A new breed of services providers can off-load IT headaches by delivering outsourced business services or processes via the Web. An industry shakeout may help streamline delivery of these services, which are forecast to approach $500 billion in revenue by 2005.
By Garry Kranz
Most IT managers are probably familiar with the acronym ASP, for application service provider. The term emerged in the late 1990s to describe companies that hosted suites of software applications, which businesses could access via the Web for a lease or rental fee.
IT managers, however, may not be as familiar with the term xSP, lately coined to describe companies that deliver a range of other Web-based services, including infrastructure, storage, security, and network management. As in the New Math, the 'X' stands for a variable (the SP stands for "service provider"). The term xSP is commonly used in the vendor community, although users have only recently become familiar with it. "The common denominator of an xSP," said Laurie McCabe, an analyst with Summit Strategies in Boston, Mass., "includes delivering some level of services over the Web. This can include everything from access services to basic horizontal-type solution services such as backup, security, virus protection, etc., that help with specific business functions or processes."
Aside from ASPs, companies lumped under the xSP label include network service providers, managed service providers, Internet service providers,
According to International Data Corp. of Framingham, Mass., the xSP business model includes services that are:
- Delivered via a network
- Always externally managed
- Standardized for many customers, as opposed to customized for individual ones
- Generating revenue through service fees using standardized pricing
IDC forecasts worldwide revenues from xSPs will reach $499 billion in 2005 -- nearly five times the $106 billion generated in 2000.
Laurie Seymour, manager of IDC's xSP research program, said the industry will see a rash of consolidation and a general shakeout in 2002. Although this ultimately may serve IT firms well by streamlining service delivery and moderating costs, the shakeout is still taking place and the dust is far from settled. "My personal opinion is that we're going to start seeing a lot of partnerships this year as service providers and suppliers try and figure out the best way to offer the solutions to the customers who are interested in them."
One of the keystones will be convincing large telecommunications companies, which own the infrastructure that enables business networks, and large computing companies, which provide the networking equipment and services, to work in concert. Seymour said "little crops of twos and threes," including telecom companies, network equipment providers, systems vendors, and professional services companies, will begin examining partnerships this year to find ways all of them could make money by delivering Web-based services. "Now that these companies have all been stuffed into the same sandbox, they're trying to figure out how to collectively build the sand castle without destroying it or having to rebuild it 15 times," she said.
The future of the market likely will include more deals similar to those inked by IBM Global Services and AT&T in 2000. IBM bought co-location services from AT&T as part of an expansion of its Web-hosting facilities. The two giants also joined forces to sell a range of Web-based hosting services to small and midsize companies. This type of arrangement, which would have been previously unthinkable, could become more common, according to Tardelli.
Rather than various Web-based services being consolidated under a single umbrella by deep-pocketed corporations, McCabe said a lot of different services companies will carve out xSP niches. "In terms of proliferation of services, I don't think we're going to see (the xSP industry) narrowed down to just a couple of companies. But what I hope will happen is that some of these big distributors, who understand this market, will get involved and make it less confusing for users to navigate."
Why IT should care
IT departments have got to be "up to speed on managed services because they are being considered more and more, especially by the line of business (managers) and CFOs, as a quicker, more cost-effective, lower risk alternative," said McCabe.
Training also may become an issue. "IT people have a certain methodology for evaluating internal solutions. Large companies, especially, probably will need a methodology for appraising hosted solutions and their impact on the enterprise," added McCabe.
Cost should not be the sole determining factor in whether to contract with an xSP, Tardelli said. "I think it would be wrong to look at outsourced services as a low-cost option. It should be looked at as (providing) stable, consistent service, better quality, and more of an internal focus on what you're company should be doing, rather than getting sidetracked by the headaches of managing a server."
Choosing a partner
When weighing options, Seymour said IT managers should go with a company and/or a product with which they are familiar. You may not want to contract with an xSP expert in 20-seat implementations if yours is a 5,000-seat organization, for example.
Second, test the prospective xSP by grilling them on their "exit strategies and panic buttons," especially regarding data protection and security. What is the failsafe in the event the service provider goes belly-up? "The best thing would be that they have a relationship with another equal vendor that says that, for whatever reason something happens to the xSP, your data goes through a prearranged process so it's protected and you have access to it" without delay, interruption or security concerns, Seymour suggested.
Tardelli pointed out that xSPs define themselves by providing very specific outsourced services, as opposed to offering all-in-one packages. It's important to choose an xSP whose services are aligned with your specific business objectives. "It comes down to how comfortable you are with your service provider. That's a gut feel, because every service provider will tell you all the great things they can do. But are they backing it up with the right language and the right methodologies?"
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This was first published in March 2002