White Paper: WP-001p

Last Modified: August 30, 2003

AEC Industry Data & Application Hosting: keeping it in-house versus outsourcing

Author: 

Jordan Cram (mail@thecramgroup.com)

Principal, The Cram Group, LLC

Categories:

ProjectXnet; Executive

SUMMARY: The pros and cons must be considered heavily before entrusting external agencies to host company data and applications.  Key issues are:

1.      IT staffing: retaining the high level of talent required to run Internet accessible networks.

2.      Security and sensitivity of company confidential and proprietary information.

3.      Keeping pace with the increasing evolution of software, software licensing and hardware.

4.      Real cost comparison (hard and soft costs).

5.      Reliability.

DEFINITIONS

?         Application Hosting:  A technology solution of deploying and managing corporate applications and data from a location which is Internet accessible.

?         Self-Hosted: Companies who purchase and manage the computer hardware, Internet connectivity and applications & licensing with internal resources.  The physical location of the self-hosting equipment may be at the company?s own premise or a remote, third party cyber center.

?         Outsourced Hosting:  A service provided by technology firms to manage the computer hardware, internet connectivity and applications & licensing. The equipment?s physical location for the outsourced hosting model is generally a third party cyber center. 

Introduction: An Analogy of a Technology Company

Outsourcing company IT systems management is increasingly a more cost-effective way to conduct business in the AEC industry.  This article will demonstrate why it is advantageous (and even critical) for businesses to do this.

Technology, like most disciplines, is well understood by those immersed daily in its application and future potential.  Familiarity simplifies these complex systems, minimizing risk exposure from down-time or lost data. 

As IT companies generally stick to their core competencies, AEC businesses do the same.  High risk is to manage IT systems (and all the peculiarities) ?part-time,? or when emergencies strike; yet ironically, outsourcing technology is not common in the AEC industry.  Leading reasons behind this will be investigated in this White Paper.

Most would react humorously to the idea of a technology company designing, constructing and maintaining its own office building.  An IT systems specialist would be tasked with coordinating various building trades, none of which he or she understands.  Why the anchor bolts must be measured for accuracy before the concrete is placed would fall outside of the IT specialist?s expertise.  Consequently, poor foundations would be laid and resulting structures unsafe and unreliable.

This analogy demonstrates why technology companies outsource AEC activities, and conversely, why AEC companies should outsource management and maintenance of their more sophisticated technology.

IT Staffing: ensure talented people work on your systems

Like most fields of work, people make the difference in technology systems management.  It is worthwhile to list key personality traits necessary to keep systems successful and reliable:

• A Self educator.
  Your technology ace must:  First, hear about new technology through Internet newsgroups, magazines or industry peers.  Second, investigate these new technologies for advantages to current and future e-Business initiatives.  Lastly, he or she must learn and understand without attending expensive training courses, which are easily outdated.  The individual needs to learn effectively at his or her own pace and independently.
• A Hobbyist.
  Working hours generally consist of setting up and maintaining technology systems, which leaves little or no time to research and investigate better methods of management and deployment.  The only options available to the systems specialist are to study on his or her own time and through dialogue with industry peers.  Technology needs to be a hobby.
• Relentless & Creative Problem Solving.
  Without relentless and creative problem solving, systems will be unreliable.  Mission-critical systems emergencies are solved quietly when solid education and experience are mixed with quick thinking and willingness to react.  Trigger-happy or gun-shy applicants need not apply.

How can you find and retain human capital with these skills?

Financial Compensation:

Construction spending on technology as a percentage of revenue can range from 0.3% to 2%.  Using 0.5% as a low (but realistic for most construction companies) average, a $50M construction company will spend $250,000 per year on technology. 

For a company to Self-Host, it will require a senior Internet Application specialist, whose annual cost (including benefits & burden) can be $122,887¹, nearly half the total IT budget. This does not leave much to purchase hardware, PCs, etc., for the 50 or so professional staff employed by this example company.  Even if the costs can be justified, two key considerations remain.

Careers spheres of interest for technology professionals.

New Technology Exposure:

?Brain Candy? is a term referring to new things in which technology people are interested.  Technology is generally their hobby; it is not just a job.  Their exposure to technology may be 35% of their reason for working with a company².  Exposure comes in the form of new IT projects, new programming languages, the latest software and hardware, etc.

Work Environment:

Technology managers during the 1990?s DOT-COM euphoria encouraged an entirely different office culture: no shoes, sofa-lounging and video game playing.  Although this turned out to be a false reality, the principle can?t be ignored that technology people work differently than traditional AEC professionals.

They are ?hot? and ?cold.?  Problems are solved in waves generally not compatible to standard 8-hour work days, and much work is done on weekends and evenings.  This takes a different management approach compared to how traditional AEC businesses are run. 

