Outsourcing Trend to Strengthen

IT moving to outsource mission-critical components.

Managed services are still a tough sell in the enterprise, but a new report from research firm META Group Inc. projects that by 2005, most IT organizations will outsource at least one mission-critical technology operation.

MEAT Group’s survey of outsourcing trends in North America also found that the market for managed services is currently growing by 15-20 percent annually.

According to Dean Davison, a vice president with META Group’s Service Management Strategies, IT organizations are reluctant to outsource technology services because many of them don’t yet understand the cost benefits associated with a managed services model.

"The average IT organization still doesn’t understand outsourcing. It’s still a bit of an enigma to them. They know that it’s out there, they know that it’s big, but they’re still not sure how they should outsource, when, or with whom. Nor are they sure about what expectations to have," Davison comments.

IT organizations that rush blindly into outsourcing agreements without first expending the time and effort to understand how and when a managed services strategy can save them money aren’t helping matters either, Davison says. In still other cases, internal IT organizations don’t have a choice because a directive to outsource is forced upon them by company management.

"You’ll still run into [cases] where the CFO says, ‘Let’s outsource to save money.’ So the biggest obstacle that internal organizations still have is this, where management thinks that just because they can outsource a service, they are going to save money," he relates.

That’s not always the case, however. Davison acknowledges that outsourcing can enable businesses to become more efficient and, in some cases, can also help them to reduce their support costs. At the same time, he concedes, clients generally realize cost savings only if they exercise due diligence during the vendor selection process and are careful about the way in which they structure their contracts during negotiations.

As a result, Davison argues, purveyors of managed services must do a better job educating potential clients about the costs and benefits associated with an outsourcing strategy. Outsourcing service providers also need to overcome perceptions of bias and self-interest that are prevalent in the marketplace. To address this problem, Davison speculates, potential clients will increasingly turn to third parties. "We see a lot of consulting being used to help them sort this out," he says.

META Group believes that by 2005, IT organizations will have developed better understandings of how and when a managed services strategy makes sense. "It’s not that the problems will be overcome, it’s that the average IT organization is gaining experience," Davison concludes. "Around 2005, we’ll sort of hit this cross-over point, where the average IT organization won’t be trying to figure it out, but will have some experience with it."

META Group’s market evaluation considers the broad market for managed services in North America -- which includes many small- and medium-sized IT organizations. According to Robert Kusche, president of Sytek Services Inc., an IBM Business Partner and IT services provider based in Bellingham, Wash., large enterprise IT organizations -- in particular, mainframe environments -- have been dealing with the costs and benefits associated with outsourcing for several years now.

"Our customers are pretty savvy about outsourcing," he asserts. "The thing is that the skill set in the mainframe arena is eroding, so it’s getting harder to find qualified people. So they’ve had to outsource."

Kusche says it helps if a provider of managed services can break down its business case in terms of costs and benefits. It’s hard for a customer to argue with a real dollars and cents figure, after all.

"In our case, we offer better economies of scale [than doing it in-house]," he says. "We can offer 24x7 support for less than the cost of a full-timer."

About the Author

Stephen Swoyer is a Nashville, TN-based freelance journalist who writes about technology.