Data Center Crossroads: Is Outsourcing the Next Step?

Rules of the Outsourcing Road

When it comes to what should or shouldn't be outsourced, Gartner analysts recommend against handing off key technology architecture such as operating systems. "Instead of the entire data center, [companies are looking] at outsourcing a portion of it," Matlus explains. "I see a lot of clients looking to outsource their mainframe because the people supporting mainframe systems are nearing retirement age and the younger members of the IT staff ... want to work on Linux and Windows machines."

Outsourcing Checklist
So you're in the market to outsource your data center but leery of the enterprise-focused Big Six (IBM, EDS, Hewlett-Packard, Capgemini, Accenture and CSC). Where do you start?

"When deciding to outsource, look at your own company culture," recommends John Madden of Summit Strategies. "If you have a bunch of employees who are support-dependent and they need a lot of help from your team, think about how are they going to react if that goes to a third party."

Madden says he is often surprised to find CIOs who don't have a clear idea of the assets, applications and servers in their environment. "Take an entire inventory. And then look at the skill set internally: Does it match what you have in that inventory?"

Gartner's Richard Matlus agrees that the first step is taking a comprehensive inventory of hardware, software, people costs and facilities. "When you start to do that, you see what's important," he says. Other experienced IT executives and experts offer these additional tips:

  1. Check in with your own network of IT contacts and colleagues. They'll tell you the truth about service levels and support.
  2. Use analysts' services to "map out the network of players," recommends CIO Greg Schueman of Employers Direct. "You hear a bit about the players, and you can plan your next steps from there."
  3. Google the companies you're most interested in to see when they've been in the news. That also helps identify customer companies that aren't on your candidates' reference lists. Call those customers and find out why.
  4. Ask customer references these questions: "If you were to do this over, what would you change?" and "What would you have taken out of the contract?"
  5. Plan to do real-life responsiveness testing once you have the vendor under evaluation. "When I call in with a question, I want an answer quickly, or tell me what the process is to get me that answer," says Lawrence Tam, VP of engineering at Constellation HomeBuilder Systems.
  6. Offer to be a reference customer in exchange for special consideration. "Pretty up before you go out on the main floor," says Schueman. "What's your key value statement on being their customer? Will you be willing to talk about your experiences and help them out?"
  7. Consider hiring legal help for contract negotiations, particularly if you're a first-timer or it's a larger company than your own.

For midmarket enterprises operating under the classic constraints of fewer resources and smaller staffs, offloading labor-intensive processing tasks can provide "a chance to look at the business," says Summit Strategies' Madden. "If the CIO is busy plugging holes in the data center, he won't have time to deal with the business side of IT."

Madden identifies four main factors involved in evaluating data center outsourcing:

Control. "You need to lay down the rules about who is responsible for what and who is responsible if something goes wrong."

Security. "Customers of all sizes, particularly in the midmarket, need to know that the assets are going to be protected."

Trust. "Some customers are more inclined to look to a third party for non-core competencies such as infrastructure and management."

Cost. "It's not just about 'How much can I save?' It's about measuring the value and the business benefits that outsourcing will produce."

Show Me the Savings

But the cost factor does loom large for midsized firms on either side of the equation, whether the data center is an in-house operating expense or an outsourced capital expense.

The investment required to build your own data center ranges from $250 per square foot to $1,000 per square foot or more for a high-end, fully redundant tier-one data system, according to various experts. "I don't think [midmarket companies] can afford not to outsource. The stakes are too high and the costs too great" to build your own, says THINKstrategies' Kaplan.

"For us, it's about the reliability and the facility," says CIO Justin Yaros of Kelley Blue Book in Irvine, Calif., a publishing company that rents data center space from Missouri-based SAVVIS Inc. but keeps all applications in-house. A joint advertising campaign with General Motors -- and the additional server workload on the publisher's Web site (www.kbb.com) -- underscored the importance of turning to outside help. "We're servicing 130 million automotive consumers a year through our Web site. That means that availability is critically important," Yaros notes. "But for a company like ours to bear the cost of maintaining the data center would be unbearable."

Monthly hosting costs are far from trivial. At Rackspace, for example, the hosting costs among its midmarket enterprise customers range from $5,000 to $10,000 a month on the low end to $300,000 to $400,000 in the upper echelons. But there are ways CIOs can drive down hosting costs through better negotiating or a willingness to make compromises to get a certain price.

At Employers Direct, Schueman's vendor proposals ranged from $20,000 to $60,000 a month. He ended up in the "high 20s" with his final contract, which doesn't include disaster recovery protection. "I was looking at it based on how much it would cost me to do all this stuff and then trying to drive it as low as possible. I'm a tenacious negotiator," he explains. "We did some things others might not choose, like using AMD CPU equipment from a white-box vendor and Sun Microsystems' low-end Opteron-based line."

Schueman was also willing to try a vendor relatively new to the managed hosting space, Phoenix-based Avnet, an IBM partner that is better known as a product distributor than a data center hoster. "We're a good catch for Avnet in the midmarket space where they're aiming," he notes. His actual contract is signed with IBM. Before the deal was signed, Employers Direct made sure to have its Los Angeles-based legal counsel hammer out the actual terms. "Our L.A. firm has experience dealing with IBM contracts, and I've used them very successfully in the past," says Schueman. "IBM will start out with a contract not favorable to you."

This was first published in April 2006

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