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