When it comes to the decision to outsource, there is no one-size-fits-all answer.  The questions companies need to ask about outsourcing aren’t universal either.  They are unique to each company’s situation and dependent on the outcomes required.  Generally speaking, outsourcing is a mid-level growth strategy that makes sense in many situations.  But how do you determine when outsourcing makes sense for you?

The philosophy of outsourcing is based upon the premise that the provider can either bring services or resources that the company doesn’t have or can perform the service at an overall reduced cost.   Many companies outsource engineering, payroll processing, or benefits administration because they haven’t reached a size where having a full-time staff makes sense. 

Is there a point at which the decision to outsource changes?

For this discussion, I’m going to use a fictitious data center company to examine the question – talking specifically about facilities operations outsourcing.  Let’s call the company ABC Data Centers.  Let’s assume that this company has two data centers and is building more.  It’s expected to have a total of five by the end of the year.  Both data centers and the company headquarters are currently in the same local metropolitan area, but the three planned data centers are in other metropolitan areas.  The first data center was staffed by a facilities manager that was hired on early in the company’s beginnings.

As the first data center was built, the facilities manager learned the new facility.  Things went fairly smoothly in the first years of operation due to the new equipment and existing vendor warranties and service agreements.  The equipment was lightly used and maintained in accordance with the vendor’s recommendations; but as the data center filled up, equipment utilization increased up to design limits.  This high rate of utilization caused two things to occur:  1) ABC built a second data center, and 2) ABC’s costs increased in the form of increased maintenance, increased usage of consumables, and increased incidents (both outages and near misses).

With the increased utilization of the first data center, additional facilities staff was hired to monitor the environment so the company could meet its Service Level Agreements (SLAs) to its customers.  The staff grew to accommodate 24×7 shift coverage.  As the second data center was built and brought on-line, the first facilities manager was re-assigned to the new data center and a new facilities manager was selected from the existing staff to run the first data center.

So far all is fine, we have a crew at the first data center and a facilities manager starting to grow a new crew at the second data center.  Remember that the primary job of these facilities people is to monitor because maintenance is still being performed by vendors.  In this scenario, the work of monitoring can be performed by people who are used to doing property management.  When something happens, they identify the system or equipment that’s causing the problem and call the appropriate vendor and monitor the work.  In this scenario, ABC can get away with having as few as five people to cover the data center.  But let’s assume instead that the business now has two full data centers and a full staff of ten in the facilities department.  Let’s also assume that the maintenance and repair work is still being performed by vendors.

Now let’s add costs to this scenario.  In this first example, I compare a single data center operated as stated above to a fully staffed, outsourced facilities crew.  Assume that the outsourced staff can perform up to 90 percent of the maintenance and that, due to their level of expertise, any outages are mitigated within one hour and they only happen once every five years. (This has been my personal experience with outsourced staff).

As you can see, for a single data center, it is actually cost effective to outsource the facilities services.  This is mainly due to the fact that the outsourced team performs up to 90 percent of the maintenance and outages are reduced from 1.24 per year to about 1 every five years.  In addition, an outage lasts half the time due to the proximity of skilled people at the site.  Other cost savings are realized because the outsource company typically provides some engineering and training support.

So if this is true for a single data center, is there a tipping point when you add more data centers and more staff?  Outsourced companies normally have to maintain a 25 to 30 percent gross margin in order to maintain profitability and the support services (engineering, training, et cetera).  Let’s examine what happens as the ABC company acquires more data centers and support staff.

We will look at apples-to-apples relationships in this comparison.  Each facility has 10 personnel at the site, one full-time engineer for every three sites, and one full-time trainer for every 40 operations personnel.  Assume that all other support staff costs remain the same (HR, finance, et cetera).

As you can see from the graph, it appears that the least expensive option is to use in-house personnel.  Using a monitoring/vendor solution appears to be the most expensive option, leaving the outsourcing model as middle ground.  This is the case for the ideal situation, but we live in the real world and this model may not reflect the reality of your situation.

In practice, it has been my experience that data center companies actually have a tipping point – the point at which factors become more favorable to change their facilities operations model.  Since decisions around outsourcing are unique to each company, I put in a curve for the “most probable” path.  This is the most common path I’ve seen data center companies take as they grow.

With a single data center, the cost difference between the monitoring/vendor model and outsourcing model is about 12 percent.  This is within the natural fluctuations of the budget.  So to a CFO or CEO, the question is generally, “Why should we change what we’re doing?”  When the company acquires its second data center, that 12 percent is now at the $400K level and that amount usually gets their attention.   The case can be made that using an outsourcing company at two or more facilities can save costs, avoid adding people to the company’s ranks, and provide a lot of expertise from which the company can benefit.  Following this line of reasoning, many companies will normally outsource the facilities operations at this point.

When the company gets to the point where it has four to five data centers to staff and operate, the cost differences between outsourcing and using in-house staffing become more dramatic and could make for a persuasive argument to bring things in-house.  At five data centers, the difference between outsourcing and in-house staff are about $824K.  Even at this level of savings, there are pressures to maintain the outsourcing arrangements: “It’s not our core business,” “Our CFO doesn’t want to add 52 people to the liabilities side of the balance sheet,” or “The company doesn’t have the expertise to run such an operation,” et cetera.

At six data centers, the cost differences are $1.2M a year for outsourcing versus in-house staffing, about a 14 percent savings for the total operation.  As the company grows, the argument for in-house staffing becomes increasingly persuasive.  At ten data centers, the savings can amount to over $1.9M.

As you can see, there is a time when it makes sense financially to move the operations in-house; and for some companies, finances alone will drive the decision.  In an ideal world, everything would be performed by in-house staffing; but in the real world, there are significant benefits to be gained by outsourcing – particularly for a growing company.  Some of these are:

•  Instant expertise

•  Experience from other sites (lessons learned)

•  Services that are bundled and cost less than if purchased separately (engineering, training, et cetera.)

•  Services are an expense, not a liability on the balance sheet – and are, therefore, easier to control/reduce.

• Focus…they are focused on that specific aspect of your business, allowing you to concentrate on your core business.

This thought exercise focused mainly on the financial aspects of the decision process, but also noted some of the factors that make the outsourcing/in-house staffing decision difficult.  The non-tangible aspects, such as the lack of desire of the leadership team to run their own facilities organization may essentially veto any decision to build an in-house operation.  As stated before, each situation is unique with its own set of parameters and requirements.  Each factor must be evaluated for the value it brings to the company.  Hopefully this exercise will help you identify the tipping point for your company on the outsourcing decision.