Peritus is Turning Inside Out

With in-house tech talent harder to find, some companies farm out their intranets.
Kris FrieswickOctober 1, 1998

When Peritus Software Services started up seven years ago, its founders figured the only way to make money was to build an intranet as the backbone of the Billerica, Massachusetts- based enterprise.

Peritus maintains applications software, system software, and system utilities for corporate customers and software providers as an outsourcer. And because many companies didn’t value software maintenance very highly when they did it themselves, Peritus co- founder, CEO, and CFO Allen Deary didn’t expect customers to be willing to pay Peritus much to do it for them. He believed that his company would succeed only by stringing together “virtual teams” of less-costly software developers from such countries as Spain and India. So the intranet–which would also let Peritus offer 24-hour maintenance using time-zone differences to advantage– was “a design that was fundamental to the founding of the company,” says Deary.

But Peritus was in the unusual position of being an outsourcer in need of outsourcing itself. While it could write the software programs to run on its fledgling intranet– another name for a World Wide Web site designed to serve an internal company audience- -the company lacked the onboard knowledge to administer and expand that intranet. So, four years ago, Peritus outsourced the infrastructure expansion to Integris, a division of Bull HN Information Systems Inc., also based in Billerica. Integris created a wide area network through which Peritus accesses its intranet. Integris also installed T-1 lines, cables that carry more than 1.5 megabits of digital data per second; designed switches and routers; and began troubleshooting, performing equipment upgrades, and monitoring network performance and operations for Peritus.

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“Access to their people was the crucial area. We would have had to invest a large amount to get the expertise that Integris already had,” says Deary, whose company has grown from $2.2 million in revenues in 1993 to $40 million last year, when it went public. “Cost was a component of the decision, but not a major component.” From the perspective of Peritus, now with 400 full-time employees at six locations, outsourcing “is about going toward our strengths, and away from things that aren’t.”

Peritus is far from alone in its decision to hand off development of its intranet to an outsourcer. The total market for intranet- related outsourcing services, estimated at $960 million this year, should jump to $2.9 billion in 1999, and to $6.9 billion in 2000, according to Forrester Research Inc., a technology research firm in Cambridge, Massachusetts. While still a minuscule portion of the overall information-technology outsourcing marketplace, intranet outsourcing certainly is among IT’s fastest-growing areas.

A wide range of companies are choosing to outsource their intranet development, from smaller companies like Peritus to multinationals like Swiss pharmaceuticals maker Novartis, and from manufacturing businesses to the high-tech, health care, and service industries.

With many companies considering intranets easy to install and manage, why is outsourcing enjoying such an upswing? The shortage of technology personnel and resources is one reason. A study last year by Forrester shows that 73 percent of companies outsourcing their Web development cited a lack of in-house skills to do it themselves, and 64 percent said they were short on the technical support systems for the work. Adding to the outsourcing pressure is the ever-more- sophisticated nature of the intranets, which now extend into nearly every aspect of a company to become a critical infrastructure for communications. Further, the use of intranets in general has surged. As recently as 1994, they were considered somewhat radical, but within two years, “almost 100 percent of Fortune 1,000 companies had some form of intranet,” says Carl Howe, director of computing strategies for Forrester. “It was one of the fastest adoptions of any technology ever.”

There is also a new wave of aggressive marketing by big and small outsourcers eager to win intranet-outsourcing business. Such traditional IT providers as IBM Global Services, GTE Internetworking, Compaq Services, Lockheed Martin Technology Services, Integris, Metamor Technologies, and Computer Sciences have already invaded the top end of the intranet-development game by offering it as part of their overall contracts. Such firms as Andersen Consulting, Ernst & Young, and PricewaterhouseCoopers help companies redesign business processes and applications to run on an intranet platform. Subscription-based intranet providers are now appearing– including Lotus, Netscape, Changepoint, and Netopia–allowing companies to “rent” time on their existing applications and networks. There are also a growing number of small outsourcing shops that specialize in building and, occasionally, hosting intranets. And though not strictly outsourcing, remote hosting for intranet software is being offered by such traditional Internet service providers as AT&T, MCI, PSINet, and Sprint.

