Is the in-house tech specialist becoming an endangered species? It sure is starting to seem like it.
A growing number of companies are beginning to realize that managing their own IT infrastructure no longer makes sense.

“From a business dynamics perspective, the realization is dawning on companies that much of their computer operations can be handled by others,” says Paul Madarasz, President of Livingston, NJ-based AIG Technologies. “There’s been a demystification of computer operations; they are not a core competency; not a value-added business area. The question becomes, does management want to spend time running computer operations – essentially a commodity – or does it want to focus on higher value-added business activities? Outsourcing commodity functions enables companies to focus on their core business.”

This trend is consistent with recent outsourcing surveys that found companies increasingly interested in farming out non-core functions so they can better focus on their company’s raison d’etre.

Indeed, in the Outsourcing Institute’s 2002 Outsourcing Index, an online survey of 1,110 buyers of outsourcing services, the number one reason offered for outsourcing was improving their company’s focus, the first time “saving money” was not cited as the top motivation. Sure, “reducing and controlling operating costs” finished a close second with 54% of respondents citing this as a reason for outsourcing, but the shift is undeniable. Add in “freeing resources for other purposes”, which goes hand-in-hand with improving company focus and garnered 38% of respondent votes, and it’s easy to see that focusing on higher value-add business activities has become a priority.

These results are in contrast to the Outsourcing Institute’s 2001 IT Index, when 48% of the respondents selected “reducing and controlling operating costs” as their number one motivation, compared with just 40% who cited “improving the company’s focus.”

This means that CIOs must create a technology environment that can help boost the company’s overall performance. A technology organization that effectively leverages its resources can make a powerful contribution to the company’s strategy and bottom line.

During a period of economic instability and weakness, spending time and money on non-strategic tasks isn’t a wise way to utilize resources. Companies, says Madarasz, are asking themselves: What is it costing us to continue to manage this process in-house? Well beyond dollars, there’s the cost of focus and of maintaining limited resources versus obtaining greater muscle/access to talent, expertise, software, hardware and services.

“Offloading” what Madarasz refers to as “commodity” business functions provides greater cost competitiveness in the company’s overall business strategy. Among other results, outsourcing commodity functions provides access to missing skills, minimizes non-essential organizational overhead, eliminates the necessity of maintaining high-cost, limited internal resources and assets, cuts costs, improves service levels, and provides access to better technology.

“Viewing computer infrastructure as a commodity is a trend that will continue to grow over the next couple of years,” says Madarasz. “Companies will ask themselves: Why are we negotiating with vendors? Why are we expanding functions and managing computing capacity? Why are we handling tasks that can be more cost-effectively achieved by factoring them out? Why are we continuing to handle tasks that, if outsourced, would give us the time and money to focus on other value-added business areas?”

With these thoughts in mind, it’s not too surprising OI’s Outsourcing Index found that IT remains the most popular area to outsource (55%).

Identifying the Commodity Function
Of course, companies must be careful to not outsource core functions that leave them a “shadow” of their former selves. Successful outsourcing relies, at least in part, on knowing what not to outsource as well, say experts. Companies need to identify the work critical to their company’s strategic intent.

Chip Gliedman, a research analyst at Giga Information Group, suggests four areas of analysis.

Cost: Identify all the costs related to a function and calculate the total per year.

Benefit: Itemize the primary/direct benefits expected from outsourcing.

Flexibility: Identify all the indirect benefits of outsourcing.

Risk: Place a monetary value on the certainty of the estimates.

“The beauty of outsourcing commodity functions, is that they’re readily identified as commodity functions, and the direct and indirect benefits are easily discerned,” says Madarasz.

The AIGT Advantage
Madarasz concedes that most outsourcing providers tend to provide similar services. “So, clearly it’s not the services, per se, it’s about how those services are delivered,” he adds. “Outsourcing commodity functions can only provide sustainable business value if it’s reliable and easy to use, otherwise clients find themselves continuing to be bogged down in the minutiae of managing the same processes they’ve outsourced.”

American International Technology Enterprises, Inc., now doing business as AIG Technologies (AIGT), is a member of American International Group, Inc. (AIG), the world’s leading U.S.-based international insurance and financial services organization, which operates in approximately 130 countries. In combination with American International Group Data Center, Inc., AIGT has satisfied the information processing demands of AIG member companies for more than 30 years. Beginning in 1995, AIGT began working with non-AIG clients and, today, is a leading provider of cost-effective, utility-based managed services that help companies leverage technology, save money, and focus on their core business.

To further his point about “the how of service,” Madarasz identifies the AIGT-specific approach to service delivery that differentiates it from other mid-tier providers:

Agility: “We’re small enough to be responsive and for our mid-tier clients to be comfortable a) with our size and b) with the size of the company they’re keeping.”

Access: “Our clients have access to AIG’s world-class data center – superior engineering expertise and technology. Based upon standardization, our clients benefit from technological enhancements we make for AIG – all within their contractual cost structure.”

Price predictability: “We use a pure ‘pay according to use’ utility computing model with no additional charges. Clients tell us that ours is the only bill they can explain to their financial people.”

Simplicity: “In addition to our pricing model, which results in one-page bills with essentially two items, all clients are assigned a dedicated Account Executive, essentially the combination of a relationship manager and technology manager, to service their account. A complicated relationship is counterproductive to a service environment.”

