Outsourcing Pros and Cons
Managed Network Services: Are They Worth It?

Aug. 12, 2010 (Vol. 31, No. 15)

The term “managed services” is common, but how common is it for enterprises to actually use them?

Experts say that while the practice of turning to a third party to manage some or all of its networking functions is growing, doing so doesn’t always deliver the deep cost savings generally promised. Instead, they say, successful use of managed network services tends to be limited to a few primary situations:

1) When a business needs entirely new capabilities for which it has no infrastructure in place. The main motivation here is that the organization won’t have to fork over the time and resources to build it. Another reason might be that the capabilities desired are available only in the form of a third-party service.

2) When an organization suddenly must scale its telecom environment dramatically and lacks the in-house resources to do so.

3) When an organization can turn over a function to a third party and actually eliminate the people on staff who were handling it. Often, however, those internal staffers are also working on other projects and are thus retained, which takes a bite out of the hard return on investment (ROI) that some companies expect.

“So if the objective is to save money, that doesn’t necessarily happen,” says Melanie Posey, research director, hosting and telecom services, in the NewYork office of IDC.
 
IDC published a report, “Worldwide Managed Network Services, 2010-2014,” in May based on a 700-respondent survey of IT telecom decision makers conducted in late 2009. The IDC study discovered that the use of managed network services jumped from 29% to 43% of enterprises between 2008 and 2009.

But “we haven’t seen managed service use fueled specifically by the economy,” says Posey.

Outsourcing Myths?

“The myth of outsourcing is that you save money,” adds Ken Agress, research director of unified communications, voice, and contact centers at Gartner, who is based in the Chicago area. “The reality is that you save money when you outsource what you can’t do well yourself. And if you’re not going to completely outsource your network, there aren’t massive cost savings.”

Why not?

“WAN costs are dwarfed by voice spend compared to fixed costs. Licensing and maintenance agreements also cost more,” Agress says.

Pat Flynt, wireless systems specialist at Macy’s Systems and Technology in John’s Creek, Ga., came to a similar conclusion. He says he looked into outsourcing any or all of the company’s wireless device provisioning, help desk and contract management functions and concluded it wasn’t worth it.

“The pricing and commitment required per line were just too high,” says Flynt. “We’d have had to spend more money than we do today.”

Old Habits Die Hard

A third (33%) of the 400+ online survey respondent base, queried in July 2009, said they were using managed services for half or more of their IT/networking services. And 38% intended to increase their use of managed services in the future.

Yet about half (52%) said they expected no major change in their use of managed services going forward.

“What I found interesting was that while a majority of respondents agreed that using managed network services would save money, most also said they weren’t going to do it,” says Steve Taylor, president of Webtorials and the primary author of the company’s study, “Managed Services in the 2009 Economy.”

“That tells me that in-house vs. outsourced trends have more to do with social phenomena, business climate, resistance to change and job preservation” than the promise of cost savings, he says.

That seems to be the case at S&C Electric Company in Chicago, where corporate culture plays a strong role in such decisions. S&C is moving from a TDM phone system to a Cisco VoIP and unified communications (UC) environment, and an internal infrastructure group is handling the project soup to nuts.

“No managed services for us,” says Marta Rinaldi, voice communications specialist at the company. “We do everything in-house. We always have. I guess being privately held, that’s the way [the company likes] to do it.”

Even so, IDC’s Posey generally describes IP telephony and UC as potentially “low-hanging fruit” for outsourcing.

“If you’re using TDM today and want to use VoIP and UC, going to a managed service as opposed to buying, installing and managing a whole new infrastructure will deliver that ROI that everyone is talking about,” she says. “Sourcing new capabilities without having to build them yourself is kind of a no-brainer.”

What about ‘The Cloud?’

“As the industry moves toward more cloud computing, I think you’ll see managed services become more attractive because more of a given service will be residing naturally out in the cloud anyway,” he observes.

Taylor points to integrated Google Docs for Business, Google Apps for Business and (Google) Gmail for Business as an analogy.

“E-mail and voice services will soon be such that you can’t tell the difference; if UC is in the cloud, your voice services will have more reason to be in the cloud,” he says.

Gartner’s Agress says that the cloud is “unproven in many organizations’ minds” and that he is “waiting for the cloud to sort itself out.” His colleague, Jack Stackhouse, a research director of networks and telecom at Gartner in Nashville, adds that while in his experience “outsourcing isn’t real popular,” there might be more interest in data center cloud services, such as infrastructure as a service (IaaS) and software as a service (SaaS) offerings.

“There’s not a lot of appetite for [spending] huge capex to build multimillion-dollar data centers,” he observes.

What’s Right for You?

When mulling the build or buy decision, ask yourself two questions, advises Agress:
• “Do I have the expertise to manage [one or more functions] in-house?”
• “Am I better able to manage contracts or technology?”

He suggests that if you answer “yes” to the first question and if your company is very efficient, “is it worth paying an additional 3% to 4% to turn the tasks over to someone else?”

On the other hand, if the company is more adept at managing contracts and relationships than technology, outsourcing might be a better way to go.

He counsels not to outsource “anything so strategic that any inflexibility [introduced by a third party] will come back to haunt you.”

It’s not uncommon to initially save money but lose so much agility that when the company tries to make changes, “it becomes discussions between lawyers,” he explains.  “Eventually, the contract may not cover the things you want, so there are change orders. And as you add things, [the cost] can cause your jaw to hit the table.” (