Outsourcing Finds A New Market Niche

Big businesses have long outsourced some technology operations, paying other companies to manage their computers, networks, software and other technologies. Now, small and medium-sized businesses are increasingly following suit.

Millennium Partners Sports Club Management LLC, a Boston-based manager of health clubs around the country, had enough money in its budget last year to add three information-technology workers. Instead, the 1,000-employee company used the money to pay CenterBeam Inc. to manage its technology. Under the agreement, Millennium for the first time handed over the task of maintaining and monitoring its desktop and laptop computers, server computers, spam-filtering software and network to CenterBeam, a closely held San Jose, Calif., start-up.

Millennium pays $30,000 a month for CenterBeam to oversee its tech systems and act as its help desk. That's about the same cost as having three additional employees, Millennium says. But it also buys access to a broader range of tech experts through CenterBeam. And by handing over day-to-day tech operations, Millennium's in-house tech employees have time to take on more strategic initiatives, such as adding a new accounting-software system.

"If we hadn't outsourced, I couldn't focus 100% on things that can drive the company forward, like a new accounting system," says Henry Svendblad, vice president of information technology at Millennium, a subsidiary of national real-estate firm Millennium Partners.

Millennium joins a growing list of small and medium-sized businesses working with companies like CenterBeam that can take over tech tasks on a smaller scale than before. Demand for outsourced help desks for small and medium-sized businesses -- enterprises with 1,000 or fewer employees -- is swelling fast. According to researcher IDC, the market is rising 13% to 15% a year to between $1.9 billion and $2.2 billion world-wide in 2010, up from $1.1 billion to $1.3 billion in 2006. Overall, small and medium-sized businesses are forecast to make up two-thirds of the outsourced help-desk market in 2011, up from a quarter today, says researcher Gartner Inc.

The outsourcing trend is growing because many small and medium-sized businesses can't afford to hire huge numbers of information-technology workers, yet must deal with office technology that's becoming more complex. These companies are grappling with a surge of new technologies such as Internet telephony, Web video, new mobile devices -- from BlackBerries to cellphones -- and increased security threats from viruses and worms.

"Small businesses usually lack the budget and skills around tech, so we're seeing more kicking of the tires around outsourcing now," says James Browning, an analyst at Gartner. "It's a growth market."

Until recently small and mid-sized businesses had few places they could turn to for help with all the technology. While there are many local mom-and-pop operations that help small businesses with tech, such firms typically aren't equipped to handle customers that have offices across several states. And big technology outsourcers such as International Business Machines Corp. and Hewlett-Packard Co. primarily focused on large enterprises, where a single contract can yield several billion dollars. In 2003, for instance, Procter & Gamble Co. signed a $3 billion contract for H-P to manage its IT services over the next 10 years; the deal was expanded for an undisclosed amount in 2004.

Now a slew of technology outsourcers are moving down the size curve. Companies such as CenterBeam, All Covered Inc. and MindShift Technologies Inc., which mostly sprang up in the past few years, today offer small companies a menu of services under contracts that last one to three years. Small and mid-sized businesses generally pay a monthly fee to those firms based on how many workers they have and on what kinds of services they need.

Some bigger firms are also jumping into the market. Electronics retailers such as Best Buy Co. offer some outsourcing services to small businesses. H-P and IBM have said they want to tap the small and mid-sized business market. And AT&T Inc. in the last year has added network-consulting services to help small businesses.

For many small businesses, outsourcing tech not only reduces the headaches of managing complex technology, but also pares costs. Bernard Chaus Inc., a New York maker and importer of women's apparel with 350 employees, began handing over its IT help-desk operations several years ago to Roslyn, N.Y., tech company CGAtlantic Inc. after hiring a new chief information officer, Ed Eskew. The move allowed Bernard Chaus to eliminate the two IT workers on its in-house help desk at the time, says Mr. Eskew.

As Bernard Chaus's tech needs grew, it was able to turn to CGAtlantic to implement new technology such as spam filtering. As part of the outsourcing deal, two CGAtlantic engineers are on site at Bernard Chaus's offices.

Today, Mr. Eskew estimates that if he were to terminate his outsourcing contract, he would have to hire six to eight full-time employees to replicate the same tech capabilities, to the tune of around $600,000 to $700,000 a year. Instead, Bernard Chaus is paying CGAtlantic around $240,000 a year, a savings of more than 50%.

