Network World, 2/21/6: SMBs see outsourcing as growth tool

By Jennifer Mears, NetworkWorld.com, 02/21/06

Encharter Insurance, headquartered in Lexington, Mass., prides itself on its hometown appeal. It’s that neighborhood feel that has contributed to its rapid growth, doubling in size in the last few years to 55 employees and about $8 million in revenue.

But while business boomed, like many small companies, Encharter paid little attention to developing an IT strategy to support expanding technology demands.

“I came into this job and found that there was no IT department,” says Michael Sher, who was named president and CEO of the group of seven insurance agencies spread across Massachusetts and Connecticut last year.

As a result he started looking for outside help, a somewhat maverick decision for the head of a small company. For the most part, small and midsize businesses remain reluctant to hand over IT functions to outsourcers, in large part because of a lack of familiarity with the idea of outsourcing, as well as a fear of losing control.

In addition, while some smaller outsourcing vendors such as CenterBeam and Everdream have built their businesses by focusing on SMBs, big name providers such as EDS and IBM have yet to carve out a niche in the low end of the market, creating a supply side issue that is holding back more widespread demand, analysts say.

Gartner estimates that about 90% of all new business created in the U.S. is small or midsize. It’s a huge opportunity for outsourcers as these small firms begin to recognize that they can achieve the same kind of benefits that large organizations enjoy when handing over non-core IT functions to outside service providers.

“There is a small but growing legion of SMBs that are considering outsourcing,” says Robert Brown, a research director at Gartner.

Brown notes that the base is small. Companies with between 100 and 499 employees, for example, account for just 7.8% of the $50.5 billion business process outsourcing market today, but that number is expected to grow to over 8% of a $78.8 billion market by 2009, according to Gartner.

“For most SMBs, there is an unfamiliarity with outsourcing that dictates that when they make technology buying decisions, the first thing they are going to think about is buying hardware and buying software and then trying to integrate those through internal resources and staff, as opposed to turning to an outsourcer to help,” Brown says.

Indeed, Sher says that when he left Plymouth Rock Insurance to run its subsidiary Encharter, he could hardly believe the situation when it came to IT.

“The offices weren’t networked. And it was all supported by one guy who if he was sick our whole system could be down. He was also charging us for travel between the seven offices in two states,” Sher says. Encharter turned over the bulk of its IT infrastructure, including its Microsoft Exchange servers, to CenterBeam last year.

“Now we have nightly backups. We have servers that are in a Class 1 data center. We have all the things that you would want a growing insurance agency with aspirations for further acquisitions and expansion to have,” says Sher.

The small company had to invest in upgraded hardware such as routers and T1 lines to take advantage of remote service, but Sher says that investment paid off. “We have probably cut our IT costs in half,” he says.

In addition, Sher says Encharter now has the kind of technology support it needs to continue to grow. It’s a growth-by-acquisition strategy that is pushing other SMBs to look at outsourcers – even offshore.

Kitcoff-APSI, a full-service employer sponsored retirement plan consulting and administration firm based in Coral Gables, Fla., for example, is using Indian offshore provider Patni to buoy its numerous acquisitions. The company’s founder, Michael Campo, says outsourcing is the key to his business model.

“I needed to lower my labor costs,” he says. “Once I bought holistically into the idea of outsourcing, I could then acquire another firm and completely take over its entire book of business and outsource it to India without absorbing any of their labor cost mistakes.”

Patni handles record keeping tasks associated with the administration of Kitcoff-APSI’s defined contribution plans. Campo had worked with Patni at a larger corporation and so had already eased his concerns about using an outside provider, but he acknowledged that outsourcing can be a tough decision for any company, large or small.

“The problem is inherently a small business owner has even more reservations because [the company] is his. He owns it. There is a sense of proprietary there,” he says. “But there are many ways to mitigate those fears.”

One is to completely embrace the concept of outsourcing, Campo says.

“My business model is completely immersed now in the concept of outsourcing the heavy lifting to Patni,” Campo says. The strategic advantage – customer service – remains an in-house function.

Henry Svendblad, vice president of IT at Millennium Partners Sports Club Management in Boston, also was looking for a way to offload non-core IT headaches. He outsourced the company’s IT functions to CenterBeam in December, just a month after coming on board.

“As I looked at our IT strategy, I realized I could dedicate most of my time to building an IT infrastructure and then trying to build our business systems from scratch. Or I could let CenterBeam focus on our infrastructure and focus all of my energies on our business systems where I can really add value,” he says.

In addition, CenterBeam puts high caliber technology such as advanced patch management, storage area networks and redundancy in the small company’s reach.

“It provides us greater agility in terms of what it allows us to do,” Svendblad says. “We can go and acquire a new location tomorrow and in 30 days I have the infrastructure to support it whether its 30, 300 or 3,000 users and I know exactly how much it’s going to cost.”

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