7 Trends in IT Outsourcing

Which tasks are corporate IT departments hiring out and which are they keeping in-house?
7 Trends in IT Outsourcing

A few short years ago, it was primarily very large companies that outsourced portions of their IT work. They would do it on a project-by-project basis, or simply hand off departments such as the help desk to vendors. For small and midsized businesses, outsourcing IT was not really on the mental map.

But now some small companies outsource all of their IT, and many companies of all sizes are experimenting with farming out some of their information technology work. It’s not always the right choice; for instance, flirtations with offshoring have shown some firms that there is such a thing as too far away. And sometimes it costs more to communicate what has to be done and ride herd on outside vendors than it costs to just go ahead and do it.

But in certain situations, outsourcing may free up companies—many of which are still understaffed and loath to go on a hiring spree—to concentrate on their core work. Here’s why it’s happening, and here’s what local experts expect to see in the years to come.

1. It has become an accepted business practice to outsource some (or all) IT tasks.

MindShift Technologies, Inc., a Massachusetts company, recently entered the Twin Cities market with its 2011 acquisition of Mendota Heights–based computer services outsourcer Orbit Systems. Paul Chisholm says that when he became CEO of the company nine years ago, it was sometimes an uphill battle to sell the idea of outsourced IT. The idea of a remote help desk, or of technicians diagnosing and fixing problems remotely by connecting to the company’s network, was foreign.

“That was not the historical way that people did it,” he says. “They had an internal person, or they had a guy who showed up three days [a week] and did something for them. But then outsourcing started to come in vogue for a lot of industries. Part of what’s made it more [popular] is things like software as a service, Salesforce.com, and just ordering things online in general. It’s not scary to people anymore that that is the normal way to do business.”

At the same time, many small companies have also found it increasingly difficult to cover all their bases with in-house IT staff. A one- or two-person IT department can work, but it tends to be overkill 90 percent of the time and completely insufficient the other 10 percent of the time.

“I think the word’s getting out that if you’re fewer than 150 employees, it’s almost never going to be cost-effective to have your own IT staff on board,” says Mitch Gram, vice president of service at Sovran, Inc., an Eagan technology solutions firm. “You’re not going to be able to hire one person who has all the skills, or [who] can help everybody at once when you have a day where IT’s a little bit of a struggle and you really wish you had six people on your help desk. It’s just not very flexible.”

Whereas large companies generally outsource IT projects and maintenance jobs on an a la carte basis, small companies may choose to farm out the whole thing. The advantage is scalability: They’re not hiring a specific number of people; they’re using some or all of a team of off-site staff on an as-needed basis.

2. The economy has improved, but it’s still uncertain.

During the depths of the recent recession, area companies were working with skeleton crews. If they lost an IT person, they often didn’t rehire, but instead contracted out the work. And it was mostly help desk and maintenance work—very few new projects or applications were launched.

“Project work is much more affected by economic fluctuations than maintenance is,” says John Beesley, director of business development at CrossUSA, an IT-outsourcing firm in Burnsville. “I think that when the economy really begins to tank, people obviously have less money to work with. They’re looking for lower-cost solutions [and to a certain extent will outsource]. But it’s been our experience that there’s a certain point in time where they just don’t have enough money to do the project, period. It doesn’t matter who’s going to do it.”

That type of work has started to rebound, and a very large proportion of it—perhaps a larger portion than usual—is being outsourced.

Minneapolis managed services firm Agosto, Inc., serves mostly businesses in the 25- to 500-employee range. Its customers operate mostly in the retail, professional services, and manufacturing industries. And in those three verticals, CEO Aric Bandy says IT outsourcing is on the rise.

“The economy is starting to pick up, and businesses are starting to have more project work,” he says. “They’re starting to reinvest in their business, which always has an IT component in it. However, everybody’s a little bit afraid. I see a lot of optimism about where the economy is, but everybody is a little bit concerned that maybe there’s another dip around the corner. People have all of those needs, especially as they’re reinvesting in their growth, but they’re a little leery to bring [up] the headcount. So I see that as having a tremendous impact on the opportunity for outsourced IT services.”

