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Outsourcing: Should It Stay Or Should It Go?

Companies are finding a host of reasons to offload bits of their E-business operations.

With traffic to its consumer Web site doubling nearly every year since 1996 and online transactions surpassing $100 million annually, Amtrak knew its E-business operation was strained to capacity. Its first thought: outsource everything. So in late 2000, E-commerce directors Mary Cortina and Lenetta McCampbell sorted through proposals from Digex, Exodus, IBM, and Loudcloud, companies that, as Cortina says, “definitely knew their business” in terms of technology. But the price tags proved too steep, so Amtrak added staff and transformed a data center originally intended to support legacy applications into a new E-business hub.

In general, Amtrak executives say that approach made sense: the price was right and the site has performed well. But when the September 11 terrorist attacks drove hundreds of would-be travelers to amtrak.com, the rail line didn’t stand a chance. Its three-person IT staff couldn’t add bandwidth fast enough to meet demand, and call centers were overwhelmed, forcing Amtrak to turn away potential customers.

The outsourcing option returned, and in an unusual way. Cambridge, Massachusetts-based Akamai Technologies Inc., a provider of E-business infrastructure, let Amtrak reroute Web traffic through its servers for free for one month following the attacks, solving the bandwidth problem. “They literally saved our site,” says Cortina. As a result, Amtrak changed its mind about outsourcing and signed a deal with Akamai. Its former all-or-nothing view gave way to a mix-and-match approach in which, as McCampbell says, “the combination of internal support and outsourcing means that spikes can be handled more efficiently,” whether caused by emergencies, holiday traffic, promotions, or other reasons.

While outsourcing decisions are rarely born of such drama, analysts say a growing number of companies are now realizing that E-business operations are difficult to handle alone. “We expect that companies will have to ship out at least some component” of E-business, says Jeanne Schaaf, formerly an analyst at Cambridge, Massachusetts-based Forrester Research. “Companies that do it all themselves tend to overspend on bandwidth, storage, networks, and personnel.”

Choose Your Partner(s)

Research firms say that slightly more than half of U.S. companies still maintain all E-business operations in-house. “There’s a cowboy mentality at some companies, where they want to do E-business all themselves. The CIO wants to be able to walk down the hall and pet the server,” notes Marc Jacobson, an E-business analyst at Ovum, a Wakefield, Massachusetts-based analyst and consulting firm. But as E-business infrastructure grows to accommodate large-scale applications like customer relationship and supply-chain-management programs, he says, “going forward, the in-house approach is simply not going to work.”

Outsourcing options abound, so much so that some companies are rife with outsourcing relationships, a situation often exacerbated by the fact that various departments within a company may establish separate approaches to E-business. Germany-based sporting-goods maker Adidas-Salomon AG, for example, relied on 15 companies to host various components of its adidas.com site before it consolidated with one company last summer.

Analysts say that one way to handle E-business outsourcing is to find one company that can do it all, but won’t insist on doing so. Such managed service providers (MSPs) as Sunnyvale, California-based Loudcloud Inc. (which now handles adidas.com) act as a sort of general contractor, making sure clients get whatever services they need and tapping a network of providers for the underlying hosting facility, security systems, or whatever else is needed.

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