But making the outsourcing transition can be painful for some small businesses. Curtis Helsel, vice president for information services at the University of Colorado Foundation in Boulder, Colo., began outsourcing the 185-person foundation's technology needs to CenterBeam in 2003. Today, he pays $30,000 a month for CenterBeam to take care of everything from the foundation's switches and routers to its email systems.

But the shift to an outsourcer "was a culture change," says Mr. Helsel, whose division is the nonprofit fund-raising arm of the university. "The personalized service was gone," he says. "People were grumbling about it." To change attitudes, Mr. Helsel says he began offering Starbucks coupons to encourage employees to fill out an online survey on CenterBeam's customer service. The staff complaints have subsided, he adds.

Some small businesses say they can't go back to managing their technology internally. Jean Gooding, chief financial officer for the Distilled Spirits Council, a Washington-based trade association, decided to outsource tech in 2002. The 48-person association had one in-house IT person at the time, and he was overloaded with work, Ms. Gooding recalls. Rather than hiring an additional IT staffer, the council outsourced its tech systems to Virginia-based MindShift.

Since then, MindShift has helped the council undergo technology upgrades, adding a firewall, spam filtering and data-backup services. MindShift is now researching the effectiveness of Internet telephony so that the organization can decide whether to implement it, adds Ms. Gooding.

"I was very nervous [about outsourcing] initially; it could've made or broken my career with the organization," she says, adding that the council pays $13,400 a month to MindShift for its services. "But we couldn't do [what MindShift does] ourselves."

Eastern Europe becomes a center for outsourcing

illip Pejfar works in a sparkling new office tower on the western edge of the Czech capital, Prague, using high-resolution scanners to enter accounting material into the computing systems of Accenture, the global business consulting group.

Pejfar's bookkeeping is not helping Czech clients. His expertise is meant for companies like the French chemical giant Rhodia and the big German software group SAP.

Prague is turning into a center for outsourcing white-collar jobs like bookkeeping, data crunching, and even research and development. The Czech Republic and other Central European countries, including Poland, Hungary and Slovakia, are clamoring to serve the needs of multinational corporations--and themselves.

The United States may turn to India to fill many of its call center jobs and the like. But Western Europe is turning more frequently these days to its own backyard, transforming a few urban centers of the former Communist bloc into the Bangalores of Europe.

American companies are cashing in as well. In recent years, IBM, Dell and Morgan Stanley, among others, have outsourced services to Eastern Europe or helped other American companies do so.

To be sure, Eastern Europe, with an outsourcing business estimated at about $2 billion this year, represents just a fraction of the global outsourcing market, estimated this year at nearly $386 billion. But Robert H. Brown, an outsourcing analyst at Gartner, expects growth in Eastern Europe to outstrip the rest of the market in the next four years, expanding close to 30 percent by 2010, compared with 25 percent for the global market.

What is unusual about Eastern and Central Europe is that their most advanced cities offer a potent mix of attributes that even Bangalore cannot rival: a highly educated, multilingual pool of talent in an increasingly affluent consumer market--all barely a stone's throw from its prime clients.

Outsourcing is booming as this region moves more quickly to integrate itself economically with its more affluent neighbors to the west, reflecting progress that is reducing the high unemployment that plagued these countries for years after the fall of the Berlin Wall and the collapse of the Soviet empire.

It is also feeding a real-estate boom in high-rise office space. Despite high unemployment in much of Europe, Western European companies are pressed by labor shortages in several important occupations, encouraging them to turn to their eastern neighbors to ease the strain.

"Yes, there is a trend, and it started a few years ago," said Miroslaw Proppé, the director for the Warsaw office of KPMG, the accounting firm. He added that it was "not necessarily based on low labor costs but on the potential of young Polish graduates."

Commerzbank of Germany does its data processing in Prague, and Siemens, the electrical giant, does bookkeeping, as well as research and development, in the city. Royal Philips Electronics, the Dutch electrical conglomerate, operates a shared services center outside Warsaw.

Last summer, Morgan Stanley announced that it was opening a business services and technology center in Budapest that would supplement a mathematical research center the company established there in 2005.

The company employs about 200 people there, said Hugh Fraser, a spokesman, and will employ about 450 when fully up and running. He said the choice of Budapest in both cases was made because of the "availability of high-quality talent."

The reasons for Central Europe's new attractiveness for outsourcing are not limited to promising talent at cheap prices. Central and Eastern European countries also remain some of the world's great untapped markets for services and consumer goods.

But there is no doubt that low wages in the region appeal to Western companies. Employees in Hungary and the Czech Republic earn a quarter of what employees in Western Europe make; Slovakia's pay runs only a fifth as much, the statistical agency Eurostat says.

If that does not make the region attractive enough, governments also offer incentives like simplified tax structures and subsidies for office construction.

Unlike other regions that compete for outsourcing work, like India or the Philippines, where English is the sole operating language, employees in Accenture's Central European business speak a variety of languages, giving clients access to people who speak English, French, German, Russian and local languages.

"The key thing is language," said Andrew Grech, an Australian native who directs Accenture's operations here. "The other factor is a stable political and economic environment. The Czechs are in the European Union and NATO."

The growth of these jobs is helping stanch a hemorrhaging of workers from Central and Eastern Europe to the West in search of jobs. And it is exerting some influence on decreasing the unemployment rate across Eastern Europe, Proppé said.

In the Czech Republic, unemployment fell by the start of this year to 7.1 percent from 7.8 percent in 2002; in Poland, joblessness dropped to 13.4 percent from 20.2 percent five years ago; and in Slovakia, to 11.6 percent from 19.7 percent, according to Eurostat.

Not so long ago, outsourcing was the preserve of the biggest companies. International organisations, such as Andersen Consulting (Accenture), set up d

Not so long ago, outsourcing was the preserve of the biggest companies. International organisations, such as Andersen Consulting (Accenture), set up dedicated services that enabled large businesses to have information technology, payroll and other “back-office” functions managed by teams of specialists.

However, the arrival of the internet has given smaller businesses the opportunity to gain from the concept. Increasing numbers of growing businesses are, for example, avoiding employing full-time human resources managers by obtaining advice and services via the net.

A typical case is API Group, a producer of specialist packaging and security products used by consumer goods companies to help their products stand out on the shelf. Now a UK-listed company, API has grown into an international business with 1,000 employees and an annual turnover of £120m. By the time Iain Anderson became director of information systems in 2002, the company’s IT operations had also grown spectacularly. The IT budget was running at 2.5 per cent of turnover and there were 25 full-time employees. Now, the team is half the size and the budget is less than 1 per cent of turnover.

Anderson says this has been achieved through a restructuring that “focused on what was important to the organisation”. He and his colleagues started by making infrastructure changes that involved moving the architecture of the IT systems out to BT. Then they made Dell the standard supplier of computer hardware, making use of the company’s support to do away with the need for support personnel on site.

But perhaps the most far-reaching change Anderson has made has been to implement Oracle On-Demand, which involves outsourcing hosting and management of hardware, software and applications of IT systems. There was initial scepticism on the part of the board, but the advantages have been so great that any opposition has been overcome.

Moving to this approach has contributed greatly to reducing the IT headcount, cut the cost of hiring and training IT support and reduced IT operating costs by 40 per cent. Moreover, having the system supported by a remote hosting centre has proved cheaper than the company setting up its own disaster recovery plan.

Among the associated benefits is the fact that users of the system enjoy higher service levels than before – making them more productive. The ease with which the system can be updated and upgraded to accommodate more users is also a great benefit, adds Anderson.

Above all, the changes mean that the business can focus on its core manufacturing operations instead of worrying about IT.

This backs up research, which show that firms that outsource aspects of their operations tend to be more profitable than those that do not. This is partly because such businesses are probably more likely to analyse and seek to make as efficient as possible all aspects of their business. But it is also true that by outsourcing activities such as finance, HR and IT, companies are able to gain access to higher levels of expertise than might be available in-house and also save costs.

The practice is not without its risks. Again, research indicates that businesses engaging in outsourcing need to ensure that the providers are meeting their needs, the costs are appropriate and that there are adequate controls. After all, if something goes wrong it is the reputation of the company outsourcing rather than the service provider whose reputation is likely to be affected.