3. Companies are using IT outsourcing to reduce their HR burden.

To the extent that companies are willing to hire their own IT staff, they may not be able to find suitable candidates right now. “I just heard the statistic yesterday,” Bandy says. “The unemployment rate for IT in the Twin Cities market is a little less than 1 percent. That means it’s hard to find people, so you sometimes almost have to go to an outsourcing model in order to just get the projects done. A lot of the companies that we work with, their budgets have been frozen for so long. For the first time, they’ve got the ability to go out and invest in some of their IT, especially the bigger capital expenditures: some new storage, an ERP or accounting package, or some kind of software package. But now all of a sudden, the people aren’t there to be able to bring on staff.”

Of course, the shortage affects outsourcing firms, too; Bandy says his company had a project manager position open for an entire year before it filled the vacancy by bringing in a new hire from the East Coast.

The implementation of a new software application can also cause HR headaches. Someone needs to install the new system and iron out the kinks, but someone also needs to be available to run the old system in the meantime.

“A lot of times, they’ll outsource the maintenance and support of the legacy application for a year or two and have their [internal] resources help the company move to the new platform,” Beesley says. “Then, when the old platform goes away, so does the outsource provider. ‘Sunsetting work’ is what I call it. That way, they don’t have to deal with layoffs, they don’t have to deal with retraining, they don’t have to deal with unemployment. When the work goes away, so do the resources associated with it, and it’s a very, very cost-effective way to kind of migrate from one application to another.”

4. There are ways to get around the “impersonal” factor.

Many companies prefer to outsource only the more generic IT services, such as help desk and networking—things that don’t need to be infused with the company’s personality or are not customer-facing. Red Wing–based Red Wing Shoe Company has used this strategy for years. “If there are commodity services, like monitoring our networks to our retail stores, those are things that we’ll ask a third party to do,” says CIO Joe Topinka. “But if it comes to designing new client-facing solutions, we’ll do the design work ourselves. If there’s some strategic advantage to us doing it ourselves versus us just looking like everyone else, then that’s kind of the high-level set of criteria that we use. In contrast, a network connection is a network connection.”

But in the business world as a whole, there is an overall trend toward outsourcing higher-level, more strategic computing tasks, as well as the more mundane ones.

“While all of [outsourcing] will grow, I see the biggest area of growth as that higher, consultative, more strategic type of services,” Bandy says. “So many of our clients have tons and tons of work there that they just can’t get to, but they’re not going to be able to hire the people to get to the work. They’re outsourcing more strategic roles—project management, business analyst. It’s a bit more of consultative services to the business units. So there are absolutely concerns around [whether the outsourcer is] going to fully understand their business.”

The solution to that concern is to build long-standing relationships with one or more IT companies. That’s the strategy Honeywell Enterprise Applications in Golden Valley applies. “We set a standard for outsourcing,” says vice president and CIO Kathryn Freytag. “We have many strategic partners that we work with. But there are as many flavors of relationships [with those partners] as there are business units and operating models within our organization. Another thing to note is that Honeywell has a captive employee base in India [a specialized department of Honeywell employees]. So for many of our strategic applications or our strategic development activities, we leverage our internal captive outsource provider, so to speak.”

Even so, when IT functions align with Honeywell’s core skills, Freytag says the company prefers to keep them in-house. At this point, the company’s business units are still doing their own customer engagement and relationship management, technical architecture and design, and business analysis.


5. Vendors have made huge advances in cloud-based applications.

Right now, there are more cloud computing solutions available than ever before. Many companies, such as Red Wing Shoe Company, are taking advantage of these applications because they like the combination of outsourced technology and insourced customization. It’s another way of punting some of the work outside while still maintaining control of the way the technology fits with the company’s brand and mission statement.