An Inch At A Time

Intranets let all data files and software applications live on a single server. Users need only a network connection to the server (internally or externally housed), a browser such as Netscape or Microsoft Internet Explorer, and sometimes a security access code or password, to use the intranet applications and gain access to intranet files. Intranets are platform-independent, meaning that whatever type of computer you are using, you may view the same files everyone else views, often in the same format. That’s why many companies now use intranets as platforms for all business-critical applications, from human resources to manufacturing control systems. Some have expanded access to their intranets and have turned them into extranets, thereby allowing outside customers and vendors their own Internet access to the company’s vital internal company data–at the same time raising ever-more-pressing security questions.

The way outsourcers work has been transformed of late, too, in no field more than for intranet outsourcing. A decision to outsource an activity once implied that an entire business function would have to be moved outside a company’s walls, and arrangements were widely predicated on long-term contracts and economies of scale. The tiny portion of total IT assets represented by intranets, however, forces outsourcers to concentrate on tailored systems if they want to avoid missing a booming market. So, many adjust deals to be cheaper and shorter-term than traditional IT contracts, and offer more piecemeal services.

“Increasingly, what’s happening is that companies are getting into intranet outsourcing an inch at a time,” says David Foster, program director, business and marketing strategy, for IBM Global Services, in Tampa. “It’s a consumerlike buying model rather than a strategic model. When we talk with large outsourcing customers, we usually talk about a plan–their hopes and dreams for the next five years. But now we get companies saying, ‘Let’s start small.’ Then, they step up their investment as their perception of the value of the intranet grows.”

A Softer Landing

While most IT requires a huge initial investment, that’s not true of Web-based technologies, many of which have their genesis in the minds of IT employees simply tinkering with corporate Web pages in their spare time. Today, outsourcers cater to companies by offering to unbundle intranet services, a departure from the soup-to-nuts approach they take in most other IT outsourcing. Customer companies can enter into “cosourcing” or select-sourcing contracts, which provide such stand-alone services as application development, user interface design, or infrastructure maintenance. Some outsourcers offer “instant intranets,” prepackaged, remotely housed intranet servers that come complete with a limited selection of preconfigured software, such as E-mail and document management. Customers can even sign on for an instant intranet at a flat monthly or per-user fee, or they can pay rent on the basis of time used.

Some experts consider fiscal accountability something of a black hole in the IT field of information technology, let alone the small slice of IT that intranets represent. There appears to be very little useful data about the cost or ROI experience other companies have had after outsourcing their intranets.

Smaller contracts naturally mean lower prices. The average cost for an intranet outsourcing contract is about $750,000, according to Forrester. That’s a far lower risk investment than a complete IT outsourcing contract, which can vary in size from $4 million to $200 million or more a year, according to several big companies doing outsourcing work.

The modest price of such “starter” intranet outsourcing means that companies face a much softer landing if the intranet work fails. It also means that these projects are of a scale for which the normal, exhaustive, cost-benefit studies may not be required. That was the case with CBS Corp.’s decision to outsource intranet development, according to Donald Janson, formerly vice president of business process analysis at CBS and now director of shared services at Ingersoll-Rand Co., in Woodcliff Lake, New Jersey.

“There was no benchmarking done on this, no cost analysis. It’s still too experimental,” says Janson, who paid Icon CMT Corp., of Weehawken, New Jersey, less than $100,000 for CBS’s financial intranet, over which the company distributes monthly financial performance information to its various business units. “It saves us from having to make copies and distribute all this information to a large number of locations at month’s end. The beauty of this is that we can experiment for under $100,000. If we don’t like it, we can throw it away.”

That’s also how Lippincott Williams & Wilkins, a publisher of medical journals in Baltimore, viewed outsourcing when it built its intranet three years ago. “I looked at it as an experiment,” says executive vice president Art Newman. “We started pretty small.” The company spent from $150,000 to $200,000 to outsource its intranet start-up, employing Century Computing, of Laurel, Maryland, to provide for a system giving all employees access to a common publishing information database. Today, information is available that follows a book project from inception to publishing, with the author’s and editor’s name, a book description, production schedule, and sales figures.

The decision to outsource seems even better to Newman now that plans are under way to expand the intranet past its humble beginnings, when it was used mainly to consolidate data and streamline the workflow, to help marketing drive sales to vendors and customers. With some embarrassment, Newman says that he, too, has done no formal cost analysis of the intranet, though he’s confident it has paid for itself with Internet sales. Lippincott’s intranet houses information on more than 2,000 titles and is a major feeder for the company’s E-commerce site, which generates $1 million a year in book sales.

