Fishing for a Deal

 
 
By John Moore  |  Posted 2001-04-09
 
 
 

After i9 Interactive won a job to create a Web site for serious anglers, the New York-based integrator embarked on a fishing expedition of its own. The goal: catch a reliable hosting partner.

The story began when Ken Schultz, fishing editor of Field & Stream, hired i9 to develop Kenschultz.com. While the integrator felt confident in its design and online branding abilities, hosting was another story entirely. "One area we were always a little unsure of how we were going to proceed was hosting," notes Jeff Hirschman, CIO at i9.

The company considered offering its own hosting service, an expensive proposition. At one point, i9 opted to work with a small co-location center but worried about the demands of high-traffic customers. Hirschman toured various hosting centers to find a more permanent solution, but he encountered such nightmares as equipment left lying on the floor outside of protective cages.

The integrator eventually hooked up with IBM, becoming the first company to participate in Big Blues recently announced co-location program for business partners. The program lets partners remarket or receive referral fees for IBMs hosting services. For i9, the program provides both an expanded service reach and peace of mind. "We can sleep at night," says Morris Sitt, president and CEO of i9.

Alliances such as i9s accord with IBM have become increasingly common. Over the past few months, Internet data centers have pulled thousands of e-integrators, consultancies and solutions providers into their orbits. Indeed, partnering has become the strategy of choice for companies unwilling—or unable—to spend the bucks required to build and maintain their own hosting infrastructures. In IBMs case, that total tab runs into the billions of dollars.

But the burgeoning partnerships are not just marriages of convenience. In a tough market, partners are searching for services to sell, and hosting provides a sizeable opportunity. International Data Corp. (IDC) predicts that co-location hosting will become a $4.2 billion market by 2004, up from $912 million in 2000. In co-location hosting, a vendor provides space and bandwidth to support customer-owned equipment like Web servers and storage gear. Managed hosting, in which a vendor owns the equipment and manages applications, promises to be an even larger market, which IDC forecasts to reach $17.2 billion by 2004.

Whats more, hosting is the second largest budget item for Web sites, comprising 13 percent of their annual expenditures. That trails only design/programming, according to ActivMedia Research. Thats a big chunk of business to leave on the table for companies trying to recapture their sales momentum in the current downturn.

Hosting vendors, however, have as much at stake in alliances as their eager partners. With hosting services becoming more competitive and commoditized, providers are relying on partners to drive business their way. Every hosting vendor interviewed for this article runs an alliance program, with some reporting that half of their sales come through partners.

Allies provide more feet on the street, but they also help vendors move up the value chain. "We dont provide up-front design and programming to get the Web site up and running," says John Thomas, director of business development at hosting vendor Epoch Internet. "We need to partner with folks who provide the value-added services to complete the solution."

Everybodys Doing It Integrators developing e-commerce and other Internet-driven applications are a natural match for hosting companies. Customers frequently demand that their Web developers also provide hosting, but most Web integrators have stayed out of that business. Some that entered the hosting market, such as iXL Enterprises, already have divested their operations, while others, including MarchFirst, are in the process of doing so.

"We dont really want to manage the applications … and we certainly dont want to house them," says Tod Knight, CTO at Web integrator Luminant. "They [hosting vendors] dont want to build the applications. Were all in it together, but were all taking a separate piece."

In cultivating hosting partners, Luminants strategy has been to perform due diligence on a limited number of providers to ensure that the company and its customers get the best service. And having "someone who knows us when we call" is an added plus, according to Knight. The firm has two hosting companies on its shortlist, but will work with others at the request of its customers.

Traditional integrators also are flocking to hosting companies. Names such as Accenture, KPMG and PricewaterhouseCoopers appear on the partnering rosters of many hosting vendors. The objective of the Big Five integrators is much the same: Obtain a consistent, trusted source to hand over customer apps for hosting purposes.

But its not just large integrators cultivating hosting alliances. Smaller resellers also are getting involved. Brock Computer Applications Inc., a Houston-based Hewlett-Packard reseller, recently entered a hosting relationship with Epoch. The company linked with Epoch through an Avnet Computer Marketing program that lets resellers purchase space and bandwidth much like they would servers and software.

Tom Brock, president and CEO of Brock Computer Applications, says his customers have been asking about hosting arrangements. He says the Avnet/Epoch arrangement provides something he can offer his xSP customers, some of which are considering building their own data centers. "Its just a great extension for me," Brock says, adding that he also will get a piece of Epochs monthly service charge.

Joining the integrators and resellers are xSPs—application service providers (ASP), management services providers (MSP), and the like. MSPs, for example, hope to sell their specialized services through hosting vendors. That direction marks a dramatic shift for some companies that originally had hoped to sell their Web server monitoring services independently.

SiteLite, for one, disbanded its direct sales force in February and now sells its services entirely through partners. Stephen Sickler, executive VP of sales and marketing at SiteLite, believes hosting companies represent a key outlet for his companys services, which include the management of network devices, Web servers and applications. Co-location companies, in particular, want to push into such managed services, but most are "having a very hard time actually providing the services," Sickler says.

