Outsourcing IT: A Strategic Choice for Increasing the Value of a Portfolio Company
Outsourcing IT functions can prove to be an effective alternative to using internal information technology and resources for many private equity portfolio companies. In an environment where organizations are faced with heightened pressure to minimize the cost structure without jeopardizing execution capabilities or business value, outsourcing IT serves as a cost-effective solution that simultaneously reduces operational cost while increasing value and efficiency.
Outsourcing Advantages: Cost Benefit and Beyond
In a study published in 2013 by MIS Quarterly, data gathered from approximately 300 U.S. companies studied over a four-year period showed that a $96.14 million increase in IT outsourcing was associated with a $121.14 million drop in non-IT operating costs.1 In other words, for every dollar spent on IT outsourcing, operational costs dropped by $1.26. In addition to affecting the bottom-line and cutting costs, other key advantages to shifting from in-house to external IT services include:
- Focus on Core Activities – Outsourcing enables portfolio companies to do what they do best. Instead of consuming internal resources at the expense of marginalizing core activities, outsourcing enables managers and employees to keep focused on core business functions without sacrificing efficiency in IT operations.
- Reduce Overhead Cost – The costs associated with hiring employees to build, manage, and maintain an IT infrastructure—such as training, health insurance, and employment taxes—is eliminated with outsourcing.
- Expert Capabilities – Unless a company is in the business of IT, shifting to an outsource model is a tremendous advantage. Many middle-market portfolio companies are not equipped with the proper level of resources needed to effectively manage their IT functions. Turning to outsourcing allows a company to benefit from the collective experience of a team of professionals that specializes in areas most needed and are able to assist in aligning IT strategy with a company’s corporate strategy.
- Mitigate Risk – Choosing to manage and support IT operations in-house instead of externally can actually pose a risk rather than function as an enabler of the business. Employees oftentimes do not have the necessary skill level, time, or resources to effectively manage an IT system, and critical monitoring of the network, including proper security infrastructure, may be minimal or absent. Professional outsourced IT providers are able to keep up with technology required to run the company, as well as identify and resolve issues before they cause any disruption to the business. The cost of outsourcing is largely offset by the savings realized through eliminating downtime and thereby a potentially significant loss in revenue and profitability.
While loss of control is often considered a risk in the decision to outsource, this is not necessarily the case. The company still needs to identify a point person to work directly with the outsourcing partner and clearly communicate the IT strategy of the business. Doing so will ensure the company remains in control of the process.
Key Considerations in Selecting a Vendor
Whether choosing to outsource all or part of a company’s IT infrastructure, ensuring a positive and successful sourcing decision should be based on the following key considerations:
- What are the existing in-house IT operational costs versus the projected cost of outsourcing?
- Does the outsourcing partner have strong resources and a positive history and reputation?
- Does the outsource company have a nearby facility for on-site support? Are they U.S.-based or offshore?
In conclusion, outsourced IT services provide a host of benefits at the portfolio company level, essentially reducing cost and increasing competitive advantage.
For more information, please contact Jeremy Swan, Principal in CohnReznick’s Private Equity and Venture Capital Industry Practice, at 646-625-5716 or Jim Ambrosini, Director in CohnReznick Advisory Group, at 973-618-6251
Visit CohnReznick’s Private Equity and Venture Capital Industry Practice webpage.
This has been prepared for information purposes and general guidance only and does not constitute professional advice. You should not act upon the information contained in this publication without obtaining specific professional advice. No representation or warranty (express or implied) is made as to the accuracy or completeness of the information contained in this publication, and CohnReznick LLP, its members, employees and agents accept no liability, and disclaim all responsibility, for the consequences of you or anyone else acting, or refraining to act, in reliance on the information contained in this publication or for any decision based on it.