SMBs: Outsourcing a growth tool

Encharter Insurance, in Lexington, Mass., prides itself on its hometown appeal. That feel for the neighborhood has contributed to its rapid growth - Encharter doubled in size in the last few years, to 55 employees and about $8 million in revenue.

But while business boomed, like many small companies Encharter paid little attention to developing an IT strategy to support expanding technology demands.

"I came into this job and found that there was no IT department," says Michael Sher, who last year was named president and CEO of the group of seven insurance agencies in Massachusetts and Connecticut.

He started looking for outside help, a maverick decision for the head of a small company. Most small and midsize businesses are reluctant to hand over IT functions to outsourcers, in large part because SMBs lack familiarity with the idea of outsourcing and fear they will lose control.

In addition, while some smaller outsourcing vendors such as CenterBeam and Everdream have built their businesses by focusing on SMBs, big-name providers such as Electronic Data Systems and IBM have yet to carve out a niche in the low end of the market, creating a supply-side issue that is holding back more widespread demand, analysts say.

Gartner estimates that about 90% of all new businesses created in the United States are in the SMB sector. It's a huge opportunity for outsourcers as these small firms begin to recognize that they can achieve the same benefits that large organizations enjoy when they hand over non-core IT functions to outside service providers.

"There is a small but growing legion of SMBs that are considering outsourcing," says Robert Brown, a research director at Gartner. He notes that the base is small: Companies with 100 to 499 employees now account for just 7.8% of the $50.5 billion business-process outsourcing market, but that number is expected to grow to more than 8% of a $78.8 billion market by 2009, according to Gartner.

"For most SMBs, there is an unfamiliarity with outsourcing that dictates that when they make technology buying decisions, the first thing they are going to think about is buying hardware and software, and then trying to integrate those through internal resources and staff, as opposed to turning to an outsourcer to help," Brown says.

Sher says when he left Plymouth Rock Insurance about a year ago to run its subsidiary Encharter, he could hardly believe the IT situation.

"The offices weren't networked. And it was all supported by one guy, and if he was sick our whole system could be down. He was also charging us for travel between the seven offices in two states," Sher says. Encharter last year turned over the bulk of its IT infrastructure, including its Microsoft Exchange servers, to CenterBeam.

"Now we have nightly backups. We have servers that are in a Class 1 data center. We have all the things that you would want a growing insurance agency with aspirations for further acquisitions and expansion to have," Sher says.

The small company had to invest in upgraded hardware such as routers and T-1 lines to take advantage of remote service, but that investment paid off. "We have probably cut our IT costs in half," he says.

In addition, Sher says Encharter now has the kind of technology support it needs to continue to grow. It's a growth-byacquisition strategy of the kind that is pushing other SMBs to look at outsourcers, including offshore.

Kitcoff-APSI, a consulting and administration firm that focuses on full-service, employer-sponsored retirement plans, is using Indian offshore provider Patni to buoy its numerous acquisitions. Michael Campo, founder of the Coral Gables, Fla., company, says outsourcing is the key to his business model.

"I needed to lower my labor costs," he says. "Once I bought holistically into the idea of outsourcing, I could then acquire another firm and completely take over its entire book of business and outsource it to India without absorbing any of their labor cost mistakes." Patni handles record-keeping tasks associated with the administration of Kitcoff-APSI's defined-contribution plans.

Campo says outsourcing can be a tough decision for any company, large or small. "The problem is, inherently a smallbusiness owner has even more reservations because [the company] is his," he says. "But there are many ways to mitigate those fears." One is to completely embrace the concept of outsourcing, Campo says.

"My business model is completely immersed now in the concept of outsourcing the heavy lifting to Patni," Campo says. The strategic advantage - customer service - remains in-house.

Henry Svendblad, vice president of IT at Millennium Partners Sports Club Management in Boston, also was looking for a way to offload non-core IT headaches. He outsourced the company's IT functions to CenterBeam in December, just a month after coming on board.

"As I looked at our IT strategy, I realized I could dedicate most of my time to building an IT infrastructure and then try to build our business systems from scratch. Or I could let CenterBeam focus on our infrastructure and focus all of my energies on our business systems, where I can really add value," he says.

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