approach, IT departments either build their own
software or buy it off the shelf and manage it themselves.
But with the growing popularity of MSP services users can pass on
responsibility for implementing and operating IT systems to
outsourcing suppliers. Increasingly, then, the question facing IT
departments is whether to buy or rent an IT service, rather than
just some software.
For instance, it is not unusual today for an IT department to
consider implementing a sales management database application
in-house or outsourcing an online solution.
In many ways, the case is stronger for outsourcing managed services
than for outsourcing off-the-shelf applications. The work that is
offloaded with MSP is tedious and labour-intensive, while some
might argue that implementing, say, sales management tools is
interesting and career-enhancing.
Some of the factors to consider when doing a cost-benefit analysis
for MSP are: hardware purchases, such as equipment for an
operations centre; software components, such as application and
system management tools; adding staff for 24x7 coverage; training
staff in new software and processes; devoting staff time to
development and implementation; and outside consulting to help with
design.
After in-house capability is designed and implemented, ongoing
maintenance and staffing for three shifts of cover 365 days a year
must be budgeted annually.
This compares with outsourcing the entire exercise, for a quite
cost-effective monthly fee that ranges from a few pounds per device
covered to a couple of thousand pounds a month for low-level MSP.
High-level implementations will inevitably be considerably more
costly.
MSP: cost benefit analysis
Some of the factors to
consider when doing a cost-benefit analysis for managed service
provision are:
- Hardware purchases, such as equipment for an operations
centre
- Software components, such as application and system management
tools
- Adding staff for 24x7 coverage
- Training staff in new software and processes
- Devoting staff time to development and implementation
- Outside consulting to help with design
- After in-house capability is designed and implemented, ongoing
maintenance and staffing for three shifts of cover 365 days a year
must be budgeted annually.
Katy Ring is research director for e-business at Ovum