Financial Data
Updated 30 Sep 2020

Outsourcing: The how, why and when

Using technology is one thing, but maintaining and managing it is another. So who do you call for help, and how do you ensure that you do not get a raw deal?

11 August 2009  Share  0 comments  Print

All the answers to your unique business lifestage questions

As an SME owner you are probably used to being your own marketer, financial director, HR manager and sales team all rolled into one. Frustrating, isn’t it? Especially when these tasks have so little to do with the individual skills that enabled you to start your own business in the first place. The same applies to technology. 

Using technology might be a relatively easy thing to master, but choosing, purchasing, maintaining and managing it is a specialised task – one that can be very costly and time-consuming to handle on your own. 

Initially, outsourcing may seem expensive, but consider the following:

  • Overall costs: The rapid pace of change, coupled with overtime by staff (and downtime of machines) during crises, can make running your own IT a pricey exercise. When you take into account the salaries, overheads, time and ongoing training required to employ your own IT staff, the total cost of outsourcing over the course of the year is usually lower. 
  • Ease of installation and maintenance: Even simple upgrades imply downtime and distraction from the day-to-day affairs of business. Outsourcing helps to mitigate this by allowing you to spend less time working on the tools of your trade and more time on the business itself. 
  • Fix problems – or find profit? Technology should not be a distraction. It should support the affairs of business and streamline operations. Outsourcing your IT frees you up to focus your energy on areas where it will have the most impact such as sales, service and customer relationships. 
  • Operational performance: Depending on how you choose to finance your IT, outsourcing allows you to take advantage of the latest equipment and technologies that you might not have been able to afford otherwise. 
  • Integrating the old and the new: Few businesses have the internal skills to integrate new applications with their existing technology. Even fewer can afford to waste time trying to operate disparate systems. With outsourcing, integration can be part of the package.

The cost and time savings you can realistically expect from an outsourcing arrangement depend on how much or how little you choose to do yourself. The more services your supplier provides, the easier it is for him or her to add value to the package. 

However, you may have the resources and capability to handle certain tasks yourself.

Keeping some aspects of your IT “in-house” also gives you a greater degree of control over your systems. Analyse your current IT costs and requirements carefully to see which option will benefit your business the most.

Your new best friend:

Successful outsourcing, like any relationship, is based on understanding and trust. Follow these tips to maintain a good relationship with your IT supplier/s:

  • Make sure you both have a clear understanding of what you will get in terms of hardware, software and services.
  • Keep the relationship mutually beneficial – your supplier will have no interest in helping you achieve your business goals if you are only chasing the cheapest possible price.
  • Set targets based on what your business gets out of its IT systems – not on the delivery of boxes and cables.
  • Keep in touch – both of you need to know how things are going in terms of implementation and use.
  • Make sure that you have enough flexibility to accommodate change, whether this is through new technologies, a changing business environment or refined business goals.
  • Sign a contract that details who is responsible for what and when, and how disagreements or disputes will be handled.  

Who do you outsource to?

Most IT suppliers provide a comprehensive range of hardware, software and services, but the way they describe themselves can be confusing. Here are some basics: 

  • Resellers act as agents for hardware manufacturers, but sometimes also offer software and a range of IT services and support. 
  • System integrators specialise in choosing hardware and software that meets your needs in an integrated, working system
  • Specialist suppliers have expertise in one specific area or industry, eg, customer relationship management systems or Internet technologies. 
  • Consultants are generally people who provide analysis and advisory services, but not hardware, software or maintenance. 
  • Retail, mail order & online suppliers may be appropriate if you know which off-the-shelf hardware or software package you require, and do not need any advice. 

Spare a thought for the little guy

Smaller IT resellers are often able to provide close personal attention that you don’t always get from a retailer or large distributor.

As a starting point, consider contacting the head office of the software or hardware brand you are most comfortable with, and ask them for a list of their top vendors. 

Cash is king – or is it?

Owning assets provides security and credibility for further finance, but few entrepreneurs have the capital to buy the technology they need upfront. A more feasible approach is to finance or lease it.

Both options allow you to spread your payments over a longer period but both also commit you to increased overheads for a fixed time. Consider the following when calculating which will work best for you:

  • If the lease agreement is a true lease according to the South African Revenue Service, payments are deductible as operating expenses. Finance payments, however, are not.
  • Leasing is more expensive than paying cash, but not necessarily more expensive than credit. Compare the total cost of a loan versus a lease based on the same period. Take depreciation into account – even though you will own the equipment at the end of a finance period, it might not be worth much.
  • How often do you upgrade or replace your equipment? If this is similar to your lease period, compare the total costs of both. If your IT requirements are small and you have the cash (or a low- interest loan) then buying the equipment will save money in the long term. However, if it is a substantial investment, you might be better off leasing what you need and using your spare cash to grow your business. 

Essential questions:

  1. Is maintenance included or are you responsible for it? If so, are there any restrictions in terms of who does it?
  2. Is there a buyout option that allows you to purchase the equipment for its fair market value at the end of the lease?
  3. How long is the lease for? The longer the lease, the lower the monthly payments and the higher the overall cost.
  4. Must you insure the equipment? Sometimes insurance fees are added to your monthly payments.
  5. Can you add equipment to the same lease, and how will this affect payment/lease terms?
  6. Can you terminate the lease early, or will penalties be payable? If so, how much? 
  7. Use this checklist to evaluate a new supplier or IT system:
  8. Can the supplier/s provide all the hardware, software, services and support you need?
  9. Will they install and configure your system so that it is fully operational?
  10. Will they provide training on how to use the system?
  11. Will they provide you with detailed written documentation to help you understand your system?
  12. Will they take responsibility for any components that they purchase elsewhere?
  13. What exactly is included in their supply contract? (Ask for an itemised list of what is included and excluded.)
  14. What sort of warranty will they provide?
  15. What frontline support will they provide (eg, access to a helpline)?
  16. What sort of maintenance will they provide, what will this entail and what will it cost?
  17. Will they provide remote monitoring/diagnosis of system problems? (Bear in mind that on-site visits are usually charged for by the hour.)
  18. Will they continue to provide support if you take responsibility for replacing faulty hardware yourself?
  19. Are upgrades and software patches included in the price?
  20. Have they demonstrated the proposed system and will they let you test it beforehand, perhaps under a non-disclosure agreement?
  21. Have they provided proof of financial viability and a strong track record?
  22. Can they provide references from other, similar customers?
  23. Have they shown a clear understanding of your industry and business needs – both current and future?
  24. What are the total costs – both initial and ongoing?
  25. What are the terms, and can you pay after the system is installed and working to your satisfaction?
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