Employee Motivation & Interest
Factors involved in company selection for tech professionals².

ANALYSIS:

The above points overwhelmingly to technology outsourcing.  Technology companies can maintain and keep motivated high-caliber systems specialists by (1) paying competitive salaries, (2) offering exposure to cutting-edge technology, and (3) utilizing management and company culture techniques to maximize employee creative and problem-solving energy.  By keeping the right people around, an outsourcer of technology services can keep systems up and available.

Companies who try to maintain a group of IT specialists within their organization will be under constant strain.  They are challenged by mixing their traditional operations with the IT group.

Security and sensitivity of company confidential and proprietary information

The subject of Security can be categorized into the following:

• Physical: where computer equipment is stored and how physical access is controlled.  Can any employee gain access to the server room, and is there an access log kept?
• System intrusion from those without: using a Firewall to keep out intrusions.
• System violation from those within: protecting company data from company employees.
• Virus protection: monitor, spot and react quickly to both virus threats and potential vulnerabilities.

The Weakest Link - If only network security did not involve people

Malicious hackers are stereotyped as brainy introverts intimate with computers, working from a dark windowless basement and surviving on junk food.  It is supposed most security problems come from these ?techies.?  Yet statistics prove overwhelmingly the weakest link within a company is not those without, but those within. 

Careless Internet surfing and use of passwords to gain access to company information open doors to both those internals and externals seeking to capture or damage company confidential and proprietary information. 

One of the most famous ?hackers? of recent years is Kevin Mitnick, who counted on human vulnerabilities to get into computer systems of US government agencies and technology companies, such as Sun Microsystems, Fujitsu and Motorola.  After five years in jail, Mitnick, testifying before a Senate panel on government security in 2000, explained that:

When I would try to get into these systems, the first line of attack would be what I call a social engineering attack, which really means trying to manipulate somebody over the phone through deception. I was so successful in that line of attack that I rarely had to go towards a technical attack. The human side of computer security is easily exploited and constantly overlooked. Companies spend millions of dollars on firewalls, encryption and secure access devices, and it's money wasted, because none of these measures address the weakest link in the security chain.

That being said, companies in the AEC industry might find more comfort relying on outsourced data policemen who take securing data and passwords as priority #1.  It is not easy to explain to anyone in the AEC industry why passwords should not be shared, or why they should be complex and hard to remember.  Outsourcing the company?s hosted applications puts the onus of security on others who think and breathe security.  This seems like prudent policy since a firm?s own employees will for sometime remain its largest security vulnerability.

Keeping pace with the increasing evolution of software, software licensing and hardware

It is no secret that keeping pace with evolving technologies is difficult and time-consuming; however, it may surprise some to know that managing software licensing will also become a tricky business, if not already.  Vendors are evolving into a complex scheme to prevent unlawful use of software, which will result in more detailed tracking and management required for consumers.

Moore?s law (see chart) has proven relatively accurate since introduced in 1965, but this will start to change as the heat generated by these modern microprocessors reaches nuclear levels.  (The heat generated per square centimeter of today?s microprocessors is nearly equivalent to a nuclear reactor.)

Does this mean innovation curve of technology?hardware and software?will flatten?  Not necessarily.  It means the complications of managing new technology will shift into other areas.  Firstly, software products will become increasingly easier for end-users.  Interfaces will be dramatically improved, and applications themselves will be designed around fundamental elements of human psychology and behavioral patterns.  As the user experience improves, the management of these systems will become increasingly complex. 

Gordon Moore, co-founder of Intel, the world?s biggest chipmaker, in 1965 came up with a famous prediction: that the number of transistors which could be put on a single computer chip would double every 18 months.³

This forecast, which implies a similar increase in processing power and reduction in price, has proved broadly accurate: between 1971 and 2001, transistor density has doubled every 1.96 years.

Companies will need?either by insourcing or outsourcing?talented individuals to run these applications upon which they will increasingly rely.  The good news is companies will no longer need to learn and understand as much about procuring and managing technology; that is, if they go the way of outsourcing.  According to MetaGroup, outsourcing of hosting services will grow from $120B in 2002 to $200B in 2005⁴.  This will outpace company spending on hardware and software.  Positively for businesses, this trend will ?productize? outsourced services, reducing costs and increasing quality, stability and reliability. 

Outsourcing service providers will not only be taking the load of understanding new technologies off company bosses? shoulders, they will also help procurement divisions. 

Software vendors are deploying new licensing schemes to decrease, or even eliminate, the ability companies and consumers have to pirate software.  For more sophisticated applications, the concurrent licensing scheme has proven most popular. 

The named licensing scheme, to which most vendors are trending, will place the burden of software authentication and licensing management most likely on Human Resource departments.  Companies who have not already decided to outsource management and hosting of their complex application will then be more tempted.  Outsourcing service providers will have in-house license management agents to track the complexities of multiple vendor licensing schemes and roll them into a simple fee for businesses.

