IT outsourcing simply pays off

For a number of years, the Polish economy has been undergoing dynamic transformations. Mergers and acquisitions, changes in the product portfolios and a strong pressure on cost cutting are only some examples of the efforts undertaken by companies to improve their performance and competitiveness. A strategy adopted more and more often to support the restructuring processes is outsourcing.

Outsourcing involves the use of outside resources and consists in the subcontracting of the essential business processes of a company to specialist third parties who can execute such processes in a more efficient way. Usually, this concerns supporting processes which are not directly associated with profit generation. The most common examples of processes outsourced in recent times include security, legal, IT or administration services. Some companies take one step further and outsource the support function or some of the production process.

The many faces of outsourcing

Scanclimber started to use outsourcing at the end of 1990s, as part of a major restructuring scheme. At that time, reception and security services were outsourced to the former employees of the company. It was the first step on the way to systematic employment downsizing and increased work efficiency.

In a company with over 280 employees, in less than two years, new – or even revolutionary at the time – ways of management were implemented, as a result of which the headcount dropped by half. The reorganization affected almost all organizational units of the company, from the Management Board, through the broadly understood administration, to direct production staff. Following the exercise, a number of new businesses were set up which took over the staff who used to be employed by Scanclimber.

The majority of them still cooperate with Scanclimber providing such services as:

• cleaning and security,
• transportation,
• repairs,
• IT maintenance (e.g. regular ‘cleaning’ of computers, LAN maintenance),
• legal,
• advisory,
• translation,
• car hire and other.

The implementation of a new, integrated ERP class system (mySAP ERP) which took place in 2005 was an incentive to analyze the opportunities for outsourcing the whole IT function.

Specialists needed

Anyone planning implementation of an ERP system should bear in mind that the use of such a system generates not only benefits, but also challenges and costs.

The company will need specialists in charge of ongoing maintenance of the business critical system who will administer the software and hardware, monitor efficiency and supervise performance of the servers. Additionally, users will need support of a helpdesk who can answer their questions and resolve issues in the daily work with the system. Finally, it is advantageous when some of the development work (e.g. new reports) can be done without the need to hire athird-party provider.

This – let’s call it traditional – logic can be found in a majority of large and medium-size companies using ERP systems. That’s why the companies set up their own ERP system administration teams and build the in-house support capability with the help of key users who assist other users in the operation and development of the system in particular areas (Finance, Sales, Production, etc.).

Costs and risks

The trouble is that all those arrangements give rise to costs. The building of an in-house specialists team takes a considerable time and costs a lot. When we ultimately reach the point when we can honestly say ”Yes, we have the right people now”, we have to accept new expenses and new challenges, some of them difficult to plan. The examples include:

• training in new technologies,
• payroll costs which must be born to retain experienced and skilled staff in the company,
• disruptions in task execution caused by holidays and medical leaves of employees,
• risk of losing the key specialists,
• cost of key users’ time (when engaged in providing internal support, they get distracted from the main area of their responsibility, for instance sales, finance or other).

Thus, that the cost of maintaining an internal team is quite considerable. Moreover, the availability of in-house specialists is quite limited. We can’t afford to run the risk of key personnel being on holiday or falling sick when they are most needed i.e. when problems with the performance of the system occur.

Unfortunately, such problems can have serious consequences for the company’s business. When the system is down, planning raw material purchases or invoicing customers becomes very difficult, if not impossible. A long-lasting ERP system failure may cost the company dearly, including loss of trust of the key business partners.

Hence, when planning the ERP system implementation and operation strategy, it is worthwhile to give a good consideration to all the pros and cons of having an in-house team of specialists. A DIY (Do it yourself) approach is not always better and cheaper.

Towards IT outsourcing

One more observation can be added to the above presented considerations. Usually, a smaller company means a smaller scope of the implemented ERP system and fewer users. In such a situation, maintenance of an internal IT team is even less justified from the economic point of view. Theoretically, you can save by reducing the size of the team, but the unavoidable consequence is a higher risk of problems with the system performance.

And in the actual fact, what is the point in keeping in a company a specialist with competences which might become useful once a year? We should also bear in mind that no IT specialist is an expert in every aspect of the ERP system administration.

And this is where outsourcing comes into play. The whole or part of responsibility for the proper functioning of the system can be delegated to a company which specializes in such services. The outsourcer maintains the required team of people and, in return for a fixed fee defined in the outsourcing agreement, guarantees a particular level of the ERP system availability.

The client stops worrying about the staffing issues and can focus back on the core business. If any problem occurs, the client has access to a team of highly skilled specialists obliged to respond to the request within a defined period of time.

The other side of the coin

When considering the advantages of outsourcing, we shouldn’t forget about the possible threats, such as:

• reliance on the outsourcing company,
• uncontrolled growth of costs,
• possibility of losing crucial/ strategic information, and
• poor performance of the provider of outsourcing services.

Taking into consideration all pros and cons and, in the case of outsourcing, minimizing the risks is a significant challenge to the company management. The factors important to mitigate the above mentioned risks include:

• reliable definition of the requirements from the outsourcer,
• selection of an experienced service provider,
• well drafted outsourcing agreement, clearly defining the responsibilities of both parties.

Defining the expectations

The needs and expectations concerning the use of IT systems are client-specific and are determined by a number of factors, such as the strategic choices, in-house competences, current experience, availability of alternative solutions and the financial considerations.

