Indeed, congruency can be a major factor in whether an MSP makes sense. "When you go to a hoster or an MSP, a lot of times you have to make a lot of concessions, because in order to be successful, they need to standardize their offerings," says Gartner analyst Ted Chamberlin, who notes that this has been a common problem for his clients. "They may say, 'We know your systems are sitting on a Linux box, but we think they need to be on Windows,' because that's what they're using for everybody else."
Standardization, however, allows for big savings on commodities like storage and bandwidth. Bouten, for example, says buying through Loudcloud saves him 50 percent on bandwidth costs. Standardization also creates flexibility: a hoster can increase a client's capacity at a moment's notice, while companies that handle E-business in-house usually carry extra capacity so they can add it when they need it, an approach that is not cost-effective.
E-business outsourcers also offer the advantages associated with other, more traditional forms of outsourcing: economies of scale and (in theory) qualified staff. "That means they can provide a tighter level of security than we could alone," says Rob Hack, director of global information technology and infrastructure at Syracuse, New York-based Carrier Corp., a United Technologies company, "because they can spread the overhead across a number of clients." Carrier signed on with Genuity Inc. five years ago and now has about 60 Web sites on more than 20 servers under Genuity's care, including customer- and supplier-facing extranets. Using an MSP, says Hack, provides predictable service levels and response times in a secure network and computing environment that complements site-level and back-end security.
Staffing issues also drive outsourcing strategies. The "war on talent" continues to rage in technical areas, and even companies that create software for a living often lack the IT expertise needed to run E-business operations in-house. "Building applications is not the same thing as managing IT," says Nicholas Zaldastani, senior vice president and chief marketing officer at Personic Inc., a Brisbane, California-based software firm that specializes in corporate recruiting and hiring. Personic acts as an ASP (application service provider), renting its software to clients. And it relies on MSP Digex to make sure the systems run properly.
The need to keep things running, in fact, motivates a move toward some form of E-business outsourcing far more often than the ability to actually cut costs. "I could have generated some savings out of our old approach without making the change to Loudcloud," says Bouten, "but I couldn't have achieved all that we needed to do, and there would have been more risk, since I didn't have the right expertise on staff."
Reliability plays a key role in measuring the ROI of outsourcing. At Carrier, "the analysis really boiled down to 'what would the gross margin loss be if our sites were not available?'" says Hack. Given that the HVAC-products manufacturer draws about $1 billion worth of business through its Web sites and "there is no sympathy" from its user community for technical failures, the upgrade seemed essential.
While cost may not be a prime motivator, analysts say it is a buyer's market, as the herd of mostly young, unproven MSPs fight to build market share. Monthly fees range from $30,000 to $70,000, with $10,000 a bare minimum. Loudcloud says its customers pay an average of $1.5 million annually, or $125,000 a month. Meanwhile, Chamberlin of Gartner expects prices for hosting services to rise from 10 percent to 20 percent annually over the next several years to meet profit pressure from Wall Street. "If your balance sheet allows it, and you're Web-enabling some services, you're in a prime position right now," says Ovum's Jacobson. "Next year you'll have much less chance to negotiate the sweet deal you could today."
The recent bankruptcies of hosting giant Exodus and ASP pioneer USi have raised doubts about some of the business models used by ASPs and MSPs. However, some analysts say that by establishing alliances with telecom firms (Loudcloud with Qwest, Digex with Worldcom, and Genuity with Verizon), questions about stability become moot. "It's more a question of whether they will stand alone or be integrated into the partner," says Andrew Schroepfer, president of Minneapolis-based Tier 1 Research. Either way, as companies increasingly rely on the Web, they will almost certainly come to rely on an expanding web of technology providers.
For Genuity, Flex Time
For a lesson in the appeal of the à la carte approach to E-business outsourcing, look no further than the recent fortunes of Loudcloud and Genuity. These two MSPs provide essentially the same services to large companies, yet Genuity's revenue from these activities dropped 5 percent year-over-year (as of November), while Loudcloud's rose 200 percent.
Analysts say flexibility is the differentiator. Loudcloud has long touted its ability to take on selected portions of E-business on various platforms, while Genuity has tried to steer clients to comprehensive integration. "A multinational company with 50 different business units that have their own Web sites and enterprise applications would have to move all of them to a single platform to sign up with Genuity," explains Andrew Schroepfer, president of Tier 1 Research. Loudcloud, however, "would let a client outsource piece by piece, while working toward an integrated platform."
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