Data Center Crossroads: Is Outsourcing the Next Step?

The Day of the Outsourcer

Still, analysts like Jeff Kaplan of THINKstrategies in Wellesley, Mass., believe managed services -- which he calls "out-tasking" -- are the wave of the future for midmarket companies. The catalyst can come from multiple angles: regulatory compliance, internal growth, mergers or acquisitions, spiraling Web site traffic, changing disaster recovery needs, even the loss of key personnel. "Out-tasking includes a variety of managed services, such as the storage function, the security function or the networking function," he explains. "Rather than putting yourself at risk, you parcel out bits of your data center, measure the outsourcer's success and incrementally give them more responsibility over time."

Midmarket Players
Here are some of the midmarket players that analysts and users identify for managed hosting services:
  • Everdream Corp., Fremont, Calif.
    Desktop management services
  • mindSHIFT Technologies Inc., Fairfax, Va.
    Managed technology services with a vertical focus in law firms, associations and professional services
  • CBE Technologies, Boston
    Managed IT services for small and midsized companies, schools, and government agencies
  • AimNet Solutions, Norwalk, Conn.
    A range of managed services
  • SAVVIS Inc., St. Louis, Mo.
    A range of managed services
  • Perimeter Internetworking, Milford, Conn.
    Managed network and security services
  • Rackspace Managed Hosting Ltd., San Antonio
    Managed Web and infrastructure hosting

New technologies in virtualization, remote monitoring and data center management are also multiplying the options available to midsized companies today. "Midmarket companies can have better visibility into what the service provider is doing," says Kaplan. "I'm seeing a lot of growth in managed services. The deals are getting smaller, and the time frames shorter. That means less risk."

There are unquestionably more outsourcing deals involving midmarket companies these days. And many have never outsourced before, says Richard Matlus, a vice president of research at Gartner Inc. "We're seeing more selective outsourcing, and along with that is multi-vendor outsourcing."

On the vendor front, there are the Big Six in outsourcing, which Summit Strategies in Boston identifies as IBM, EDS, Hewlett-Packard, Capgemini, Accenture and CSC, followed by a plethora of smaller players (see "Midmarket Players," at right). But midmarket companies are historically leery of striking deals with these providers. In a September 2005 survey of 179 customers at small to midsized companies, only 6% to 7% identified IBM or HP as "strategic vendors" in their outsourcing plans. The percentages shrank further for the remaining four. Even more telling, 21% of those surveyed by Summit Strategies said they would "prefer to avoid" EDS. Yet roughly one-third were willing to consider these major vendors "if the price was right."

Analysts don't track the size or number of deals with midsized companies yet, but everyone agrees that the market is growing. "Ten years ago, vendors weren't giving midmarket customers a second look," says John Madden, a practice director at Summit Strategies. "The vendors' goals were to rake in mega-deals, but now those kinds of deals are fewer at the enterprise level. The vendors all need to look at the midmarket as having greater potential growth." Just last month, IBM Business Consulting Services announced that it will sell services to small and midsized businesses through regional resellers.

Still, there are plenty of midsized providers ready to serve users with big-vendor aversion. To win business, they emphasize their solitary focus on the hosting business. "This is all we do: hosting Web sites, infrastructure and IT systems," says CTO John Engates of Rackspace Managed Hosting Ltd. in San Antonio. "We're not a phone company. We don't do development or consulting." The managed hosting provider -- itself a midsized company at $140 million in annual revenues -- competes for business against giants such as IBM, EDS and AT&T.

This was first published in April 2006

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