“That’s why outsourcing is attractive,” says IBM Global’s Foster. “You can keep your costs low. It’s pay-as- you-go, with a minimal investment. If customers perceive value, they keep going, and if they don’t, they stop.”

Ha-Lo Does a Deal

The ease with which the outsourcing deals are drawn up also means that companies failing at an intranet project may just try again, or move to a more traditional technology, such as client/server, in which software applications live on each individual’s PC but data files reside on a central server. CBS’s financial intranet was the product of a second attempt after an in-house first attempt “didn’t work,” says Janson. The nature of the deals is also shortening the average duration of intranet outsourcing work. Standard IT-outsourcing contracts last from 7 to 10 years, the minimum required for outsourcers to recoup their initial capital outlay, according to Paul Cofoni, president of the Falls Church, Virginia-based technology management group of Computer Sciences Corp. Outsourcing contracts with durations of two years or less are now common.

Such was the case with Ha-Lo Industries Inc., a Niles, Illinois, distributor of promotional products, with sales of $415 million last year. Ha-Lo had done little with technology, compared with other companies its size, when CFO Greg Kilrea came on board two years ago. It lacked a chief information officer, as well as an efficient way to communicate with more than 40 sales offices around the country, he says. With in-house technicians at a premium, an outsourced intranet seemed the fastest, cheapest technological solution.

“The IT profession had exploded,” says Kilrea. “It was hard to get and keep people. We needed a lot of new resources to keep up, never mind make progress. We would have had to put in an entire infrastructure to recruit, train, and retain qualified people.” Because he was outsourcing the entire IT function, Kilrea was concerned about saddling a newly hired CIO with an existing contract. Kilrea negotiated a two-year IT outsourcing agreement with Chicago-based Metamor Technologies Ltd. last year. A simple communications-focused intranet, featuring E-mail, addressed Ha-Lo’s urgent short-term communications needs, he says. The company plans to expand it over time, has found a CIO, and intends to renew its contract with Metamor.

Much of the intranet outsourcing being done is still part of full-service IT deals with giant outsourcers, such as IBM Global, Pricewaterhouse-Coopers, and CSC, which can cover the spectrum, from a complete business- process reengineering to transitioning those processes to a new intranet that is housed and maintained remotely.

With all the competition for segments of the market, however, the big players are learning to bend a little. “About 70 percent to 80 percent of our outsourcing opportunities are total IT outsourcing deals, but about 20 percent are selective sourcing engagements,” says CSC’s Cofoni, adding that “we’ll certainly take them if they come.” CSC did more than $2.5 billion in IT outsourcing worldwide last year.

Paying a Premium

Experts caution that outsourcing intranet operations isn’t right for all businesses, and that perhaps the chief peril is overpaying for the work. “You’re probably going to pay a premium for this service over time,” says Gene Phifer, an analyst with the electronic workplace division of GartnerGroup, a Stamford, Connecticut-based technology research firm. “The majority of enterprises will pay a price premium versus doing it in- house if you have the infrastructure on board. Companies that don’t have the infrastructure will still get whacked, but not as hard.”

Phifer cautions companies to think twice about outsourcing if they believe the outsourcing is transitional and that they will eventually bring the intranet in-house. “Unless you have a driving business need, you’re just postponing the inevitable,” he says.

However, some companies, like Peritus, assert that the cost of the contract is of less importance than access to reliable technology expertise. “Cost was about third on my list,” says Allen Deary. Peritus is spending about $40,000 a month on its complete IT outsourcing contract and an additional $5,000 to $10,000 a month in consulting fees with Integris.

Having an outsourcer handle the intranet can also introduce a clash in corporate cultures– a risk in any outsourcing agreement, but particularly acute here because of the sensitive company data and mission-critical applications often involved. “Our outsourcers took our database and gave it a GUI [graphical user interface] front end. But our IT department has a case of what I call extreme ownership,” says Lippincott’s Newman. “We kept control of the network internally for that reason. Our outsourcers were our developers, but we bought and maintain the servers.”

