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Need for speed driving midmarket adoption of IT outsourcing services

The midmarket's adoption of IT outsourcing services is increasing as the economy begins to recover, with SaaS deals in the five figures and skills augmentation topping the list.

IT executives at midmarket organizations are hurrying to sign deals for IT outsourcing services, including Software...

as a Service, as business demand for new functionality kick in along with the economic recovery, consultants and observers say.

In some cases, midmarket companies are spending in the five figures on applications procured via the Software as a Service (SaaS) model, even without a visit from a vendor salesperson, one consultant said. That's because the recession has limited the size of vendor sales forces, and customer comfort with punching in a credit card number online for even big-ticket purchases has increased.

"If the vendors have reduced their sales staffs, you almost have to do this over the phone or Web to get the service," said Ben Trowbridge, CEO of Alsbridge Inc., a Dallas-based IT outsourcing and business process optimization consulting firm. "There is a deeper, wider adoption of SaaS and hosted services in the midmarket. I don't even think they oftentimes think of it as outsourcing -- it's just that they need it."

According to "State of the Outsourcing Industry in Mid-2009: Activity to Resume With a More Cautious and Global Focus," a recent report by AMR Research Inc., IT outsourcing activities will increase during the next six to eight months. In particular, application development, hosting and IT infrastructure outsourcing will experience growth, as organizations seek to both lower costs and access technical skills they do not possess in-house. The survey was conducted in May and June with 700 companies, with the results broken out by enterprise and midmarket firms. AMR defined midmarket as companies with $750 million to $3 billion in revenue.

Phil Fersht, a research director at Boston-based AMR Research and co-author of the study, said the uptick in outsourcing is not necessarily a rush to lock in contracts before recessionary pricing goes away but an effort to get projects started quickly .

"It's more about companies making the decision and wanting to get it done quickly. They don't want to spend a lot of money on consultants -- they just want to do it," Fersht said. "We have seen an influx of companies looking at doing outsourcing quickly, particularly in the application development and maintenance area."

More midmarket companies are also signing contracts of three- to five-year durations for managed services, rather than taking on project-based service providers here and there, Fersht said. But he cautioned that going with managed services is a complicated decision because it will change what IT does.

Companies considering managed services must first assess their company culture and managerial structure, and determine how internal roles must change to support IT outsourcing activities. "You're [filling] a governance and vendor management role rather than a technology delivery role," he said.

Instead of us buying and maintaining the hardware, we could have someone else maintain it for us.

John Cunneen, IT coordinator, Win-Holt Equipment Group

John Cunneen, IT coordinator at Win-Holt Equipment Group, a manufacturer and distributor of material handling equipment, is looking at going that route for ERP. With a two-person IT staff and an ERP replacement in the offing, he said he will be evaluating ERP hosting options in the coming months.

"I would like to check out if third-party hosting of our application is a viable solution," Cunneen said. "Instead of us buying and maintaining the hardware, we could have someone else maintain it for us, and we would buy the software and put it on our systems."

If the 250-person company, headquartered in Syosset, N.Y., purchases a new ERP system to replace its 10-year-old one rather than outsource it, Cunneen might have to make an additional hire.

"Right now, I don't have a person on staff to maintain that hardware," he said. "I'll look at what third-party hosting would cost, and as long as it comes out cheaper than the monthly payment or yearly lease amount [of a purchased ERP system], maintenance, and possible salary, I should be able to convince management to do that."

Let us know what you think about the story; email editor@searchcio-midmarket.com.

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