Technology has made self-hosting a practical alternative. What influences a customer's decision toward either outsourcing or do-it-yourself?
Weighing all options
August 2002: Hosting Tech MagazineTechnology has made self-hosting a practical alternative. What influences a customer's decision toward either outsourcing or do-it-yourself?
Wayne Epperson correspondent | wepperson@hostingtech.comEven as hosting providers fall one-by-one to poor planning and a hostile economy, the surviving companies still might find expanding their customer bases a daunting challenge. Generally, numerous objections have to be overcome and competitors have to be bested before a prospect becomes a client. No matter how slick the presentation or how hot the service provider, the scariest competitor will always be the customer itself. It has been called everything from initiative to independence to ingenuity, but it boils down to one thing: self-hosting.
No figures have been published about the number of companies taking care of their own Web services, but there is general agreement that the business practice of self-hosting is the single biggest check to the aggressive growth of service providers. A company that chooses to self-host can be any size, from a small business to a major enterprise-class company.
The little guy
At BroadSpire (www.broadspire.com), a managed services provider in Mission Hills, California, the consensus is the self-hosting market is sizable, but SME (Small to Midsize Enterprise) customers are more likely to outsource their hosting.
"This is where the managed service provider market is growing fastest," says Marketing Manager Jay Shaw. "They simply do not have the resources to self-host, and they readily admit it."
Enterprises, on the other hand, might not have the resources to host, but are a lot less ready to admit it or to pay for something they believe they can handle on their own. They typically have in-house I.T. resources (i.e., hardware, connectivity, and personnel) that senior management wants to utilize across all I.T. endeavors, including hosting, says Shaw.
"Until enterprises start off-loading bulk business processes to the Internet, the outsourcing rate of growth will remain relatively steady," Shaw says.
When they do start intensively utilizing the Internet, enterprises will realize they need 24x7 support coverage from highly skilled engineers, more scalability, and other costly commodities - all of which can be accomplished more cost effectively by outsourcing, he says.
BroadSpire has found most enterprises have some self-hosting combined with outsourced hosting, and Shaw predicts the "mixed" trend will continue for some time. An enterprise's mission-critical initiatives are typically kept in-house, while smaller projects are outsourced.
"I think the trend to outsource is growing; however, with the recent collapse in the telecom sector, it's growing at a much slower pace than six months ago," Shaw says, adding that enterprises are conducting a lot more due diligence these days. "I think we'll continue to see companies evaluate outsourcing, and it will probably take them two to three cycles of this evaluation process before they take the leap. This means we'll only see more sizable growth over probably a three-year period. The trend to outsource will grow only as fast as the adoption of 'business changing' Internet technologies used in the enterprise [mobile computing, field force automation over the Internet, etc.]."
Another Californian managed services provider, VPI.Net (www.vpi.net), sees the self-hosting market increasing gradually with the addition of small, entry-level websites, according to Chief Executive Officer Zachary S. Zeiler . Although Shaw suggests large companies are more likely to self-host, because of their greater resources, Zeiler disagrees.
"We are finding larger companies are choosing to end the self-hosting and save their budget on their own internal I.T. department by outsourcing to the very competitive Web hosting market, especially in the current economy," Zeiler says. "We project the smaller, entry-level websites will to continue to self-host and [the market will] increase at a steady pace."
In the midsize enterprise space, VPI.Net is also seeing a mixture of outsourcing and self-hosting. Companies are outsourcing management of their websites to minimize potential network intrusion and downtime, while self-hosting their e-mail and collaboration features of Microsoft Exchange.
Why DIY?
Companies self-host, according to Zeiler, because they sometimes feel they can get the most out of their high-speed connection - which they often need to have for their I.T. needs outside of hosting - by hosting their own site. Companies also feel faster PCs and connections and more stable operating systems mean system administrators and network engineers spend less time keeping the enterprise running and therefore have more time to devote to self-hosting tasks.
BroadSpire says the reasons firms choose to self-host usually include:
- desire to fully utilize current I.T. staff
- fear that outsourcing critical business functions is insecure
- perceived loss of control
- fear of dependence on a financially unstable provider
At ViaWest (www.viawest.net) in Denver, Vice President of Hosting Jim Chan says his company sees the SME market moving steadily toward outsourcing, and the enterprises, especially Fortune 500 types, are moving toward or staying with self-hosting. The two main reasons given are cost and existing infrastructure, he says.
"The bigger companies already have the infrastructure in place in their datacenters for other activities," says Chan, "and it's just a matter of adding one more job function to an existing employee to manage the hosting."
In such cases, self-hosting is often seen as a way to cut costs and reduce redundant infrastructure. At the other side of the table is the SME market - these companies are facing increased hosting complexity requirements and shrinking available staff to manage it.
"Regarding trends, we are seeing a continued polarization of these two positions ... either you have the infrastructure and staff to do it in-house, or you don't Ã?and so you outsource," Chan says.
In contrast, large companies have the personnel on staff and the infrastructure in place already. That is their primary reason. Also, many companies think they can do it themselves and fear a loss of control by outsourcing.
"At ViaWest, if we see these types of objections from a smaller business, we can typically turn these companies around by showing them how they can still remain in control, and how they'll realize a big cost savings by outsourcing," Chan says.
The experiences of ViaWest and BroadSpire typify what most hosts encounter regarding self-hosting. Melanie Posey, an analyst with IDC (www.idc.com) in New York, says the chief complaint of providers is that self-hosting is their biggest competitor. She blames providers for not understanding the logic that works against them in the minds of potential customers.
"Look at it this way: If you do your own laundry now, you know how much it costs you to do it, and you know how much time it takes. It's a pain, but at least you know," Posey says. "If you were all of a sudden to outsource your laundry to somebody else, well, that's going to cost you more. How does that save you money?"
Providers also tell companies they should stick to their core business and outsource their I.T. functions, Posey says. "That makes sense to a certain extent, but you could extend that argument to everything. There is no such thing as a virtual company ... [For example] if you make doughnuts [does it make sense to] outsource accounting or human resources or any other cost-center support function?"
Selling points
At BroadSpire, Shaw says executives choose to outsource because companies cannot match the hosting expertise of a provider, nor do they want the cost of running a true 24x7 technical operation is prohibitive. Staffing turnover is high, and most enterprises are unable to scale a Web hosting infrastructure quickly by adding hardware, software, or bandwidth on demand.
When talking with prospective customers, Chan stresses two main factors: infrastructure and aggregation points of service. Providers like ViaWest offer a significantly stronger and more secure hosting infrastructure than a company could afford to purchase on their own, and spreads the cost over several thousand customers. Customers can choose from a variety of services to meet their needs. This might cause a shift in self-hosting trends, says Zeiler of VPI.Net.
"Companies are starting to see that firewalls, DSL providers, and I.T. departments don't always mix," Zeiler says. "A managed services provider or Web hosting firm that is professional and reputable can represent their interests at a fraction of the cost. Computers, e-mail clients, and Web browsers are easier to install, more stable, and the education of the enduser has become something that is much more acceptable over the telephone."
Zeiler says the ROI for self-hosting depends on the size of the firm, the speed and stability of its connection, and the overall knowledge of the I.T. department.
"Many SMEs feel that the time to outsource again is now, and that the ROI is in their favor to have a manageable fixed cost each year," Zeiler says.
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