Characterize outsourcing services in Canada as the many serving the few.
Outsourcing, for those who may not be aware, is the notion of handing off internal IT provisioning and functional responsibility to a third-party service provider, usually for a lengthy period of time: at least a year and typically longer. The Canadian systems integrators and professional services companies who offer outsourcing have built their businesses upon a foundation of serving the largest of businesses – typically companies with more than 500 employees and more often those with more than 1,000.
Never mind that large companies account for less than one per cent of the total number of business in Canada, while conversely, small businesses of less than 100 employees account for more than 98 per cent. It’s the big guys that spend the dough.
Outsourcing works and has proven to be extremely successful, both from the perspective of customers who realize cost savings and improved IT performance, and for service providers who through an ability to implement and manage IT in a much more cost-effective way, earn good profits on these services.
Outsourcing will generate nearly $5 billion this year and is among the few areas in IT that are sustainable and successful. It’s not surprising that services companies, particularly the largest systems integrators, target large business customers, since it is this group that most recognizes the value of IS outsourcing. It’s also where the largest retail margins for services are achieved because most outsourcing engagements are unique and require extreme customization.
Smaller businesses are continually challenged by the need for greater IT infrastructure reliability and performance, and are recognizing the competitive values and differentiation gained through IT. In fact, the need for IT services is arguably greater among this group, since most small businesses are much less equipped to deal with the challenge of IT. Small business employs fewer IS professionals and generally can’t compete for skill sets required.
Services companies have tried to be responsive to through the advent of selective outsourcing or out-tasking, which sees specific functions, processes and activities packaged as services. But most selective services were intended to offer outsourcing a la carte to larger business that preferred not to make the entire leap to total IT outsourcing.
While many large systems integrators and IT outsourcers have tried, few have succeeded in the smaller business space. There is certainly some question about the commitment by many to succeed in this market. Many of the service solutions presented to smaller business are, in fact, scaled-down versions of more comprehensive offerings designed for larger business needs.
When early success in the small business space failed to materialize, many systems integrators and outsourcers bailed. In a corporate segment where most customers did not understand the cost of achieving greater IT reliability and performance, customer education was need, but not provided in an effective way.
However, give those vendors who tried some credit – at least an attempt was made. Too many others have not even shown the slightest interest in securing the smaller business customer, deterred by the spectre of low margins and commoditized services. The irony here is that the large business segment is increasingly crowded as smaller service providers look to move up the food chain, existing players seek to increase market share, and new entrants from other regions also want a slice of the pie. Pricing pressure is exerted continually by customers who now have greater selection and choice.
There are limits to any market and outsourcing for large business is conceivably no different. It may only be a matter of time before the well of opportunity runs dry – note the experience of network hardware companies this year, when large communication service customers suddenly decided they’d invested enough for the time being in expensive infrastructures.
It isn’t easy to figure out what sells in the small business space. A recent study by IDC Canada, however, strongly suggests that IT hosting will. Hosting sees a customer choosing to partially or fully locate and utilize IT infrastructure provided as a managed service from a third party for storage, Web site, communications, server, applications and just about any other IT function or application imaginable.
Recent IDC Canada research shows small businesses are proportionately purchasing more Web hosting services today than customers in other business size segments. Hosting fits the bill nicely for many small businesses. The service sale may begin as a generic offering that becomes a proving ground. As these customers realize service benefit and value, conceivably they can be grown into richer, more advanced offerings that provide even great value.
In other words, hosting engagements start small, then grow, much like the businesses of many of these customers. It’s admittedly a simplistic view, but the fundamental challenge for service companies in the small business space is creatively and effectively serving the unique needs of this segment. Hosting presents an intriguing approach, which is demonstrating a measure of success in Canada.
Hosting doesn’t just appeal to small business. IDC Canada’s study shows there’s strong potential in various company sizes and segment, although not all are interested in or enticed by the same values and services. That said, there’s every reason to believe hosting is an IS outsourcing set of services that can and will serve the needs of the many, especially for smaller companies.
McLean is director of enterprise network services research for IDC Canada Ltd. in Toronto. He can be reached at dmclean@idccanada.com.