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IT Outsourcing in the Small and Medium Businesses

Infrastructure Management Outsourcing (IMO) is a growing trend among models for delivering infrastructure services. In fact, it accounts for approximately 25 percent of the entire infrastructure outsourcing market.

Both buyers and suppliers have questions about IMO, its value proposition, and how it is evolving. What can buyers expect from suppliers delivering IMO services? Where should suppliers invest to increase their IMO capabilities? What infrastructure management functions can companies send offshore?

The Everest Research Institute conducted an online survey in November 2006 among outsourcing buyers, suppliers, and other professionals regarding their opinions about IMO. The specific objectives of the survey were to determine:

• How professionals view the future of IMO
• The perceived offshorability of various infrastructure functions

For the survey analysis, the Institute developed a Popularity Perception Model metric, assigning a weighted number to respondents' answers of "agree," "neutral," or "disagree" and calculating the weighted average of the responses. We accorded a percentage point of 100 to a statement when all respondents agreed with it.

Of the 250 respondents to the survey, the majority view IMO as a viable alternative to traditional infrastructure outsourcing. The Popularity Perception metric for buyers' responses measured 87 percent and for suppliers measured 83 percent.

The findings also reveal that suppliers (measuring a level of 60 percent) view the future of IMO similarly to buyers (measuring 52 percent), and both are of the opinion that IMO will become a primary choice for IT executives who consider outsourcing management of their IT infrastructure.

Another survey question asked respondents to rate their level of disagreement with the statement that "IMO is not likely to see widespread adoption." Responses found the level of disagreement with this statement was 44 percent for suppliers and 18 percent for buyers.

IMO is the overarching model comprising of two service delivery models: Infrastructure Managed Services (IMS) and Remote Infrastructure Management Outsourcing (RIMO). Both primarily differ from the traditional outsourcing model in that the buyer seldom transfers people and infrastructure assets to the supplier in an IMS or RIMO model.

There is a very thin line between the two IMO models. In IMS, the supplier assumes operational responsibility of certain end-to-end functions related to the IT infrastructure. The buyer's infrastructure assets are managed from another location (usually onshore). In a RIMO arrangement, the supplier is responsible for one or two functions within an infrastructure tower (such as outsourced server monitoring within a data center) and manages the process from an offshore location.

The survey found that buyers are ready to embrace IMO services. Buyer respondents for the question regarding IMO intentions showed 53 percent will adopt IMO in the next 12 months, 20 percent will adopt it later than the next 12 months, and only 27 percent have no intention to adopt IMO.

IMO Offerings and Promotion Tied to Labor Arbitrage

Although buyers and suppliers alike agreed on the viability of IMO and its growing popularity over the traditional models, they differ in their opinions on how the suppliers will offer IMO. Most buyers believe offshore suppliers will be the ones primarily offering and promoting IMO. In contrast, most suppliers responded that they believe IMO will be offered by both traditional and offshore players. (See Exhibit 1)

The finding illustrated in Exhibit 1 reflects respondents' assumptions about one of the benefits of IMO. Buyers are now realizing the benefits of traditional infrastructure outsourcing through adopting IMO as well. Since IMO does not involve aggressive asset transfer, buyers increasingly view IMO as a way to retain control over their assets.

The different stands of buyers and suppliers illustrated in Exhibit 1 also reflect perceptions about the overall value proposition of IMO. Whereas much of the value in traditional infrastructure outsourcing models depended on asset and people transfer, the value proposition in IMO is primarily labor arbitrage. Thus, there is perhaps a tendency for buyers to think that offshore suppliers will focus on IMO more than traditional suppliers.

However, in reality, the traditional suppliers are currently investing heavily in acquiring offshore resources to be able to deliver IMO services cost effectively. IBM, for example, announced it will ramp up resources in India over the next two to three years, other traditional players are acquiring companies in India (i.e., EDS acquired Indian supplier Mphasis), and there are several instances of strategic alliances between traditionals and offshore suppliers.

Responses from suppliers participating in the survey clearly show that suppliers are focusing on four diverse areas of investment to build up their IMO capabilities:

• Alliances and partnerships for providing onsite services (e.g., desk-side support)
• Building/acquiring software-monitoring tools that automate typical infrastructure management tasks
• Building an offshore labor pool for standardized RIMO tasks
• Alliances for access to data-center real estate in key US, European Union, and Asia Pacific locations

Of the four strategic focuses, 41 percent are investing in offshore labor pools for standardized remote infrastructure tasks and 56 percent are investing in an alliance/partnership approach to providing IMO services.

Which Infrastructure Functions are Offshorable?

A key focus of the survey was measuring respondents' confidence in the offshorability of various infrastructure functions. The survey used the basis of the Everest Infrastructure Management Functions Framework (see Exhibit 2). It also used the Institute's Level of Enthusiasm metric, which assigned weighted numerical values to respondents' answers of "high," "medium," or "low" to capture respondents' amenability toward offshorability.

The survey found that respondents' level of enthusiasm is linked to functions for which suppliers already have developed capabilities offshore and are currently ramping up capabilities. For example, within the data-center tower, job scheduling and database administration are perceived as the top two offshorable functions. A high level of enthusiasm for offshoring job scheduling was reflected by a level of 62 percent on the enthusiasm metric for the suppliers and 58 percent for the buyers. Slightly lower enthusiasm (59 percent for suppliers and 55 percent for buyers) was indicated for database administration. Disaster-recovery planning ranked lowest among the data-center functions for offshorability. (See Exhibit 3)

Findings also reveal that, although buyers and suppliers are largely aligned in their evaluations of the offshorability of most infrastructure functions, their confidence level differs in the area of help desk functions. While suppliers (level of 52 percent) are enthusiastic about the offshorability of level-2 help desk support, buyers (43 percent) are less enthusiastic about offshoring this function.

More than half (54 percent) of the survey's respondents hold decision-making roles regarding outsourcing decisions; 43 percent are in roles of analysis for decision support; three percent hold other roles. Sixty percent of the buyer respondent firms have annual IT spend in excess of US$50 million.

The survey analysis report provides details of offshorability enthusiasm for all infrastructure functions listed in Exhibit 2, providing clear implications for buyers now looking to make decisions about outsourcing infrastructure management services and for suppliers making IMO capability-investment decisions.

For more information or a copy of the report, "Infrastructure Management Outsourcing (IMO) Survey Result Analysis," contact the Everest Research Institute at information@everestresearchinstitute.com.

Lessons from Outsourcing Journal:

• Infrastructure Management Outsourcing (IMO) is the overarching model comprising of two service delivery models: Infrastructure Managed Services (IMS) and Remote Infrastructure Management Outsourcing (RIMO). Both primarily differ from traditional outsourcing model in that the buyer's people and infrastructure assets are seldom transferred to the supplier in an IMS or RIMO model.
• One of the benefits of using IMO models is that buyers can retain control over their assets and still achieve most benefits that the traditional outsourcing model provides.
• Whereas much of the value in traditional infrastructure outsourcing models depended on asset and people transfer, the value proposition in IMO is primarily labor arbitrage. Thus, the suppliers of traditional infrastructure models are currently investing heavily in acquiring offshore resources to be able to deliver IMO services cost effectively.
• Currently, buyers' level of enthusiasm and confidence in the offshorability of infrastructure functions is linked to functions for which suppliers already have developed capabilities offshore and are currently ramping up capabilities.

Publish Date: April 2007

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Copyright © 2007 - Everest Partners, L.P.

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