“A good example might be e-commerce, business-to-consumer retail platforms,” says Topinka. “There’s a lot out there that you can customize and tailor, available in the cloud. That’s a combination of outsourcing the hard-core technology, but still maintaining the ownership and the subject-matter expertise surrounding the actual user experience. A lot of those solutions have administrative tools now, [so] that you don’t really end up having to build software. It’s more configuring and setting parameters and business rules, using their rules engines.”

Beesley says another appeal of cloud computing is that the applications are device-agnostic because they are hosted off-site and are accessed via the Internet. “I think anytime people have an opportunity to consolidate, provide some level of uniform platform, get everybody drinking from the same bucket, it’s a lot easier and more cost-effective to support that,” he suggests.

Yet Topinka says businesses should make sure to consider the total cost. “While the solutions themselves might be priced lower than, say, the licensed software versions if you were running them in-house, you also have additional costs to deal with,” he says. “Integrating with other cloud-based vendor solutions, figuring out how to handle security and not trying to overwhelm people with 10 different user IDs and passwords in an outsourced model is a challenge. So there are new costs that come in. For us, it’s more about what market functionality and what operational functionality is available, either in licensed software instances or in cloud-based instances, and whichever one has the better answer, that’s the one we’ll probably use.”

6. Companies like the business continuity aspects of managed services.

Many businesses also see off-site hosting as a hedge against disaster. “The second part of that equation is ‘I need to get this critical equipment out of my building,’” Chisholm says. “A move to the cloud, which is really a move to a data center, is a critical thing that most businesses are asking for. Because whether you have a power outage, a flood in your building, whatever physical issue you have, you want your service to be in a high-availability location that customers can have access to.”

Topinka confirms that the physical location of the data and hardware is part of his decision-making process. “One advantage we have with the cloud-based solutions is you’ve got a lot more flexibility as it relates to disaster recovery and business continuity,” he says. “But if your ERP system, as an example, is in-house, systems need to leverage it. It doesn’t really give you a big advantage, because those systems won’t work without our ERP solution. So you still need to worry about business continuity and disaster recovery.”

7. As choice increases, so does complexity.

In the past, when employees joined a company, they would often be issued a company phone or a company laptop. Now, it’s much more common for new hires to bring their own devices—whatever make and model they like best—and use them in the work environment. “In today’s environment, people just expect you to show up with whatever phone you want, and they’ll figure out a way to get you connected, make it secure, and make it work,” Beesley says. Gram says tablets and other devices are increasingly important because employers are finally acclimating to the idea of telecommuting. The office is wherever workers are, no matter what devices they have in their pockets.

“People have Android- and iPad-type devices that they want to use,” Gram says. “They’re bringing us in to design and deploy and do a knowledge transfer on some thin-client computing technology so that they can give users that flexibility. They’re trying to enable more workers to work at home. In the past, they might have had some simple infrastructure for a small group of employees that could work at home occasionally or maybe when they’re on the road on sales activity, but it wasn’t really meant as infrastructure for everybody in the company. So we have a lot of projects that have happened in the last 18 months to two years where it’s like, ‘We really want to adopt this technology for everybody.’ Instead of spending 100 bucks a week in gas for coming back and forth to the office, if they really only need to be in the office a day or two a week and can work remotely and be as productive, there’s a big return on that technology.”

Chisholm says these trends translate into an uptick in mobile security concerns and greater complexity with respect to networking. Both of these are areas of expertise that smaller businesses may not have within their internal staff.

“The key thing in any information technology system is integration,” he says. “That implies, when you put everything together, more complexity. And if you’re going to say, ‘I want everything integrated’ and you have more complexity, you need to hire IT experts to do it. A small business generally can’t fund everybody. So I think the whole point is the next time you find that there’s an issue, stop for a minute and think of your options. Don’t go back to the way you did it 20 years ago or 10 years ago.”