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Capital Risk

The High Cost of Doing It Yourself

Outsourcing means never having to buy the stuff yourself. Or even know what to buy.

One of the major benefits of outsourcing is the vendor makes sizable capital investment in assets that buyers need but do not want to purchase. Making the wrong decision can be very costly. So is the job of keeping up in a changing world.

Nowhere is that clearer than in the management application and hosting arena. Bob Rentsch, director of product marketing for NaviSite Inc., an Andover, Massachusetts provider, outlines the asset costs for an average NaviSite customer:

  • Four front-end servers for the Web site and two back-end servers to house the database: $75,000.
  • Networking gear, including routers and load balancing devices: $125,000.
  • Firewall: $30,000.
  • Data storage and back up in the terabyte range: $500,000.
  • A database in a clustered environment: $150,000.

In addition, Rentsch says a company handling these infrastructure needs in-house would also have to:

  • Hire a senior level person (“assuming you can find one”) to manage the configuration ($150,000).
  • Maintenance contract: up to $20,000 a year.

Rentsch estimates a company would have to spend $1.2 million to $1.4 million in manpower and equipment on its own infrastructure.

Outsourcing also removes much of the risk of equipment obsolescence. Every time a buyer adds capacity, NaviSite makes sure it purchases the newest and fastest. “The next server we buy is always the latest,” says Rentsch. Buying the most up-to-date equipment allows NaviSite customers to upgrade their equipment as they go.

Moreover, companies who choose to go it alone have to start writing checks immediately, incurring all their costs before they can book a penny of revenue. “You build it and hope they will come,” he says.

Instead of writing a $1.2 million check to get started, NaviSite buyers find their start-up costs “in the $50,000 range.” The costs are significantly lower because NaviSite customers are leveraging the shared infrastructure. This lowers the buyers’ business risk.

Buyers who select NaviSite’s managed hosting model don’t have to do any procurement; the vendor purchases all the equipment from preferred providers. NaviSite uses its expertise to insure its customers have the most current equipment available.

On the human capital side, the vendor “owns all the headaches of the process.”

Lessons from the Outsourcing Primer:

  • Outsourcing transfers asset risk and human capital risk from the buyer to the supplier.
  • Vendors use their expertise to make sure the buyers are using the latest, fastest equipment.
  • Outsourcing mitigates the risk of asset obsolescence because the vendor is upgrading over time.

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