The Fiscal Argument for IT Outsourcing

The complexity of information technology (IT) systems have reached a point where no company should be handling all of their IT needs themselves. Outsourcing is not only more cost effective, but it lowers a company's risk of experiencing a significant technology outage or the effects of a devastating cyber attack.

The main issue comes down to specialization. The person who handles desktop support for a company is in all likelihood not qualified to also provide system administration, cybersecurity, and strategic technological guidance. Most companies make the mistake of trying to hire a generalist to perform all of the duties required for IT management. It is a strategic and economic mistake.

First, the cost of hiring, training and maintaining IT personnel is much higher than an average employee. Not only are they highly paid individuals with specialized skills, but they need to continuously update their skills which is both time consuming and expensive.

To calculate the cost of an individual IT professional, use their burdened cost for an entire year and then calculate their cost per hour. To account for taxes, medical benefits, retirement benefits, etc., use 30 percent as a burden rate. Each company may have a slightly different burden rate, but this seems to be a fair approximation for most companies. To account for vacation, sick leave, personal days, and holidays use 1,850 working hours in a year. It is just an approximation and can be customized for an individual case:

Formula: (EC *1.3)/1,850 hrs. = Cost per hour

EC = Employee Compensation (base + bonus/commission)

1.3 = estimated burden rate (taxes, medical, 401k etc.)

1850 = rough # of working hours in a year

Example:

$60,000 base salary + 10,000 bonus = EC of $70,000

($70,000) * 1.3 = ($91,000 Burdened cost)/1850 hrs. = $49/ hour

In this example, an IT professional who earns $70,000 per year will cost the company $91,000 a year, not including training, recruiting and churn costs—that is more than $7,500 per month just for IT support.

However, the biggest issue for companies is that it is unlikely that their support costs will only be $91,000. More likely than not, they will still require additional support. IT is just too complicated for a single individual who has a fulltime job to keep up with all of the skills necessary. Specialization, especially in cybersecurity, is nearly a requirement to prevent a real issue from occurring. The price of IT support will only increase and the time to resolution will increase even further if there is no ongoing relationship with the support firm.

Technology companies that specialize in providing IT support most often charge using a monthly retainer model, and they include multiple specialties in the retainer. For one price a business has access to security, systems administration, desktop support, and even CTO specialists. Moreover, most support companies utilize sophisticated monitoring and management software that is generally unavailable to small businesses.

It is not unusual for companies to overspend on IT with the misguided belief that they are remaining in control. They feel that by directly employing their IT support personnel they will improve their service. Although it may have been true 10-20 years ago, it is no longer the case. Technology support companies have come a long way in learning how to deliver professional expertise in real time.

Companies should compare the burdened cost of hiring internally against the service offerings of 3-4 different IT support companies. Depending on individual requirements, it is not unusual for companies to save 30-40% on IT support while improving their service and lowering long-term risk. The potential savings and peace of mind involved are worth the effort.