SiteLite wants to fill that gap. The MSP already has inked agreements with such hosting customers as Rackspace and Exodus Communications. The latter is providing SiteLite services under its own label.

Riptech, an MSP focusing on security services, also is targeting Internet data centers as partners, signing a deal with Epoch last month. Elad Yoran, executive VP of Riptech, expects as much as 80 percent of his companys sales to flow through such alliances by the end of this year.

In addition, product vendors play a key role as hosting partners. Its no secret that equipment vendors sell a ton of gear to Internet data centers and their customers. But the vendors also have emerged as a source of leads for the hosting firms. At Exodus Communications, for example, the companys enterprise partners, which include Cisco, EMC, Oracle and Sun Microsystems, account for half the companys partner-generated revenue, according to Arif Razvi, director of worldwide alliance programs at Exodus.

"We spend quite a bit of time reselling their products, and they are making referrals to us," Razvi says. "They own the enterprise relationships and assist us in getting into accounts."

Pick a Flavor That eclectic mix of partners has inspired partnering programs in a variety of flavors. Some vendor programs cater to the taste of xSPs, while others target integrators or solutions providers. Some programs offer multiple levels of membership with perks increasing with sales volume.

But for simplicitys sake, most hosting partner programs fall into two main varieties: referral and remarketing. In a referral-oriented program, a partner receives a fee for turning a customer over to a hosting vendor. Industry executives say those programs work well for companies that want a closer relationship with a hosting vendor but dont want to get involved in the paperwork of reselling a service.

"If one takes some of the bigger integrators in the market, they dont want to sell AT&T services per se," says Jenny Proctor, director of AT&Ts Ecosystem for ASPs program. "They are more interested in … a streamlined handoff to the vendor. We see the whole referral space growing quite rapidly."

Hosting outfits with large direct sales forces—such as Exodus—offer referral programs, as opposed to reseller arrangements, to prevent the vendor and partner from competing for deals. "We go with the referral model and pay them a good chunk of the hosting fee," says Razvi. Exodus, he says, plans to expand its referral program to compensate partners for the professional-services fees Exodus generates on sales, as well as the hosting dollars.

At Intel Online Services, referral arrangements make up the bulk of the companys partnering activities, with Web integrators, ASPs and smaller consultancies all getting into the act, according to Steve Quane, strategic planning and business development manager at Intel Online Services. Intel Online Services, however, does have a reseller relationship in place with PricewaterhouseCoopers. "They resell our services and own the SLA [service-level agreement], but this arrangement covers a small portion of our business," Quane says.

Referral programs produce a significant portion of some hosting companies revenue. Ron McMurtrie, VP of E-Services for WorldCom, says the majority of the companys co-location business comes through an 18-month-old referral program. Companies seeking referral programs should keep in mind that some vendors offer a onetime fee, while others provide a recurring monthly commission. The availability of cooperative marketing funds and training programs are other variables worth considering.

Remarketing programs, meanwhile, let partners resell hosting services, with the partners typically getting a recurring slice of the hosting vendors monthly service charges. The programs promise greater rewards than a onetime finders fee and provide partners an opportunity to bundle their own services around the hosting activity. Partners "make a pretty substantial sum of money based on recurring monthly commissions," says Craig Schlagbaum, director of partner programs at Qwest Communications.

Remarketing programs also tend to require more effort in the accounting department, although some hosting vendors offer to handle customer billing on a partners behalf.

A number of hosting vendors offer both referral and remarketing programs, and some offer strategic alliances with a small number of partners. WorldCom, for example, maintains what McMurtrie refers to as "prime/sub" agreements with such integrators as KPMG. In those deals, WorldCom acts as the prime contractor, wrapping in professional services from a given systems integrator. Typically, the integrator provides application development, while WorldCom provides project management and a preconfigured hosting platform for the integrators solution. McMurtrie says prime/sub agreements got off the ground in the middle of last year and generated $50 million in revenue in 2000.

Partnering Pitfalls? The opportunity for both near- and long-term revenue would seem to make hosting partnerships a no-brainer. But there are some potential drawbacks.

Some executives contend that companies casually referring business to hosting vendors are throwing away customer upgrade opportunities in the bargain. Another issue is the hosting vendors march into managed services, which could put some hosting providers on a competitive collision course with professional-services firms.

Hosting vendors are aware of those concerns and have made a point to declare themselves partner-friendly.

Epochs partner program, for instance, is structured so that resellers can take advantage of upgrade opportunities when customers require additional storage or Web servers, according to the company. "Most programs dont allow for participation in upgrades," Thomas says.

"We dont conflict with the partner community," notes AT&Ts Proctor, adding that AT&Ts services dont clash with integrators design and implementation offerings.

Assurances such as those sound good at a time when many companies could use a friend in the hosting business. Just keep an open mind when trolling for hosting partners.

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