SMBs That Outsource Spend 6% of IT Budget on Service Providers

May, 2010

Many small and midsize businesses (SMBs) have adopted external sourcing as a way to receive needed services for the business. While as a rule larger organizations are more likely to engage in outsourcing a wider array of functions, those SMBs that do outsource allocate a slightly higher percentage of their total IT spending to outside service providers.

This Research Byte is from our report: Four Essential Steps Toward Outsourcing IT Functions.

Figure 1 shows that among SMBs that outsource, about 6% of the IT operational budget is typically spent on outsourcing service providers, compared to 5% among large firms. The study also finds that SMBs, defined as having from $50 million to less than $1 billion in annual revenue, are increasing their use of offshore service providers, which is a relatively new development. In the recent past, only large organizations tended to engage directly in offshore outsourcing.

SMBOutsourcing Fig1 - SMBs That Outsource Spend 6% of IT Budget on Service Providers

With their limited resources, SMBs should be making even greater use of established outsourcing service providers, including offshore service providers. One reason that they are only now beginning to do so is because many large service providers do not understand how to work with SMBs. They often take the same approach for large and small companies when responding to RFPs for their services. But SMBs typically do not have the time or resources to deal with the level of detail that is presented or to negotiate complex deals. Many SMBs do not understand how to state their requirements, evaluate external sourcing proposals, find and qualify vendors, navigate direct offshore sourcing deals, or market external services to the stakeholders inside their companies. Therefore, both IT organizations and service providers need to learn how to find each other and do business together.

Our full report outlines the essential steps required to establish the requirements, select a service provider, and negotiate a deal. Although the straightforward approach that we recommend here is especially relevant for SMB organizations, the approach is generally applicable to large organizations as well, which may find that traditional procurement practices in outsourcing deals are overly cumbersome.

This Research Byte is a brief overview of our report, Four Essential Steps Toward Outsourcing IT Functions. The full report is available at no charge for Computer Economics clients, or it may be purchased by non-clients directly from our website (click for pricing)