As Hosting Evolves, Services Can Reign Supreme

One-third of U.S. companies overestimate the competitive advantages of hosting Web sites internally, according to Jupiter Media Metrix, which means they also overlook the $6 to $12 million in savings that can be gained over a three-year period by outsourcing hosting responsibilities.

And those aren’t the only problems that hosting questions can pose for businesses. Jupiter also found that more than 80 percent of companies begin Web development projects before their site hosting and technology infrastructure design is built. Nine out of 10 of these ventures will face some form of avoidable rebuilding as a result.

“Companies that continue to host their own sites will gain little competitive advantage and spend more money on staffing and technology than those that outsource these functions,” said David Taylor, research director at Jupiter Media Metrix. “There is 30 to 40 percent cost savings to be realized by outsourcing hosting — and too many companies are overlooking this. Those that act and act now will be saving millions in the long run.”

Cost reductions from outsourcing are readily apparent over a three-year period for companies with mid- to high-traffic Web sites. According to Jupiter analyst, an in-house staff of 18 to 25 people costs over three times as much per year, and management tools and expenses another $2 million over a three-year period. In addition, recurring costs such as bandwidth, co-location services and vendor management can easily add more than $1 million dollars in costs during the same period.

Once enterprises become aware of the potential cost saving, Jupiter predicts that the perceptions that drive companies to host applications internally will recede and the advantages of outsourcing to a specialist will be more apparent. As a result, in-house hosting will become rare within three years. Although 34 percent of companies handle hosting internally, another 24 percent manage their applications internally but outsource server management. Jupiter found that companies host in-house because of security concerns, control issues, fear of giving away knowledge and poor customer service by outsourcing vendors.

It is suggested that enterprises consider a range of criteria when selecting a hosting provider, including reliability, scalability, security, proven success, accountability, response speed and customer service. Results from 1999 and 2001 Jupiter Executive surveys found that businesses with Web sites are, specifically, underestimating the importance of scalability. When asked to rank the six most important criteria in choosing a hosting provider, respondents in 1999 rated scalability second and price sixth. However, in 2001, not one respondent chose scalability as the most important factor, while price placed only second to reliability. According to Jupiter analysts, Web companies today should not take scalability for granted because spending slightly more up front to assure proper scalability can prevent crises resulting in massive costs.

With all the potential cost savings, it is possible that the hosting market won’t find itself relying on hosting as its bread and butter for long. According to a report from The Yankee Group, hosting has begun the drive toward fully managed services — a drive that The Yankee Group report predicts will ultimately result in the virtual elimination of co-location services. The report “Managed Hosting Centers: Focus on Service, Not Space” predicts that vendors will differentiate themselves by specialty (vertical or horizontal), which will result in the industry no longer competing on communications transport and real estate, but rather on management services.

“Hosting has performed strongly for the past several years due to physical undercapacity. Today there is enough physical capacity, but a strong undercapacity in services,” said Andy Efstathiou, a program manager in the Yankee Group’s E-Sourcing Strategies research and consulting practice. “Ultimately, we believe that successful hosting providers will be focused on managed hosting services, not physical plant.”

For some enterprises, the demand for help managing all their data will drive them even further, to Internet Data Center (IDCs). IDCs allow carriers to offer a range of services to their data networking customers. According to the report “Emerging Internet Data Center Strategies of Carriers” from Cahners In-Stat Group, IDCs may offer co-location, managed hosting, dedicated or shared applications services, storage services and content delivery services.

“For the past couple of decades, carriers have been evolving their networks from voice to data and converged multimedia networks. The next stage in this evolution is to offer value-added services for data customers,” said Henry Goldberg, senior analyst with In-Stat’s Voice and Data Communications Group.

Not only can an IDC offer a set of outsourced Web site and data management services for businesses, which relieve them of IT staff requirements or having to operate their own corporate data center, but carriers also bundle data networking services to provide connectivity from the IDC to other company sites, remote users or business partners.

“Carriers have various competitive advantages that they can bring to the IDC market, when competing against specialized non-carrier companies providing similar services,” Goldberg said. “These include bundling of a range of data networking service options, end-to-end Service Level Agreements (SLAs) for applications, an established customer base for networking services, carrier-class IDC reliability and financial soundness.”

In-Stat predicts that worldwide carrier IDC revenues are estimated to grow at a 56 percent CAGR from 2001 to 2005.

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