Following is a typical extranet (hosted applications) configuration:

The table demonstrates the complexity today of managing system licenses.  The future will bring even more complex schemes difficult to manage with changing dynamics of employee turnover, increase and decreases in system usage, and of course changing technologies.

Real cost comparison (hard and soft costs)

This cost comparison is based on a typical extranet configuration running two or three construction software applications.  The figure of $120,000 per year will be used as the cost of a systems specialist to manage the extranet solution, as detailed in the section on technology resources.  The below chart and data represent the estimated cost comparison.

In-House:

Hardware:      $26,900

Software:       $17,000

Monthly:           $7,800

3-yr Total:    $327,000

1-yr Ave.:    $109,000

*In-House systems specialist ($120K total compensation package) at 75% time, since some time will be allocated to other company IT functions.

Outsourced:

Monthly:           $5,750

3-yr Total:    $211,000

1-yr Ave.:      $70,500

Note: Both sets of data assume a 5% increase in fees annually.

This data demonstrate the cost effectiveness of outsourcing complex systems management.  The above system could support 20-30 concurrent users, and scaling to 50 would not require major infrastructure changes.  For reference, 20-30 concurrent users may be plenty for a company with 100 to 200 actual employees.

The data also indicate the bottom threshold of IT spending required to host the IT systems internally: $109,000 per year is the real cost, which does not include personal computers, printers, Internet connectivity and general office software and network supplies.

Reliability

Even after considering the above points, the issue of Reliability may be the most important when considering whether to outsource.  This depends on the cost of downtime.  Three factors that dramatically impact the cost of downtime or unscheduled outages are as follows:

1.       Lost revenue from customers using the system

2.       Operations (job management) when key processes and communications cannot function.

3.       Cost in management and administration time to recover from the outage.

An outsourced hosting company can leverage the multiple power and Internet connectivity redundancies offered in commercial cyber centers and spread the cost across many accounts.  Typical features of these cyber centers are T3 Internet connectivity, redundant across many global ISP?s, and power backed up by multiple diesel generators.  

On August 14, 2003, major North American metropolitan centers experienced unprecedented power disruption.  The Cram Group?s ProjectXnet outsourced hosting service demonstrates how company systems can be reliable in national emergencies: the ProjectXnet services experienced zero downtime although power in and around the data center space was out for more than thirty consecutive hours.

Beyond the infrastructure reliability considerations is the availability of people to address not only ongoing maintenance issues, but also emergencies when systems or Internet connectivity fail.  If a company relies on its internal systems specialist, all eggs are in one basket, unless budgets are large enough to afford depth; however, in today?s tight economy, especially in areas of IT spending, IT resource depth is not common. 

Companies find it more efficient and cost effective to rely on the resource depth of companies providing outsourced services.  Other considerations for an outsourced datacenter coupled with the system management services of a technology firm are as follows:

SECURITY:

?          Security 24/7 security and video surveillance.

?          Security guards.

?          Biometric hand-scan entry system.

?          Mantrap controlled entrance/exit.

POWER:

?          Continuous, uninterruptible power supply.

?          Multiple standby generators.

ENVIRONMENT:

?          Environmental Monitoring Systems (humidity and cleanliness protection).

?          Fire Protection and early warning systems.

?          FM-200 gas-based fire suppression system.

?          Double pre-action dry pipe sprinkler system ? pipes disseminate until tip of sprinkler is burned.

Summary

This White Paper points to outsourcing as a smart business decision, even for companies with large IT budgets.  Outsourcing results in (1) a direct cost savings to the bottom line, (2) reduced overhead and management, (3) availability of highly skilled workforce with no additional HR burdens or cost of training and (4) an off-load of non value-added (non-core) work to focus on core competencies.

Reasons to Choose In-House Hosting

Reasons to Outsource Hosting

?          Greater control of systems and data

?          Ability to ensure security, privacy and customer service

?          Convenience

?          Integration with other company processes

?          No need for value-added services.

?          Security

?          Convenience

?          Cost

?          Support and availability

?          Dedicated resources

?          Technological expertise

?          Superior performance and bandwidth

Some or all of these may steer a company towards outsourcing, allowing it to focus on the management of risk and legal exposure, keeping clients satisfied and improving internal operations efficiencies and productivity.

  Sources & References:

¹Salary of $122,887 based on a ?Sr. Internet Applications Specialist? in Boston, MA.  Data from Salary.com

²Based on a private survey of technology professionals working for technology firms.

³Source: Silicon, Moore?s Law, Intel (http://www.intel.com/research/silicon/mooreslaw.htm).

⁴Source: MetaGroup (www.MetaGroup.com); ?Outsourcing & Service Provider Strategies?.