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Signet Banking Corp. moved fast and furiously into the world of distributed computing in 1994. That year, the $12.9 billion banking company's networking staff began to implement switched multimegabit data service networks to link some 100 file servers in its four service regions: Richmond, Va., suburban Washington, D.C., the tidewater area in Virginia and Baltimore. Then, suddenly, the rollout started to lose steam.
"When we started building the enterprise network in January 1994, we had six people building it so fast-buying routers, building the infrastructure-that we had nobody to watch the shop," recalls George Speidell, assistant vice president of distributed computing at Signet's engineering group. So Signet managers did what many in their shoes would have done: They awarded a two-year contract to Electronic Data Systems Corp. to manage the networks.
Signet pays EDS a fee based on the number of ports in the network, in this case 300, and EDS oversees the network. Speidell declined to disclose the amount of the fee.
Signet, Richmond, has joined a crowd of companies pushing the panic button-turning to outsourcers to handle network management chores. In fact, the network management outsourcing market in the United States is booming at a nearly 30 percent annual clip, according to G2 Research Inc., a Mountain View, Calif.-based research company.
Outsourcing Boom
Revenue from network management outsourcing should top $8.2 billion by the decade's end, up from nearly $3 billion this year, G2 Research estimates (see graph, page 44).
The trend shows no signs of abating. A 1994 study by researchers at Dataquest Inc., San Jose, Calif., showed that 14 percent of companies surveyed had outsourced an aspect of their network operations during the previous 12 months, and 21 percent expected to do so in the following 12 months. Rapidly changing technology has caused many to bite the bullet and sign on with an outsider.
But, for all the attraction, there is another side to the outsourcing coin. In hiring others to do the job, users must address some fundamental business issues, including cost, performance, control, security and staffing.
In addition, information systems and network managers choosing to outsource must decide the type of contractor to retain-and the field is getting crowded with players. Traditional systems integrators have added network offerings (see sidebar, page 44) while the Bell operating companies and major long distance carriers are aggressively courting customers with outsourcing deals.
Losing Control
To some, employing an outsourcer to implement and manage a network means forfeiting control. "There are lots of ways things can go wrong," says Tom Pincince, an analyst at Forrester Research Inc., Cambridge, Mass. "You can give up security {or} the outsourcer may not be responsive." For companies where data is basically the product-such as financial services firms-relinquishing control of the network could be a dicey decision.
Fidelity Investments, the country's largest mutual fund provider, for example, uses technology at the heart of its products and services. Without hesitation, Fidelity runs its own shop. T1 lines link its Boston headquarters and four other major sites nationwide, as well as smaller pipes interconnecting 80 branch offices.
"We consider our network too much of a strategic factor in the success of the business, so, generally, we wouldn't outsource an important strategic component of business," says Fidelity chief information officer Al Aiello. "In addition, nothing is more secure than your own network." Sure, Aiello concedes, more and more crucial data on third-party networks is being encrypted; however, one can never be totally assured of data protection. In his mind, "when you control the network yourself, you can {nearly} guarantee security."
But giving up management of network resources doesn't always mean relinquishing control. Signet and EDS network managers, for instance, meet every other week to review project planning, says Signet senior vice president of information systems Paul Dolegowski. And Miami-based Ryder Systems Inc., the nation's largest truck-leasing company, monitors its new frame-relay network with vendor MCI Communications Corp., though it's MCI's responsibility to resolve any problems that occur from the routers on out to the WAN. The network links 1,000 nationwide offices.
Some managers don't believe outsourcing network management means they sacrifice security. "They {outsourcers} have all these technical gadgets {and} encryption," says Jeff Legge, director of data processing at City Holding Co., the fast-growing Charleston, W. Va., banking concern that outsourced network management to Bell Atlantic Corp.'s Bell Atlantic Network Integration (BANI) subsidiary.
"Besides, people are not tapping into the data. Even if they got into the phone line, they will not get it off our host," Legge says. The $1 billion asset bank-which quintupled its assets in six years-maintains 60 offices, a sixfold increase since the beginning of the decade.
The issue isn't who owns or manages the lines, says Mike Bauer, an EDS technology planning services consultant. He points out that most lines used in-house or by outsourcers are owned by AT&T. It's security procedures that firms need.
Of course, turning to an outsourcer for network management is often a financial decision. G2 Research estimates that the typical company outsourcing network management could immediately slice 5 percent from its network budget. Eventually, the annual savings can grow to 25 percent
Indeed, City Holding's Legge estimates the West Virginia bank company cut between 15 percent and 20 percent off its networking budget-a savings of $200,000 a year-since contracting Bell Atlantic two years ago to implement and manage its frame-relay network. Citing one instance of savings, Legge notes that City Holding previously paid $1,000 for each 9.6-kilobit-per-second line it leased.
Today, the company pays $200 a month for each bank site accessing Bell Atlantic's frame-relay network. "When you have 50 to 60 sites," Legge says, "those costs can really add up."
But Fidelity's Aiello isn't sure big, fast-growing network users like his company would financially benefit by outsourcing. "It depends on how dynamic the environment is, how fast it is growing, how quickly you want to add new services," he says. "If your networking needs are static, you'll probably benefit by outsourcing. But the minute you seek new services and features on the network, you could end up having to pay the outsourcer more money."
Automatic Upgrade
But Henry Fiallo, Ryder Systems' vice president of information technology, sees outsourcing as a hedge against changing technology. In its frame-relay outsourcing deal, MCI provides Ryder with the routers linking its LANs with the WAN. "If and when we decide to go to ATM {asynchronous transfer mode}, they'll automatically upgrade us and protect our investment in the routers," he says.
