Outsource IT – The Numbers Back it Up

May 2, 2008

With Skinman blogging about outsourcing (here, here, and here) along with Michael Miller blogging about the ease of leasing vs. buying, I had to jump in to say that the numbers show that their thinking is right on track.

Using database driving financial modeling software, I modeled a small internet-based business doing their IT infrastructure in-house versus using SoftLayer to handle the infrastructure for them. The benefits of using SoftLayer are eye-popping.

Here are the basic assumptions of the mythical company. There are 8 employees, 2 of which are founders who took out second mortgages on their houses to launch the business. First year sales are about $1.5 million. Business needs require 12 servers in two different geographic locations, housed in climate controlled rooms. Pricing out the servers and networking gear on Dell and eBay worked out to $71,509. This gear was financed with part of the proceeds from the second mortgages, booked to the balance sheet and depreciated. After three years, it was disposed of and upgraded with new gear costing $125,000.

Using SoftLayer changes several of these assumptions. By letting SoftLayer handle infrastructure, one less employee was required. There was no capital outlay for the needed 12 servers and networking gear. SoftLayer got the servers running in a couple of hours with no setup fees for a manageable monthly charge. This allowed less debt to start the business, and there were no long term contracts with SoftLayer if the business idea didn’t work out. There was no need to book the assets to the balance sheet, depreciate them, and upgrading them after three years involved a simple phone call so SoftLayer. No disposing of old gear or balance sheet write offs were necessary.

Consequently, this improved all the most important financial statement measures besides revenue, which remained the same in each scenario. Gross profit, EBITDA, EBIT, and Net Income all improved dramatically from using SoftLayer. Balance sheet credit worthiness, measured by things like equity and the Current Ratio among other things, dramatically improve. Finally, cash balances and cash flow almost double by using SoftLayer. Just compare the highlighted fields in this spreadsheet.

As they say, “your mileage may vary.” But odds are that you can significantly improve your financial performance by using SoftLayer to eliminate operating costs, depreciation, debt financing, and upgrade logistics related to your IT infrastructure needs.

-Gary

Comments

May 4th, 2008 at 6:24pm

Several years ago I ran a similar analysis and found a break even point to be around 6-7 servers when comparing using a dedicated server provider vs. co-location. This was just for a single site installation. I am sure costs would increase when you have 2 locations due to all of the network gear required.

There are also many hidden benefits about outsourcing infrastructure, especially if you have minimal needs or are just starting up. I've dealt with many start-ups that enter into full rack co-location agreements, load the rack with top-end hardware with expectations of growing quickly. However, when that growth does not happen or development take longer than expected the high overhead starts to takes it toll. With turn-key infrastructure, you could launch a new service with minimal upfront costs and grow and contract as needed on-demand. I find this to be the most powerful feature of dedicated server providers like SoftLayer and others.

Lastly, there's a lot of intangible benefit to simply not worrying about your IT infrastructure. When that server dies at 3AM, you don't have to worry about replacing it. That alone can be worth a bundle.

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Comments

May 4th, 2008 at 6:24pm

Several years ago I ran a similar analysis and found a break even point to be around 6-7 servers when comparing using a dedicated server provider vs. co-location. This was just for a single site installation. I am sure costs would increase when you have 2 locations due to all of the network gear required.

There are also many hidden benefits about outsourcing infrastructure, especially if you have minimal needs or are just starting up. I've dealt with many start-ups that enter into full rack co-location agreements, load the rack with top-end hardware with expectations of growing quickly. However, when that growth does not happen or development take longer than expected the high overhead starts to takes it toll. With turn-key infrastructure, you could launch a new service with minimal upfront costs and grow and contract as needed on-demand. I find this to be the most powerful feature of dedicated server providers like SoftLayer and others.

Lastly, there's a lot of intangible benefit to simply not worrying about your IT infrastructure. When that server dies at 3AM, you don't have to worry about replacing it. That alone can be worth a bundle.

Leave a Reply

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