Data Center Crossroads: Is Outsourcing the Next Step?

Midmarket companies are arriving in ever-greater numbers at that critical build-versus-outsource decision point. There are many paths to take.

Sooner or later, every growing midmarket company arrives at an agonizing choice: Do you build your own data center or outsource it?

In greater numbers than ever before, midmarket firms are sampling a burgeoning menu of options to supply their most critical computing facilities. They range from outsourcing every stick of infrastructure to handpicking just a few key technologies for third-party hosting (also called managed services) to taking the traditional route of building it in the basement.

In outsourcing's corner, there's CIO Greg Schueman. Avoiding the financial burdens of a data center build-out actually figured into the business strategy behind Employers Direct Insurance Co. in Thousand Oaks, Calif. "Once you decide to be an owner, so much of your future is predicated on that," says Schueman. "Once you build it, you're locked in."

A 15-year IT career in large enterprises gave Schueman a lot of experience constructing enormous data centers. "Philosophically, it becomes a question of agility," he notes. His current 18-person IT staff has extensive expertise in the insurance business and project management of external service providers such as Salesforce.com and Avnet Inc. "Fundamentally, our strategy is to outsource or host everything we possibly can. We have the least troubled IT organization I've ever run," the CIO adds, "because literally, things don't go bump in the night."

At only 2 years old, $165-million Employers Direct is California's only investor-owned, direct writer of workers' compensation policies -- meaning it uses no agents or brokers. "The structure here is a pretty radical departure from what you'll usually find in the commercial insurance segment," explains CEO James Little. "The vision of not bringing [IT] in-house has really been the key to the success our company."

In the other corner, there's Barry Brunetto, vice president of information systems for Blount Inc., a $750-million, Portland, Ore.-based manufacturer of outdoor products and industrial cutting tools. "Most companies that sell outsourcing services are trying to make the CEOs and CFOs believe that technology is a utility. I do not believe that," says Brunetto. "If you outsource your strategic enabler, you are risking outsourcing your future."

Just last month, he fired his managed services vendor (IBM), brought a major production application (SAP) back in-house, and installed his own Dell and EMC hardware at an AT&T data center hosting facility in Mesa, Ariz. (see "Meet the Terminator").

After subtracting first-year costs of $850,000 for new hardware, Brunetto expects eventually to save between $700,000 and $900,000 annually by bringing his SAP application back in-house and providing his own hardware to the hosting facility in Arizona. "The whole managed services piece turned out to be a lot of aggravation and expense," he says bluntly. "I would never do it again."

This was first published in April 2006

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