Like other wholesalers, outsourcers hold down costs by offering volume services. Outsourcers have a vested interest in creating economies of scale so they can improve their own profit margins.
For the Bells and long distance carriers, outsourcing creates so-called "fat minutes," in which the phone companies can add revenue beyond the cost of a long distance phone call. Outsourcing, in other words, allows the carriers to create an environment to charge customers and their partners for using the network in services installed. So, for instance, a company such as City Holding pays Bell Atlantic for the use of its lines, as well as for the management of the data over those lines.
At the moment, few, if any, organizations will outsource network management if it will cost more money. But that attitude could be changing. "Even if costs are under control, the sheer size and complexity of a given network carries risks with it every day," says Mark McElroy, partner in charge of the enterprise network practice at the consultancy KPMG Peat Marwick, Radnor, Pa.
"Most of our clients are evolving very complex networks, and the sophistication of their network management organizations is inadequate in most cases. So, it could very well be within a company's best interest to increase costs for improved service and lower risk," McElroy says. In addition, he says, users must ask themselves "at what point do they want to become telecom carriers versus primarily doing what their businesses happen to be. Outsourcing, then, looks very attractive."
Headache Relief
Citicorp, for example, outsourced the design, implementation and management of its new synchronous optical network in the New York metropolitan area to Nynex, in part because it didn't want the headache of managing the network. Bob Swithers, director of global advanced planning and architecture for the Citicorp Global Information Network, says he wanted Citicorp's networking staff to concentrate on developing new and valued-added technologies for the bank company and not to spend time monitoring the network.
Staffing requirements, in fact, is another big factor driving companies to outsource network management. Personnel costs are estimated at 40 percent to 45 percent of networking budgets.
With new technologies constantly introduced, finding the person with the right expertise is getting harder to do.Moreover, a network administrator supports an outsource company's strategic business. For most user organizations, however, a network administrator is seen as support personnel whose salary demands can't compete with workers whose jobs bolster the corporation's core products and services.
So, with corporations ever tightening their purse strings, it's often easier for technology managers to present superiors a fixed price for a service compared with the variable cost of maintaining an in-house staff. "You don't want to wake up one day and find out something will cost an extra half-million dollars you didn't know about," Signet's Speidell says.
There is another result-deliberate or not-of outsourcing: downsizing. In Signet's case, it no longer could justify the salary of the six network professionals who helped build and manage its SMDS.
By outsourcing, a typical large company's networking staff initially is sliced by 15 percent and, by the conclusion of the contract-typically five to 10 years-it could be reduced by as much as 60 percent, according to G2 Research. The remaining staff likely will be more stable, with turnover rates reduced by 30 percent, says G2 Research senior analyst Kepler Knott.
Coming from a mainframe environment, internetworking of LANs was foreign territory for the technologists at City Holding, parent of City National Bank. So City Holding turned to BANI to design, implement and manage its frame-relay network, consisting of 10 T1 lines connecting main offices and 56-kilobit-per-second pipes linking another 50 offices throughout West Virginia-some in relatively remote areas, but all served by Bell Atlantic.
"We don't have the staff to be at every location," City Holding's Legge says, noting that the bank's LANs are situated anywhere from 35 seconds to six hours from its Charleston, W. Va., operations center. "Bell Atlantic services all of the areas we do business in. That gives us a physical presence everywhere."
A company like City Holding-located far from major urban areas-would be hard-pressed to recruit the caliber of people needed to run its network, Legge says. Besides, he says, technology changes so rapidly that he would need to train his staff six months out of the year. "This way, someone else is paying for the training," he adds.
Heavy Prodding
Hardware makers are another source prodding companies to contract out network integration. User organizations have a tough time keeping tabs on rapidly changing network technology. As Ameritech Corp.'s data services manager, Gordon Reichard, points out, "The corporate network manager is always one revolution behind in technology. It's nerve-racking. It's hard to keep staff up to speed. And that equates to huge, huge amounts of risk-capital risk, integration risk."
The rapid growth of LANs and the eagerness of corporate executives to link them places outsourcers in an ideal position. G2 Research estimates that in the coming years the typical American corporation will increase spending on LANs by 35 percent annually.
At the same time, deregulation and the accelerating demand for WANs make network integration and outsourcing an attractive business for Bells and long distance operators.
Yet some see the Bells as slow to implement new technology and needing help to understand end-user requirements.
Not true, says Mary Lee Bennett, director of marketing at BellSouth Network Solutions, the newly formed network integration and outsourcing arm of Atlanta-based BellSouth Corp. "BellSouth as a whole is aware that utilities and monopolies are no longer the way to conduct business," Bennett says.
In fact, she says, BNS is aggressively hiring professionals from the major Big Six and other consulting firms to provide the know-how to link technology with the business needs for its customers.
Nonetheless, G2 Research's Knott says the telephone companies still must prove themselves as reliable outsourcers.
"This kind of business requires a high level of sophistication on the part of a skilled staff," Knott says, "and the amount of money they get paid is significant. As far as I understand, the {Bells} don't pay that. That's why they don't have the skill sets."
Dataquest director Jeffrey Kaplan, in a recent research report on BANI, gave a brighter assessment. BANI has a solid-core staff to address its current engagements, Kaplan says, but must rapidly increase its staff size to meet the needs of a broader target market.
"Outsourcing is no longer a stigma," says Jerry Mirelli, senior vice president at the Woodcliff Lakes, N.J., consultancy Technology & Business Integrators. "In the late '80s, outsourcing was a sign of a poorly run company. In the next few years, outsourcing will be a foregone conclusion. Managers will have to justify why they're not outsourcing functions. It will be the presumed approach." Perhaps, but try telling Fidelity about that.
(Copyright 1995 CMP Publications, Inc. All rights reserved.)