Outsourcing Makes SMBs Flexible

According to Gartner analyst Mika Krammer, more than 70 percent of SMBs still waste their money on non-core IT activities such as telecommunications or maintaining and preserving their infrastructure. This costs both time and money. Krammer believes these areas are prime candidates for outsourcing, which will free up internal resources, increase productivity and also cut costs. Udo Nadolski, Managing Director of international management consultants Harvey Nash in Germany, estimates the net cost advantage of outsourcing, taking into account all interface and communication costs, “as being between 25 and 40 percent at the very least.”

For and against

Industry experts and analysts mainly expect to see two-figure growth rates on the outsourcing market over the next few years. “Companies the world over are concentrating their investments on their core business and are increasingly trying to outsource non-core business processes,” says Gartner analyst Rebecca Scholl, explaining the trend. In Germany alone, outsourcing as a proportion of the overall ITC budget will increase to around 20 percent, forecasts Harvey Nash. According to a survey of 1,000 mainly small to midsize businesses in the commercial, services and manufacturing sectors in Germany carried out by business consultants Deloitte & Touche, more than 60 percent of companies are attempting to cut costs by outsourcing IT. In their recent study, market research institutes Lünendonk and Techconsult come to the conclusion that 38 percent of German companies with fewer than 500 employees have outsourced IT to an external service provider. And according to research by Pierre Audoin Consultants (PAC), SMBs worldwide will be spending the massive sum of approx. Euro 4,000 billion for outsourcing services by 2007.
However, the main argument in favor of outsourcing is offset by an argument against, which is having an effect on absolute growth rates. Gartner analysts recently said that, with IT outsourcing projects in particular, companies often do not follow basic rules. In 2004 alone, around 50 percent of outsourcing projects will not bring the desired result, say the experts, since customers and service providers do not communicate enough with each other and when they do it is too superficial. They also advise that companies thoroughly think through and, more importantly, take time to consider the areas that can and are to be outsourced.

Defining clear goals and planning strategically

“Attempting to sort out unresolved problems through spontaneous outsourcing is (…) doomed to failure from the outset,” says a paper recently published by Deutsche Bank Research in conjunction with SAP Hosting. Ian Marriott, Vice President IT Services and Sourcing at Gartner, also warns against viewing outsourcing simply in terms of cutting costs and downsizing the workforce. And Florian Kieninger from consulting company Detecon takes the same line. For him, “Outsourcing is ultimately a business management decision, i.e. it’s not purely and simply a question of costs, though this is often a key trigger in these times of crisis.” Deloitte & Touche therefore does not believe outsourcing is a short-lived trend or even a buzzword, but sees it as a strategic tool for companies to improve their own business activities.
SMBs in particular have to spend time considering what should be outsourced, since the initial investments for outsourcing projects are often quite substantial. For instance, internal processes have to be standardized in advance and interfaces to a service provider’s processes have to be clearly defined, says the DB Research evaluation. A hurried outsourcing project, which leads to an unstructured solution, can do more harm than good and, rather than cutting costs, could even increase them. That’s why the first step should be to ascertain exactly what is to be outsourced, to what extent and finally to whom. Fundamentally, a company has to decide if it wants to partially outsource certain areas (selective outsourcing), outsource complete areas or even entire business operations such as payroll, production or IT (business process outsourcing). In the latter case, a service provider takes over full responsibility for this business process. Generally, all areas which do not form part of a company’s core business tend to be outsourced. For instance, this includes the classic outsourcing area of IT. Respectable IT service providers will guarantee consistently high levels of quality, reliability and security through contractual agreements (Service Level Agreements, SLAs). When it comes to IT outsourcing, decisions are also often made following gut instinct, since it is “heavily shaped by soft factors,” says Andreas Bureau, Director Consultant at META Group. Attributes such as “fair play”, “transparent pricing” and “a personal trusting relationship with the service provider” indicate that the whole thing has a human side to it all. And according to META Group, these factors are high on the agenda of users who advocate outsourcing, while Lünendonk says that, on the whole, experiences of IT outsourcing continue to be positive.

Outsourcing everything or …?

Following the definition given by Deloitte & Touche, companies can outsource everything which does not belong to their core business. The only requirement is that the external service provider can carry out the contracted-out tasks less expensively than is possible within the company. Though for SMBs in particular, this might not always be a feasible approach. A study by the Betriebswirtschaftliches Forschungszentrum für Fragen der mittelständischen Wirtschaft (BF/M) (Business Management Research Center for Issues Relating to the SMB Market) at the University of Bayreuth has revealed that, when SMBs outsource IT or parts of it, they adopt a selective approach. SMBs most frequently hand over control of system operation and application development. According to Volker Schilling, Managing Director of the BF/M, this is a sign that companies have recognized that customized developments are both time-consuming and expensive and are therefore relying increasingly on standard business management software. A solution such as SAP Business One can be easily adapted to suit individual requirements. However, agreeing on what will ultimately be outsourced frequently causes problems and SMBs might need longer to make themselves aware of the broad spectrum of IT outsourcing offerings.
Some SMBs still believe that someone “from outside” could never understand their business as well as they do, says Gartner analyst Mika Krammer, while others simply detest the thought of handing over the reins to a third party. Sometimes, outsourcing projects fail for the simple reason that SMBs cannot agree internally on what parts of IT belong to the core business. “Small and midsize companies want to keep control over their own destiny,” agrees Jeffrey Balentine from Deloitte & Touche. Unlike Krammer, he believes the reason for this is that SMBs have to be flexible due to the fast-paced environment they operate in and that a contractual tie to an external provider could eventually become an obstacle (e.g. if their business model changes).

Exploring new avenues

Meanwhile, advisors at consulting company Detecon suggest companies adopt a different perspective and recommend that SMBs attempt to tackle the increasing cost pressure on their IT using what’s known as a “partnering model” with like-minded companies. Companies who are similar in terms of their IT knowledge and requirements for IT could create their own, practically made-to-measure IT service provider, thus enabling them to focus increasingly on their core business. The new service provider can then support the company by providing flexible assistance in the relevant areas of IT.
“Where SMBs find themselves having to consolidate a smaller IT department, it’s worth seriously discussing the idea of partnering with well-known companies or consultancy firms and exploring the possibilities for realizing this,” explains Detecon consultant Florian Kieninger. He says the benefits of the model are quite clear, as “it enables SMBs to improve their IT infrastructure, cut costs and focus on their core business.” Kieninger continues, “The first step, i.e. setting the ball rolling, working out policy and drawing up the framework, is always the trickiest.” But there’s comfort yet, “If it all turns out to have been a wrong move, you won’t have wasted millions.”
But the fact that “traditional” outsourcing also works well is shown by SMB electronics vendor Weco Electronic. During the introduction of the SAP SMB solution SAP Business One, Managing Director Irmgard Wessels decided to completely outsource not only IT but also IP telephony to SAP Partner RAG Informatik. “For us, the outsourcing was not just about cost-cutting, but also about becoming more flexible and providing our customers with added-value in the form of better advice,” explains Irmgard Wessels. “And we’ve certainly achieved our goal.”

Further information:

General: www.outsourcing.com (= The Outsourcing Institute) http://outsourcing.weblog.gartner.com/weblog/index.php?blogid=9, www.sharedxpertise.org
Studies: www.dbresearch.de, www.deloitte.com, www.detecon.com/de, www.gartner.com, www.globalinsight.com, www.idc.com,
SAP: www.sap.com

Dr. Andreas Schaffry
Dr. Andreas Schaffry