Until recently, the outsourcing of IT services and business processes has been viewed as strictly for large companies with large IT departments and large IT budgets. But that is changing. Even though the market for outsourcing for companies like yours is small in relative terms, it is a growing one.
Cost savings and improved quality of service are two reasons why SMEs are beginning to look at outsourcing IT functions, according to recent research from analyst firm Butler Group. After all, the potential benefits of outsourcing IT systems, such as a reduction in running costs and getting the benefit of a supplier’s specialist IT skills and experience. are just as attractive to a 50-strong firm as they are to a FTSE 100 company with a global IT department of thousands.
“A small but growing legion of SMEs is taking the plunge into outsourcing,” says Robert Brown, principal analyst at analyst firm Gartner. “In the past, smaller businesses have tended to take a ‘toe-in-the-water’ approach for SMEs; they have outsourced their desktops or helpdesk services.”
Suppliers including Oracle and Siebel will likely be targeting your company with a range of outsourced services. Oracle, for example, offers the option of an outsourced service for all its main products, although it declined to reveal how many SME customers it has in the UK. For the service, Oracle runs the hardware or software on its own systems or through another supplier. Charges are monthly. Oracle is responsible for running the technology to meet the service levels you agree upon. All you need is a web browser and a website address to plug in.
But given that the main outsourcing suppliers rely on larger companies for most of their business – and have until recently largely ignored the small business market – why should your company now trust them to run your IT systems?
Alan Hartwell, vice president of marketing for Oracle in the UK and Ireland, admits that it has previously failed to come up with an outsourcing service tailored to the needs of smaller businesses.
“One reason why we were not hitting the [SME outsourcing] market was not because of the technology – that could scale down for the needs of SMEs,” he says. “The problem was that we were used to engaging with big corporates with big IT departments, but the SME has less time to negotiate contracts with suppliers and less people to engage with the [supplier’s] sales and technical support team.” Oracle will sell its outsourcing services to your company through computer reseller firms and system integrators – firms
that have more experience in addressing your market sector.
But however appreciative and cognisant a supplier’s sales team is of your firm’s IT needs, the success of the service will be hard to measure if your contract is too vague or mired in jargon-ridden management speak. The failure of outsourcing deals to meet the expectations of the user is often down to an ill-worded or inflexible contract, one that cannot adapt to meet the changing needs of your business. Changes which by definition a CRM system will cause.
Hartwell stresses that Oracle’s contracts are simple to understand, offering a partial refund if an outsourced service is below standard. “We have a very simple contract,” he says. “We say what the system does and if you’re unhappy with the performance give us reasons why and we can’t fix it then we’ll refund you some money. We have worked through all the barriers that have stopped people buying our software in the mid-market.”
Manufacturer and retailer Magnet is one medium-sized company that has decided to outsource its IT and finance functions. In a £30m seven-year deal earlier this year, Magnet outsourced its IT, finance and accounting functions to Liberata, a UK supplier specialising in business process outsourcing services. Magnet says the deal will allow it to focus on increasing sales and improve customer service while getting a higher quality of service from its IT and accounting departments.
Stephen Alambritis, head of press and parliamentary affairs for the Federation of Small Businesses, which has more than 185,000 members, says that IT outsourcing can help cut your company’s costs, particularly if your firm employees over 50 people. “By outsourcing [an SME] is not responsible for staff costs such as maternity leave and redundancy payments,” he says. “Outsourcing is a way to reduce overheads.”
But alongside the benefits of outsourcing are other risks – as well as legal expenses, warns Alambritis. “Outsourcing relies on a lot of trust. The sub-contractor of the supplier, for example, is looking after your customers. SMEs need good legal advice when outsourcing.”
Your company also needs to have realistic expectations about the level of attention you want to receive from a large supplier, warns Bob McDowell, a director at Bloor Research. “SMEs generally have to accept [an outsourced service from the supplier] that is more commoditised and not tailored to their requirements,” says McDowell. “It’s a question of economies of scale,” he says, “It’s normally not cost-effective for a supplier to offer each of their 400 SME customers a tailored service, but they could clearly tailor a service for a large company [given the higher value of the contract].”
It is still relatively early days for the SME outsourcing market, but it is likely to develop along similar lines to that of the larger company market. One of the main trends among larger companies has been the growth of business process outsourcing.
Here your company would hand over back-office business functions (for instance, claims processing), customer services (call centres) or even whole departments (finance and administration) to the external supplier.
With the potential to cut costs and plug skills gaps, outsourcing is becoming an increasingly attractive option for your business. But given the immaturity for the market and the easily overlooked costs and complications involved in outsourcing, your company (and your suppliers) will face a steep learning curve before outsourcing becomes a mainstream option.
Outsourcing offerings for SMEs
Will run its main software products on behalf of SME customers on its own systems. You need an Internet browser and web site to use the software and plug-into Oracle’s service, for which you are charged monthly.
Hewlett Packard says that there is a growing demand from SMEs for technical support for hardware.
“We are not seeing much traditional-style outsourcing within the SME market, but what we are seeing is an increasing interest in SMEs wanting to look at outsourcing remote support,” says David Smith, Hewlett Packard’s manager for small and medium-sized businesses in the UK and Ireland. “Examples of this are remote monitoring, health checks, printer problem diagnosis. These are typically is delivered via our channel partners. HP provides the enabling products, for example Insight Manager 7, on our servers, and for our printers’ embedded web servers and virtual machines.
Smith claims increased interest from SMEs in letting suppliers host IT systems and paying for this service as they use it rather than a fixed charge.
Siebel recently launched a hosted customer relationship management software service in partnership with IBM.
Designed to make complex CRM software more accessible and affordable the online subscription-service costs £42 a month. The service is available on demand from a website. Siebel believes its On-demand Service is ideal for companies who can start running their own CRM systems without having to go through the effort of installing the software themselves.
Benefits of outsourcing
1. Improved service levels and skills.
2. A more competitive business
3. Shortened product implementation times.
4. Reduced costs overall (capital and operational expenditure).
1. Start small; clearly define what is in scope for outsourcing.
2. Be selective in what functions you choose to outsource; don’t outsource everything rashly. It may be that some functions are inappropriate to be outsourced.
3. You are in control. Beware of suppliers trying to sell you unnecessary services.
4. Keep strategic business objectives in mind when in discussions, even when dealing with technical minutiae.
5. Ensure adequate measurement of existing IT systems and processes before you outsource.
This was first published in November 2003