As such concerns suggest, developing a high level of trust with an intranet outsourcer is essential. Companies looking to outsource their intranet should assign not only IT staff members, but also “process owners” and “data owners” to negotiations and planning teams at the earliest stages, suggests Frank Casale, executive director of the New York­based Outsourcing Institute.

“If the project is led solely by a technology executive in the organization,” says Casale, “you are probably not going to get as viable a business solution as you would get if you put a process owner or manager in charge of it. Most organizations look at this as an Internet thing, and feel that someone in IT should run with it. But you want to have someone there who is responsible for the process. That person is really going to be the client.”

He suggests that companies wanting to make their intranet a long-term part of the business should be wary of outsourcers marketing themselves as “intranet only” operators. They may not know the best way to structure extranets, for example.

Some believe the extranet evolution is inevitable. Forrester predicts that the migration of internal data and processes to extranets–usable by outside vendors and others–will lead the intranet-outsourcing market to plateau at about $7 billion by 2002.

But for now, companies looking either to dive or dip their toes into the intranet pool will find a wide range of outsourcers eager to help.

———————————————– ——————————— Out-Sourcery: A Guide to Getting Intranet Help
Even though there is little useful data about the cost or return-on-investment experience companies have had after outsourcing their intranets, experts suggest conducting a detailed analysis of outsourced versus in- house costs. Consider not only infrastructure costs, but costs related to software, personnel recruitment, salary and training, long-term process, and infrastructure maintenance costs, and opportunity costs associated with implementation time.

In analyzing a larger-scale intranet outsourcing deal, the New York­based Outsourcing Institute suggests, a company should look at having the outsourcer buy the infrastructure and lease it back to the customer as part of the contract’s fee. This would result in a cash payment to the company when the contract is signed. Selling the “boxes” could lower capital investment in a noncore area, and have the residual effect of improving certain financial metrics that negatively weight nonproductive assets.

After deciding to outsource, draft a request for proposal (RFP) and deliver it to your outsourcing candidates. Define requirements in complete and measurable terms; describe the relationship you seek; explain the problems to be solved; specify the service level required; and list current related costs.

Be sure to ask about the outsourcer’s corporate culture, and analyze references and past outsourcing engagements.

Once an outsourcer is selected, the most crucial phase begins: contract negotiations. Technology outsourcing contracts are especially tricky because the playing field is changing so quickly. While a company may have no problem with more-traditional language governing such basics as service levels, risk- sharing arrangements, contract length, and detail of retained costs, third-party contract help may be required for larger, more-complex arrangements. Outsourcing contract attorney Richard Raysman of Brown Raysman Millstein Felder & Steiner LLP, in New York, encourages consideration of these areas:

  • Technology refresh. Your company could lose a competitive edge if stuck with outdated technology. A refresh clause obligates a vendor to maintain the customer’s installation with up-to-date technology. Prepare to pay for these upgrades if the technology resides at your location. Vendors normally foot the bill if they house the infrastructure.
  • Intellectual property. Make sure your company’s software licenses allow you to assign usage rights to your outsourcer, and specify who should pay associated fees. Your contract should provide that an outsourcing vendor may use software or other data only on your company’s behalf. The agreement should also contain adequate confidentiality provisions. If the vendor uses its own software, the contract should stipulate your rights to access that software if the contract is terminated. Have the vendor place the source code to such software in escrow in the event of vendor bankruptcy.
  • International employment. Foreign employees terminated or transferred as part of an outsourcing agreement have varying rights, depending on their home country. Retain local counsel to advise you on the most effective way to handle transfer of employment. Include an indemnification provision for third-party employee claims, making each party responsible for the time during which the person was employed.
  • Audits. Claim audit rights allowing your company to perform on-site operational audits of vendor facilities. You may also include a right to perform a financial audit of associated outsourcing fees.
  • Termination. While termination for cause is easy to negotiate, winning a termination- for-convenience clause is thornier. Outsourcers resist granting this right before recouping their investment. After two years, rights can usually be negotiated if a company agrees to reimburse outsourcers for a portion of lost profits, loss of revenue stream, and wind-down costs. Six-month to 12-month notification is often required. A termination assistance clause assures that the outsourcer provides adequate resources for the transfer of your company to a new outsourcer.

———————————————– ——————————— Intranets Are Our Business

How to reach some of the tech outsourcers managing systems for clients.

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