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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.

Staffing issues also drive outsourcing strategies. The “war on talent” continues to rage in technical areas, and even companies that create software for a living often lack the IT expertise needed to run E-business operations in-house. “Building applications is not the same thing as managing IT,” says Nicholas Zaldastani, senior vice president and chief marketing officer at Personic Inc., a Brisbane, California-based software firm that specializes in corporate recruiting and hiring. Personic acts as an ASP (application service provider), renting its software to clients. And it relies on MSP Digex to make sure the systems run properly.

The need to keep things running, in fact, motivates a move toward some form of E-business outsourcing far more often than the ability to actually cut costs. “I could have generated some savings out of our old approach without making the change to Loudcloud,” says Bouten, “but I couldn’t have achieved all that we needed to do, and there would have been more risk, since I didn’t have the right expertise on staff.”

Reliability plays a key role in measuring the ROI of outsourcing. At Carrier, “the analysis really boiled down to ‘what would the gross margin loss be if our sites were not available?’” says Hack. Given that the HVAC-products manufacturer draws about $1 billion worth of business through its Web sites and “there is no sympathy” from its user community for technical failures, the upgrade seemed essential.

While cost may not be a prime motivator, analysts say it is a buyer’s market, as the herd of mostly young, unproven MSPs fight to build market share. Monthly fees range from $30,000 to $70,000, with $10,000 a bare minimum. Loudcloud says its customers pay an average of $1.5 million annually, or $125,000 a month. Meanwhile, Chamberlin of Gartner expects prices for hosting services to rise from 10 percent to 20 percent annually over the next several years to meet profit pressure from Wall Street. “If your balance sheet allows it, and you’re Web-enabling some services, you’re in a prime position right now,” says Ovum’s Jacobson. “Next year you’ll have much less chance to negotiate the sweet deal you could today.”

The recent bankruptcies of hosting giant Exodus and ASP pioneer USi have raised doubts about some of the business models used by ASPs and MSPs. However, some analysts say that by establishing alliances with telecom firms (Loudcloud with Qwest, Digex with Worldcom, and Genuity with Verizon), questions about stability become moot. “It’s more a question of whether they will stand alone or be integrated into the partner,” says Andrew Schroepfer, president of Minneapolis-based Tier 1 Research. Either way, as companies increasingly rely on the Web, they will almost certainly come to rely on an expanding web of technology providers.

For Genuity, Flex Time

For a lesson in the appeal of the à la carte approach to E-business outsourcing, look no further than the recent fortunes of Loudcloud and Genuity. These two MSPs provide essentially the same services to large companies, yet Genuity’s revenue from these activities dropped 5 percent year-over-year (as of November), while Loudcloud’s rose 200 percent.

Analysts say flexibility is the differentiator. Loudcloud has long touted its ability to take on selected portions of E-business on various platforms, while Genuity has tried to steer clients to comprehensive integration. “A multinational company with 50 different business units that have their own Web sites and enterprise applications would have to move all of them to a single platform to sign up with Genuity,” explains Andrew Schroepfer, president of Tier 1 Research. Loudcloud, however, “would let a client outsource piece by piece, while working toward an integrated platform.”

Genuity has seen the light, says Schroepfer, and now offers a platform that can be purchased in smaller increments. A recently announced partnership with PricewaterhouseCoopers should help spread the new message, but ultimately the company’s best shot may be to merge back into Verizon, which spun Genuity off last year as a requirement of its merger with GTE. Verizon is currently applying for regulatory relief in order “to bring us back into the fold in some way, shape, or form,” says Joel Whitman, Genuity’s vice president for product marketing and Internet strategy.

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