Subscribe to Inc. magazine
STRATEGY

The Great IT Outsourcing Debate: How to Decide

Even small businesses can benefit from outsourcing some technology functions, whether these involve human resources, finance, accounting, or customer service. But how do you make the call? And which functions do you pick?
Advertisement

Outsourcing can allow even the smallest company to go after big game. Just ask Jack Sands.

The chief executive officer of Intrep Auto Club Renewals, a Columbus, Ohio-based telemarketer, Sands has outsourced his firm's website design, logo design, software design, and phone system design. His 75 employees, all of whom work from home, are paid through an outsourced payroll system. Even the company's telemarketing software is outsourced.

Piece by piece, Sands has outsourced to technology service providers in India, China, Turkey, Russia, and the U.S. In seven years, his business has grown to the $5 million to $10 million range.

'It's allowed me to portray an image of being a very large company when I wasn't one, and at a very low cost,' Sands says. Sands then landed the American Automobile Association (AAA) as a client. "Most small firms couldn't get a client this big,' he notes. 

Reasons technology outsourcing is on the rise

A growing trend among larger firms for decades, even the smallest businesses are now turning to technology outsourcing as a way to improve efficiency and boost their bottom line. According to Yankee Group, 61 percent of firms with 20-99 employees use a contractor or business partner for IT services alone.

In addition to IT, firms are outsourcing marketing, Web design, human resources, accounting, and administrative functions like data entry or customer service. And firms are just as likely to find their needs met by a North American firm found on Craig's List as by a call center in Southeast Asia, industry watchers note.

For many small firms, outsourcing just makes sense, explains Gary Chen, senior analyst and specialist in small business IT issues at Yankee Group. Many small and mid-size businesses "just don't have someone to do these jobs, or they only have enough of a certain type of work to justify a one-fourth-time position,' says Chen. 'You can't hire someone to a one-fourth-time position.'

Outsourcing can also give a company more flexibility. Intrep's Sands outsourced his payroll operations to Rochester, N.Y.-based Paychex because his work-from-home employees are spread out across the country. 'I couldn't keep track of the different workers comp laws and tax rules,' he says. Outsourcing this allows him to hire the best telemarketers he could regardless of their location.

Challenges of outsourcing

One of the biggest challenges to outsourcing is losing local control over technology functions. If something isn't working, you have to learn to rely on your outsourcer to fix it. Business leaders need to determine whether they are comfortable with leaving something to a company in India, Russia, or even in another part of the United States. There's something to be said about being able to walk down the hall to the IT department and asking someone to fix a problem.

When outsourcing, businesses also need to appoint someone to oversee the outsourcing relationship. Problems often arise and you need to make sure that your contract with the service provider allows the flexibility to make adjustments in your service, if need be.

Lastly, leaving certain vital business services in the hands of another company can mean you are at their mercy if their service goes offline for any amount of time. You may need to have contingency plans. You may also need to read the fine print in your contract to make sure that you don't have to pay for services that you don't receive. Few outsource providers offer to compensate you for the business you lose when their service goes down.

How to decide whether to outsource IT

So, what should companies consider before they take the outsourcing plunge? Here is a checklist to help your business through the decision-making process:

  • Cost. 'Cost should be the first consideration,' says Chen. 'It should be cheaper to outsource: that's the bottom line.' To determine this, companies may need to do a little homework—checking into the potential cost of outsourcing, but also taking a hard look at how much the company is losing by trying to do certain tasks itself, says Chen.
  • Can someone else do it better? 'Do what you do best, and outsource the rest,' advises Fabio Rosati, chief executive officer of Elance, a Web-based firm that plays matchmaker between companies seeking to outsource and skilled service providers and freelancers. 'You need to acknowledge that you can't do everything well,' and that sometimes your company will need help, Rosati says.
  • Will you lose control over your business? Are you comfortable with loosening the reigns and leaving control over certain functions to someone else? What will you do if there's a problem? Businesses need to ensure in their service-level agreements with outsourcing firms that the firm will be responsive and will fix problems within a certain time frame. You also need the flexibility in your contract to do some fine tuning, especially if this is the first time you are outsourcing payroll or customer service.
  • Will this help your business? Ultimately, you need to weigh whether outsourcing certain technology functions will help you focus on your business and improve profit margins. If the cost, time-saved, and expertise doesn't result in business benefits, then you may need to think twice about outsourcing.

Conclusion

Outsourcing technology functions must be made after a review of your business. Some businesses, such as Sands' company, have found that they are able to better focus on what they do best and leave the technical matters involving telecommunications and software to someone else. 'We didn't have anyone to do this stuff for us,' says Sands. 'This way, we were able to find the best in breed for every task.'

SIDEBAR: Improving Your Odds for Success

If you've decided to look into outsourcing, where do you look? And how can you ensure success?

  • Check online job-hunter sites. Sands used Elance to find many of his service providers, but settled on Paychex and Saleforce.com separately. Other providers include Careerbuilder, Monster.com, and other sites that specialize in freelancers or per-project workers for specific fields.
  • Check skills, references. Exposing your business to newcomers can be risky. Approach choosing a service provider like you would hiring a new employee. Does the firm have the best match of skills, quality and price for your business? If across many time zones, is their location an issue? Do they have good references? Best not to rely simply on eBay-style rating systems provided by some sites.
  • Articulate your needs. This may sound basic, but Elance's Rosati says that firms need to be a specific as possible about what they want to get the best product and the best price.
  • Develop a relationship. If you find good providers, treat them well so they'll want to work for you again, say Sands. 'Don't cheat them on price," he says. "You need them, and want them to put your needs first.'
Last updated: Nov 1, 2007




Register on Inc.com today to get full access to:
All articles  |  Magazine archives | Livestream events | Comments
EMAIL
PASSWORD
EMAIL
FIRST NAME
LAST NAME
EMAIL
PASSWORD

Or sign up using: