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."