Managed hosting providers must offer security, redundancy, support and managed services just to survive. But to succeed, they must meet a new set of criteria, writes META Group analyst Corey Ferengul.
Seems like daily there is more news about failures, mergers or structural changes among managed Web hosting vendors. The market is suffering from vendor glut — too many vendors entered the market too early in its lifecycle. The market consolidation is necessary and will continue through 2003.
Even with the churn, this segment of outsourcing is still growing fast and companies are still on the prowl for vendors. Recently META Group created a META Spectrum for the managed Web hosting market. A META Spectrum is a rating of the leading vendors, based on weighted measurement categories. While in future articles I will cover the vendor landscape (the winners and losers), here I am going to focus on what characteristics should be sought in vendors, the selection criteria.
While this market has suffered from a case of supply out stripping demand (e.g., too many vendors), which has forced aspects to commoditize early in the industry's maturity. Particularly, key evaluation criteria of the past are now considered common and entry level for a vendor to even remain a competitor. Physical security, network and server redundancy, 24x7 support and availability of managed services are no longer competitive differentiators; any surviving vendor has those nailed. The criteria have shifted to more of a focus on the managed services as well as the vendors' viability and credibility. The new core criteria include the following:
Vision and Strategy: Parameters of the market are continuing to shift. Vendors must be able to demonstrate that they see these trends and quickly move to embrace them (e.g., additional managed services). Trends in 2002 that winning vendors must embrace include the following items: increased demands of service level agreements (e.g., more detail, more customer service metrics) and balancing flexibility and customization. Vendors that do not understand their own capabilities and limits are doomed, as they will typically run at a higher internal cost that will be unsupported by the industry.
Awareness/reputation: Evaluation of a vendor is difficult as there is no tangible product to test. Therefore a poor reputation will and should hurt a vendor. For many vendors the problem is that end users do not even realize they are in the Web-hosting business. It is anticipated that vendor will increase spending late 2002 in awareness-building activities, as the market stabilizes. Renewal rates below 90-95 percent should be viewed cautiously.
Financials: As investor financing has dried up, a vendor's access to capital is a key determinant of its growth potential. Vendors will need capital to continue to expand their services and participate in the consolidation; capital is not required for continued physical build out. Customers are increasingly conducting financial reviews of their outsourcing vendors, reviewing both the vendor's ability to attract funding in general as well as the profitability of the service being specifically purchased. This assessment is notably different from evaluations by investment community, which may be influenced by market hype, or where the Web hosting service may be only a small part of the services offered by the vendor
Investments: Vendors who are still investing in building out infrastructure are at risk; no additional infrastructure investment is required through 2003. At this point in the market's maturity, vendors investment must be in creating managed services and standardizing internal processes (all areas aimed at building additional revenue out of existing physical infrastructure and cutting costs). Also investment must be driven towards building application expertise (e.g., WebLogic, WebSphere, Vignette). These investments must be balanced with the key need to conserve cash, as the capital markets are not high on continued investing in this market until winners are clearer. By 2005, investments will not be as critical a selection criteria as a more mature market will lead investment areas being more widely understood (e.g., all will invest in SLAs, all will invest in managed services).
Share: There is no clear market share leader currently, though many vendors claim that title based on many different criteria. There is and will continue to be a difference between market share and wallet share (pure number of customers vs. percent of dollars spent) as low-cost leaders and those focused on small-to-midsize organizations will end up with a higher number of clients, but not the revenue per client. Share can be viewed as an indicator of market acceptance. Additionally, companies should compare the spending growth per client (e.g., a client increasing spending over life of contract) with increases of 30-40 percent being viewed as a happy client furthering their relationship. Share will not remain as important an evaluation criteria post 2005 as the market consolidation will make the leaders clear.
Products/technology: A vendor's capability to deliver profitable Web hosting services is defined by its degree of process standardization. Equally important is how various components of the vendor's menu of offerings can be tailored to meet a customer's specific needs while minimizing internal changes to process or people. As the variation in products used in the Internet data center reduces (i.e., users consolidate around a smaller number of Internet platform vendors), the actual supported product selection is less of a differentiator.
Services: Taken in aggregate, a vendor's packaging, breadth and customization are more important than the vendor's standardized (and often heavily marketed) services. While standardized SLAs are important, "cookie-cutter" SLAs based on numerous technical criteria are less important to customers than the vendor's commitment to deliver business value and make a contractual commitment to acheiving that. Thus the new emphasis will be on the vendor's ownership of infrastructure problems and its commitment to resolution regardless of the problem's source. Customers should measure their outsourcers based on their capability to maintain business-critical services, emphasizing the vendor/client relationship and allowing for customers to exit a contract without penalty when the partnership fails to deliver.
The bottom line is that while the evaluation criteria have shifted, they have gotten more complex. Customers need to take their time in making a selection.
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Corey Ferengul is senior program director of Service Management Strategies at META Group. He focuses on
the enterprise systems management (ESM) market, specializing in evolving technologies,
management and operations of dynamic e-business environments, enterprise
management processes, and vendor offerings. He assists IT organizations in
assessment, acquisition decisions and application of ESM technologies such as
management "frameworks" and point products, while addressing challenges in
heterogeneous (and mobile) environments. Prior to joining META Group in August 1999,
he was most recently with Platinum Technology, serving as director of product integration.
He received a B.S. from Illinois State University. He can be reached at coreyf@metagroup.com.
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