Outsourcing grows up

So far, so good. But here’s the real news: Outsourcing isn’t just about quick-and-easy point solutions anymore. With the help of new Web services integration standards and technologies, subscription software applications can now emerge from their silos to form a fully integrated enterprise architecture that delivers best-of-breed performance at a highly competitive price.

As CTO of Putnam Lovell, a San Francisco-based investment bank with 150 employees, my challenge is to help my firm compete effectively with much larger organizations while keeping costs in line. A few years back, one of our most critical needs was a more efficient way to deliver proprietary investment research to our clients. Building an in-house system that tied together content creation functionality with CRM data would have been far too costly and resource-intensive. Instead, we outsourced.

In 2000, we signed on with Salesforce.com for CRM as an Internet service and used Grand Central as a Web services-based integration hub to link to Blue Matrix, another Internet service for research content creation. Now, as research content becomes available, it is matched automatically with customer profiles stored in the Salesforce.com online database, then delivered via e-mail to clients.

We’ve since extended our outsourcing strategy to include services from those such as Jamcracker for HR applications, AppShop for Oracle financial applications, and American Express for employee travel. All in all, the move to the service model has saved Putnam Lovell as much as 60 percent compared with traditional applications costs.

No solution is without limitations, of course. Because you don’t own the environment of an outsourced application, you can’t customize it as much as you may want. This is less of an issue for generic operational areas that lie outside your core competency, but it makes this approach less suitable for areas where differentiated software drives competitive advantage, such as strategic customer-facing applications or e-business order management systems. At Putnam Lovell, concerns about security, reliability, and latency as well as the simple lack of specialized software services on the market have led us to retain licensed software for trading and other functions that involve client financial transactions. We’ve also kept user-facing items such as e-mail and desktop support in-house.

Outsourcing comes with its own set of caveats as well. You’ll want to funnel some of your savings into building up your networking infrastructure to ensure optimal performance on both sides of the firewall. Even with service-level agreements, private lines, and vendor redundancy there will always be the chance of a slowdown here and there. Although, that being said, in two years with Salesforce.com, we’ve enjoyed better than 99.9 percent availability, which would be hard to match with an in-house application. Don’t underestimate the resources needed for vendor management, which plays a more important role than with a licensed software (as well as offers more of an opportunity to influence the upgrade cycle). This should include close communication with the provider’s CFO to keep tabs on its financial stability; many are privately held, and your risk management strategy should include contingency planning and backup vendors should one fail (in which case the architecture’s openness becomes an important asset).

Nonetheless, the benefits of an outsourced enterprise architecture make it a compelling model for companies and service providers alike. By focusing on core competencies and business knowledge, rather than nuts and bolts, companies can put their internal resources to the most efficient possible use while achieving tremendous savings in non-core areas. Meanwhile, vendors gain a more productive development process. Instead of having to develop, test, and support software for endless combinations of platforms and operating systems, every customer can be served using the same single version that remains on-site for perfect control.

Outsourcing may have begun as a quick and inexpensive option for simple, non-integrated applications, but it’s come a long way since then. And we have yet to discover just how far it may take us.

Rodric O’Connor is the CTO of Putnam Lovell. If you are interested in writing a CTO Adviser column, please contact loretta_prencipe@infoworld.com