Apr 01 2005

Strategic Sourcing

Some companies choose to focus on what they do best and outsource the rest.

For small companies, outsourcing certain functions may offer the best of both worlds—the specialization that a dedicated department of a large corporation might provide, but without the overhead and political baggage. An unsatisfied customer can fire its outsourced accounting firm in the blink of an eye. Certain aspects of the information technology (IT) infrastructure and maintenance also can consume time and energy that might be more profitably invested elsewhere.


That was the conclusion of Matthew Duteau, network engineer at Vontobel Asset Management, regarding e-mail. Instead of managing its own system, Vontobel outsourced e-mail management not only to reduce costs and management tasks, but also to increase reliability and accountability in its e-mail retention processes.


"We are in the business of asset management. Our core competency is making money for other people; it's not technology," says Duteau. "In terms of technology, we ask: 'What can we do better to help manage our funds and make our clients more money?'"


The financial services firm manages $3.5 billion in assets—almost three times its asset base just three years ago. A subsidiary of Vontobel Holding AG, the 27-person group in New York wants to grow assets by 20 percent per year. It hopes the strategic use of technology resources will enable it to achieve that goal without increasing staff by the same percentage.


Deciding What to Outsource


To make the most of outsourcing, a company must understand its core competency, says Rob Enderle, president of the Enderle Group, a consulting company in San Jose, Calif. "What value does it provide that generates the revenue? Once a company knows this, the table is set for potential outsourcing," Enderle says.


Of the $269 billion spent by U.S. companies on external IT services this year, more than 23 percent will come from small- and medium-sized businesses, according to a recent study by International Data Corp., a research firm in Framingham, Mass. IDC predicts that investments in outsourcing IT and business processes will grow to $355 billion by 2009, and small- and medium-sized businesses will make up 27 percent or nearly $96 billion of that spending.


Once a company decides what business it is really in, says Enderle, it should identify the parts of IT it wants to outsource.


"We outsourced our e-mail precisely because it is so critical."

One option is outsourcing the maintenance and security for Web sites and e-mail. These systems represent a company's face to the world. If they are down or working erratically, it reminds customers that the company is small and creates doubt about the ability to perform, says Enderle.


Part of Duteau's strategy for supporting the growth is determining which IT assets can be outsourced and which parts of the infrastructure should remain in-house. With Vontobel's need for timely access to markets and reporting, Duteau manages network resources to ensure that portfolio managers remain connected and secure.


Edgar Ruffin, Assistant Vice President, Vontobel Asset Management

The uptime and reliability of its e-mail system are critical for Vontobel. If the e-mail were to go down, "we would lose significant business productivity each day," says Edgar Ruffin, assistant vice president.


What's more, financial firms face new scrutiny that is adding to their IT workload. In the mutual fund investigations, New York Attorney General Eliot Spitzer alleged that some fund companies allowed favored investors to trade shares improperly. In response, the Securities & Exchange Commission reiterated its guidance that investment advisers store all written communications, including e-mail, for at least five years. The importance of reliable e-mail backup and storage was underscored by a lawsuit last year against Morgan Stanley in which it was asked to turn over all relevant e-mail. The company thought it had done so, but later found more e-mail on backup tapes stored in a closet. The judge in the case was not pleased, and fined Morgan Stanley for violating the order to provide complete e-mail records.


Now many financial firms, including Vontobel, are either investing in archival storage systems or hiring third-party contractors.


All e-mails received and sent among Vontobel employees internally and externally must be archived. "The regulation specifically applies to e-mail and instant messages," says Duteau. And the volume adds up fast, particularly because many of those e-mails have large files attached. Vontobel's storage needs have grown from 10 to 15 gigabytes four years ago to between 80 and 120 GBs today, says Ruffin.


Such storage requirements, as well as the company's growth history and projects, led Vontobel to outsource rather than maintain its own e-mail systems. "When we ran out of space on the mail server and the need for archiving began, that's when we decided to outsource e-mail and backups," says Duteau. "We outsourced our e-mail precisely because it is so critical. We have our traders working at the trading desk from 6 a.m. to midnight. I'm a one-person IT department, and I can't maintain every aspect of IT on a 24 × 7 basis."


Shop for Specialty


IT Takeaway
Pinpoint your core competency. What value does your business provide that people are paying for? Everything else can be outsourced.
Start with a few minor functions to ensure that the process is transparent to end-users.
Evaluate providers that specialize in your area of business.
Don't necessarily go with the low bidder, because you'll generally get what you pay for.

When choosing a service provider, look for a company that specializes in your business, Enderle suggests. "A good first step is to ask other people in your industry for recommendations. Don't be afraid to shop around, but don't just select the lowest bidder," he says. Some companies may bid low to get the business and then increase prices dramatically during the term of the contract. Alternatively, the lowballer might not offer high-quality support because it's trying to contain its own costs and make a profit.


Vontobel required 24-hour availability, archiving, e-mail-to-fax conversion, 24-hour Web access and BlackBerry support, says Duteau. Vontobel considered three to five companies, and found that only one could meet all the criteria. But that company had a partner that specialized in archiving for the financial services industry.


By following these practices, small companies can compete better in an increasingly competitive world, while also remaining nimble enough to adjust as their needs or the market changes.


Additional reporting by Catherine LaCroix.