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Outsourcing: Should It Stay Or Should It Go?

Companies are finding a host of reasons to offload bits of their E-business operations.

If Loudcloud’s recent fortunes are any indication, the MSP model has legs. “A hoster without a data center,” as consulting firm Gartner describes it, this high-profile start-up boasts Netscape co-founder Marc Andreessen as its co-founder. For that reason, perhaps, Loudcloud was one of the few technology companies to weather the chilly initial public offering market last March. Despite a less-than-dazzling stock price (it peaked at $7 a share in May and sank as low as $1.12 in September before climbing to the mid-$4s at press time), Loudcloud posted triple-digit year-over-year revenue growth for its two most recent quarters. By leveraging other companies’ data centers rather than buying its own, and offering up slick technology–its Opsware software can automatically commission servers, patch glitches, and more–the company, analysts say, has some strong cost advantages. As its net losses steadily decrease, Loudcloud believes it can not only turn a profit in 2003 but also become a major force in E-business. How major? “We aspire to be the next IBM,” says CEO Ben Horowitz.

In fact, the buzz around MSPs is so strong that some customers find it difficult to cut through the hype. Another Loudcloud client, USAToday.com, met with a variety of would-be outsourcing partners ranging from hosting companies to phone companies, all claiming to be in the MSP business. But Adriaan Bouten, vice president of IT for USAToday.com, soon found that “while everyone was trying to be an MSP, many of them wouldn’t put their service-level agreements behind their pitches.”

Loudcloud won the business last August, both because it agreed to rebate more than 100 percent of its service fees during downtimes and because its approach to E-business infrastructure was “about 90 percent” congruent with what USAToday.com already used.

Indeed, congruency can be a major factor in whether an MSP makes sense. “When you go to a hoster or an MSP, a lot of times you have to make a lot of concessions, because in order to be successful, they need to standardize their offerings,” says Gartner analyst Ted Chamberlin, who notes that this has been a common problem for his clients. “They may say, ‘We know your systems are sitting on a Linux box, but we think they need to be on Windows,’ because that’s what they’re using for everybody else.”

Standardization, however, allows for big savings on commodities like storage and bandwidth. Bouten, for example, says buying through Loudcloud saves him 50 percent on bandwidth costs. Standardization also creates flexibility: a hoster can increase a client’s capacity at a moment’s notice, while companies that handle E-business in-house usually carry extra capacity so they can add it when they need it, an approach that is not cost-effective.

E-business outsourcers also offer the advantages associated with other, more traditional forms of outsourcing: economies of scale and (in theory) qualified staff. “That means they can provide a tighter level of security than we could alone,” says Rob Hack, director of global information technology and infrastructure at Syracuse, New York-based Carrier Corp., a United Technologies company, “because they can spread the overhead across a number of clients.” Carrier signed on with Genuity Inc. five years ago and now has about 60 Web sites on more than 20 servers under Genuity’s care, including customer- and supplier-facing extranets. Using an MSP, says Hack, provides predictable service levels and response times in a secure network and computing environment that complements site-level and back-end security.

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