When deciding to enter into cooperation with an outsourcing provider, the Management Board of Scanclimber took the following criteria into consideration:

• service quality and the experience in the service provision,
• the scope and comprehensiveness of the provide services,
• response time to service requests,
• the possibility of ensuring non stop access and the security of the data held and processed,
• cost aspects.

In the case of this company, ensuring the security of the data held and processed involved the development of a security policy, encompassing such areas as:

• physical protection of computer equipment (e.g. room security),
• protection of data stored in IT systems (e.g. backup copies),
• authorized access to data (e.g. data transmission links, system access accounts).

Costs are decisive

Despite the fact that all the criteria have been equally important to Scanclimber, cost effectiveness turned out to be a decisive factor. The Management Board prepared a summary of estimated costs which the company would have to incur if all IT functions were to be maintained internally. At the same time, a detailed scope of services to be outsourced was prepared, including:

• cost of access to the hardware and software platform,
• cost of SAP system administration,
• cost of Basis development work, and
• cost of central infrastructure (e.g. backup copies, UPS).

The estimated potential in-house costs and the forecasted cost of the outsourcing contract (based on the market information) have been calculated in a five-year time horizon. The summary is presented in Tables 1 and 2.

The summary shows clearly that the cost of retaining the IT function in the company is higher than the cost of using the services of the outsourcing company and the approximate break-even period of the investment is 2.5 to 3 years.

Selection of an outsourcing company

Scanclimber decided to choose BCC as the provider of complex SAP outsourcing services. BCC Outsourcing Center ensures a hardware platform for the SAP system, maintained in the data processing center and guarantees comprehensive administration of the system.

One of the arguments in favor of entering into cooperation with BCC were the opinions of the company’s existing clients. We decided to place our confidence in BCC due to their vast experience in SAP outsourcing and maintenance services and in the implementation of SAP in numerous market-leading companies. Another advantage of BCC was the successful cooperation with the suppliers of hardware and software platforms for SAP, such as Oracle, Microsoft, HP or IBM.

Although the structure of an outsourcing agreement is individually negotiated between the parties, the outsourcing company usually defines the package of services which forms their contractual obligations. In the case of Scanclimber, the scope of BCC responsibility includes:

• delivery and access to the hardware and software platform,
• ensuring availability of SAP systems,
• administration of SAP systems, monitoring and efficiency tuning,
• ensuring availability of the administrator during defined hours of the day via defined communication channels,
• making backup copies and disaster recovery tests.

Communication with the outsourcer

The response time to service requests has been agreed in the outsourcing agreement with BCC. Moreover, Scanclimber can check the actual response time using the HPSM supplied by BCC.

Thanks to the system, Scanclimber may continuously monitor the service quality and level and their conformance with the service level agreement (response times and effectiveness, numbers of requests in different categories, identification of responsible persons, etc.)

Outsourcing not only in Poland

An interesting fact is that the outsourcing agreement with BCC covers not only Scanclimber, but also the Finnish and German subsidiaries of Scaninter Group. Such a model is still not very popular in the Polish IT sector.

Hence, the users from Finland and Germany also take advantage of the system located in Złotniki near Poznań, in the BCC Outsourcing Center. Employees of the Scaninter Group communicate with BCC service consultants via the HPSM system in two languages (Polish and English).

Not only savings

Thanks to cooperation with BCC, in addition to cost savings as a result of the optimization of system maintenance and development costs (including employee costs) and reduction of the total costs of SAP implementation (lower entry barrier –no need to invest in the hardware platform), Scanclimber has also gained a number of intangible benefits, such as:

• non stop support offered 24 hours/ 7 days a week,
• high-level data security (and consequently, security of the conducted business).
• minimized risk of mis-dimensioning the hardware platform,
• possibility to focus on the core business,
• higher performance effectiveness of the SAP system end users and administrators (through efficient and quick issue resolution),
• development Basis work on the SAP system conducted by external specialists with the appropriate skills,
• guarantee of higher availability of the system compared to the performance of in-house administrators.

The two years of Scanclimber’s experience with outsourcing of IT processes have demonstrated not only cost effectiveness but also high security and elimination of numerous risks. Thus, in the budget for 2007 the company is planning to allocate more funds for expansion of the scope of outsourcing to include end user support.

Three dimensions of the benefits

During the last two years of cooperation with BCC Outsourcing Center, Scanclimber has observed benefits in the following three dimensions – economic, operational and strategic.

The economic value of cooperation with BCC is evidenced by the fact that thanks to outsourcing Scanclimber has cut down its costs by rationalizing the employment structure, changing the company’s processes and making use of BCC experts’ experience and of the effects of the economy of scale. Thanks to higher cost effectiveness of outsourcing, additional capital is raised which can be invested in strategic areas of our clients’ business.

The employment of innovative processes, state-of-the-art technology as well as the economy of scale gives the company real operational benefits. Top class experts from BCC often propose changes which increase performance effectiveness and enhance standardization. Scanclimber has observed such benefits. The clearly defined service levels indicators guarantee higher accountability, better service quality, predictability and more effective risk management.

From the strategic perspective, outsourcing helps Scanclimber focus on the core business areas which have a direct impact on the company value. The flexible and scalable service models adapt to the market requirements without a negative impact on the core business.

Summing up, an outsourcing arrangement may contribute to a considerable reduction of costs, savings of employee time, focusing on the company’s core business and taking advantage of professional expertise. It should be emphasized, however, that outsourcing is not a magic solution for all business. A decision about outsourcing of processes should always be preceded by a thorough economic calculation and the balance of potential opportunities and threats.