Out & About
Though corporations have not outsourced their data center operations at the pace at which the Internet industry had hoped, an irreversible, if frustratingly slow, process of moving applications off the corporate server has begun.
Two years ago, when ASP was the magic acronym, The Yankee Group predicted the application service provider market would reach $30 billion this year. The big number included Web hosting, Internet data transport, e-commerce hosting and about $2.37 billion in back-office and front-end application hosting.
The idea was that a company seeking to outsource its e-commerce Web site management, e-mail or specialized back-office productivity software would look for a shrink-wrapped package that included both hosting and the infrastructure to support the applications, such as data-center hosting and Internet connectivity.
While attractive as a concept, that incarnation of the ASP business did not fly if the market capitalization of category leaders like Breakaway Solutions, Corio and USinternetworking are any indication.
Instead, the market has been carved up by numerous specialty players ASPs concentrating on running third-party applications, Web hosters, Internet service providers and e-commerce platform providers. What is Genuitys Black Rocket e-commerce platform services suite if not an attempt to evolve from ISP and Web hoster into a more effective outsourcer? What, if not the prospect of attracting more outsourced corporate data business, fuels WorldComs data center construction binge? And what, if not slow growth of this business, fuels such specialty plays as Intira?
Part of the challenge that both newcomers and established players encounter is that some corporations tried outsourcing, got burned and are even more wary of the whole idea than before the Internet boom.
"Currently, we have a contract with a carrier to do network management of our routers. It is very painful to wait for their engineers to show up when there is a router problem," says Ram Prabhu, corporate telecommunications manager at Millipore, a $771 million manufacturer of filters used in the biosciences and microelectronics industries. "We could lose customers over this, so we are canceling the contract and taking over."
If providers cant manage routers proactively, forget trusting them with a patented database that is the lifeblood of this manufacturer, Millipore execs reasoned. But the old problem lack of time and specialists has surfaced again. If Millipore were to manage all these routers itself, it would have to expand its staff and facilities to monitor its corporate network.
This is why even the most pessimistic of the corporate bunch still feel the need for outsourcing. Thankfully, a new set of players is addressing customers like Millipore management service providers (MSPs).
Launched largely by second-generation dot-commers in late 1999 and early 2000, MSPs first concentrated on offering outsourced management of the Internet infrastructure for large dot-coms. However, when the dot-com bubble burst, many began shifting toward corporate customers and now some boast quite a following. These include Genosys Technology Management in New York City; Inteq, the MSP that ultimately won the Millipore contract; and Totality, formerly known as MimEcom. Others, including Sunnyvale, Calif., NOCpulse, have similar offerings in the pipeline.
Customers like Millipore are not inclined to outsource their mission-critical applications. There is, however, no way around the expense of building a monitoring system."We could not choose an ASP, but went with somebody like Inteq, which is monitoring our system 24 by 7 by 365, and they page us if something goes wrong right away," Prabhu says.
Yash Shah, Inteqs co-founder, president and chief technical officer, says that while complete outsourcing is not currently popular with corporations, business for managing more critical applications remotely, including Enterprise Resource Planning and e-mail, is slowly picking up.
"Complete outsourcing is not a popular alternative with many companies because of all the horror stories, but we are able to say: Guys, leave it where it is, and keep the control, " he says.
Indeed, the main currency in the business trust is hard-earned, but goes a long way. Companies that earned this trust long before the Internet hit the business world now draw on this capital to get into the outsourcing game.
Comdisco, a data-backup giant, entered the managed Web hosting space earlier this year, aiming to provide the same level of continuity in various front-end and back-end application hosting services that its customers grew to expect in data recovery, and offering outsourcing even of such services as equipment financing. The new services come with an option to guarantee 100 percent system availability.
Even so, providing some of these functions today does not guarantee recurrent business with corporate clients tomorrow.
"Some of the folks in the high end of the market have the exact opposite strategy they say their eventual goal is to roll it all back together, to take the e-commerce front ends in," says Allan Graham, president of Comdiscos Web services.
Large corporations, Graham explains, are not sure how popular the e-commerce parts of their businesses will be, so to lower their exposure to the Net economy, they outsource, with an eye to getting these units back into their own information technology folds should they become mission-critical. But, he says, that may be wishful corporate thinking, not a business reality.
With regard to midsize corporations, Comdisco is getting involved with many supply chain companies that are forced to modernize in order to participate in online business exchanges.
"Those guys tell us, Take the whole thing out, " Graham says.
What Customers Want
Companies that have been in the Internet outsourcing game for a while, like Intira, see the same dynamic. Intira moved into corporate data center and dot-com outsourcing in late 1998, when the business wasnt even on most other carriers radar screens. Intira even coined its own term for it Netsourcing.
The company is past the missionary stage and is able to sell services without much evangelizing. "Our contracts average around $1.8 million to $2 million and 32 months," says John Steensen, chief technology officer. One of Intiras key selling points, he says, is its ability to explain its service-level agreements in plain business language: "We will reimburse you X if your application doesnt work."
Developing a good outsourcing operation takes time, Steensen says, and includes trying to understand exactly what customers expect. Newcomers are optimistic that once they have a foot in the door with monitoring services, other services will follow.
"We are working with one of the top 10 accounting firms right now that is considering outsourcing one of its core back-office applications with us," says Irwin Wallach, chief technology officer at Genosys.
Should the outsourcing plan fail, the corporate data center business is surely more stable than the dot-coms.