Focus: “We ‘stick to our knitting.’ We don’t need to sell more products and/or services to cover high fixed overhead.”

Flexibility: “We’re not limited by a ‘Our policy doesn’t let us do that’ mentality.”
Commitment: “What’s important is meeting and exceeding client needs.”

The Proof is in the Practice
To get an idea of how we execute our strategy, just talk to Vestcom International, Inc., a privately-held firm with $150 million in revenues in 2001. On behalf of its clients, Vestcom produces and distributes time-sensitive documents (invoices, bills, and statements) and provides database management and direct marketing services, loyalty program management, Web-based fulfillment, and publishing of publications such as enrollment kits, user manuals and technical materials.

Customers include financial institutions, managed care organizations, telecommunications firms, and utilities. Vestcom operates multiple facilities throughout the U.S. and Canada.

Vestcom’s CTO David Adler says he wanted to combine three mainframes in three entirely separate locations in order to centralize data processing in one facility. The project was a bit complex since Vestcom needed to carefully and closely coordinate the transition with its many clients as it changed its data lines.

He says he chose AIGT over two other companies mostly for its competitive pricing, impressive data center, and “true billing simplicity.” “AIGT’s technology is state-of-the-art and very well organized,” Adler adds. “Also, its services are all inclusive, not a la carte. Everything – disaster recovery, security, and technical support – is included. They’re one of our largest contracts and we receive a simple two-page bill.”

In the end, AIGT did not disappoint one bit. “The process was close to flawless,” Adler adds. “AIGT did what it said it would. It met all of its commitments. With all data processing in one location, routing is more easily accomplished and less expensive. Vestcom does not have to invest in the software and hardware AIGT makes available to its clients.”

Adler points out that when Vestcom has periods of high demand, AIGT has spare capacity so he can have peak load configuration when he needs it, without maintaining it when he doesn’t need it. It’s like enjoying the best of both worlds.

“We pay only on the days we use it,” he elaborates. “We don’t pay for over capacity when we don’t use it. It’s a more cost-efficient way to ensure access to such a ’big machine’. This has freed up our time, so we use assets more efficiently and our customers get better services. AIGT can do on its large system in one hour what it took us 12 hours to do in house.”

Adler also points out that he was drawn to AIGT because it is much smaller than the industry’s largest outsourcers. “With other providers we’d be forced to fit into a template,” he adds. “AIGT provides us with a custom built environment to fit our needs.”

Additionally, Adler says AIGT enables midsize firms to access “size appropriate” service. “Since AIGT is not a huge outsourcer, clients don’t get lost in the shuffle as with a large provider with thousands of clients. AIGT clients get customized service and access to multi-million dollar equipment; a middle market firm could never do this for itself,” says Adler. “AIGT is in a sweet spot – below the largest in scale, but still able to deliver high-end technology. It provides billing simplicity, class A technology, engineering reliability, a high-level of financial stability, and one-on-one contact with management. Additionally, AIGT is a good partner: they stick to their service offerings and aren’t intrusive.”

A testament to the success of the Vestcom/AIGT relationship is the fact that AIGT now offers Vestcom’s marketing and business communications services as an option to clients within its packaged outsourcing solution. Notes Adler, “AIGT’s success allowed us to focus on other ways to grow our business and, ultimately, partner with AIGT to further penetrate the market for print services. Without a successful outsourcing relationship upfront, and the valuable time it gave us to focus more on core competencies, this would not have been possible.”

Michael Tahan, senior vice president and CIO of the 150+ year-old National Life Group, has been especially delighted with AIGT’s customer service orientation and the access it gives the firm to cutting-edge service and technology since becoming an AIGT client in late 2001. Tahan says AIGT demonstrated its proactive customer service orientation early on in the selection process, and that initial impression has borne fruit.

“What was most important during the evaluation process was that AIGT took the time to learn our business,” he explains. “We had already made the decision to outsource. Saving money with the wrong people wasn’t worth it.”

Tahan continues, “What we’ve discovered in working with AIGT is that they’re very proactive. They’re always interested in learning whether we’re happy and what we need. They’re extremely accommodating, very customer service oriented. They never say, ‘I’m sorry, but our policy doesn’t let us do that.’ They say, ‘We don’t normally do that so let us have time to figure it out and we’ll get back to you."

Tahan is also impressed with the simplicity, responsiveness, and focus of AIGT’s dedicated support person. “We have a dedicated information technology representative,” Tahan adds. “This individual is a problem solver – not a salesperson – who makes sure everything is working properly. This provides a great sense of security. This person isn’t trying to sell us additional products or services, he’s just trying to find out what AIGT needs to do the job properly.”

Of course, outsourcing also has its downside, Tahan concedes. “Now that our data processing services are handled externally, we have to be a little more proactive, a little more deliberate to be as responsive to our clients as when we had the function in-house,” he explains. “Of course, the tremendous cost savings – in the millions of dollars per year – far outweighs any reason to maintain these functions in-house. We’re able to use savings to focus more on our core business and value-add activities such as building new products faster and supporting marketing efforts.”

Thanks, in part, to outsourcing providers like AIGT.

AIG Technologies
2 Peach Tree Hill Road
Livingston, NJ 07039
aigtmarketing@aig.com