By Samantha Joseph

Highlights for Children was facing a situation most mid-market companies encounter at some point.

The Honesdale, Pa.-based publisher of the Highlights for Children magazine since 1946 had grown to include catalogs, Web sites and other ventures. Circulation was up to 2.5 million, the company was handling 25 million transactions a year and the IT department was beginning to wonder whether it was wise or cost-effective to handle the entire IT function on its own.  

After careful analysis, the family-owned company decided to outsource its data center. “We felt we could permanently lower our costs due to the inherent economies of scale and convert a portion of our costs from fixed to variable,” explains Elmer Meider Jr., president and CEO of Highlights for Children. “A bigger factor, however, was that we felt it would provide greater flexibility and place at our disposal technical knowledge and resources not available internally.”

The move has also freed up Highlights’ 76-person IT staff to work on application development and network support and provided the company with new business continuity processes, to boot. 

Once thought to be the exclusive domain of Fortune 500 companies, IT outsourcing has gained favor in the mid-market. More than half of all midsize companies use outsourcing to meet their IT needs to a certain degree, according to the Yankee Group.

It makes sense. Midsize companies in particular stand to gain a lot from outsourcing various IT areas. Done right, it can provide skills a smaller company may not be able to afford to keep on staff at a lower total cost of ownership. And as is the case with any size company, outsourcing non-core activities (like HR administration or network services) can free up a middle market firm’s IT staff to focus on more strategic efforts. 

And today, the middle market is moving beyond just the bare bones in terms of IT outsourcing. IT managers at midsize companies who got a little nervous a few years ago just outsourcing telecom services are now looking to outsource many of the things the big boys have been farming out for some time–from enterprise application development and maintenance to security to 24x7 help desks.

So why did it take midsize companies a bit longer to open up to the full spectrum of IT outsourcing? According to analyst Mika Krammer of Stamford, Ct.-based Gartner, the reasons vary.

Some think that an outsider will never be able to understand their businesses as well as they do. Others are reluctant to give up control. And sometimes there’s an inability within a midsize company to agree on what is a core IT function that provides competitive advantage versus what is fair game for outsourcing.

As a result, more than 70 percent of small and midsize businesses misallocate funds to non-core IT activities, such as telecommunications or infrastructure maintenance, that could be sourced elsewhere, freeing up resources and improving productivity in house, says Krammer. 

But although they weren’t the biggest believers in strategic IT sourcing in the past, the mid-tier players are getting religion, inspired largely by current economic conditions. Although only single-digit growth in mid-market IT is expected in 2003, observers say we will continue to see increased interest in and a growing number of IT outsourcing options from midsize companies as they look for ways to do more with less. 

Selective Sourcing 
Because of their size and their potential for growth, you won’t see many mid-market IT leaders outsourcing the entire IT function to one vendor–a la the big multi-billion dollar deals of the mid-90s. “Mid-market companies like to control their destiny,” explains Jeffrey Balentine, global leader for Deloitte & Touche’s Technology, Media & Telecommunications Group in San Jose, Ca. “Their businesses can and do change quickly and having control and not being tied to a big contract gives them more flexibility.” 

Instead, midsize companies are selective about what IT work they send out. “A Fortune 500 enterprise might outsource an entire process or department, but mid-market customers take a modular, hybrid approach to IT outsourcing,” Krammer explains. In fact, the Yankee Group found that just over 10 percent of small to midsize businesses use outsourcing exclusively to handle all of their IT functions. And more often than not, says Balentine, mid-market IT leaders outsource an activity because they have to, not because they choose to.

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