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SaaS, cloud computing lead to cuts in application hosting pricing

Analysts expect application hosting pricing to decline due to cloud computing and SaaS, but not everyone will be able to renegotiate their contracts. Here's what's going on.

Application hosting pricing is expected to decrease by up to 20% over the next two years thanks to increased competition on a number of fronts, including the advent of cloud computing, as well as reduced provider expenses, according to Gartner Inc. But not everyone will be in a position to renegotiate their contracts and take advantage of the cuts.

Driving the price declines are a number of factors: the rise of new offerings, in particular infrastructure utility services for SAP and other packaged applications with lower price tags than application hosting service providers'; competition from on-demand or utility-like models such as Software as a Service (SaaS) and cloud computing; and lower infrastructure costs that providers are passing on to customers.

"I think [service providers] are almost waiting for clients to come beat them up, and that will drive prices down," said Ted Chamberlin, a research director at Gartner in Stamford, Conn., explaining how new service offerings and the recession will lead to contract renegotiations.

But Chamberlin cautioned that not all companies will be able to renegotiate with their application hosting providers, which range from traditional providers such as IBM, Computer Sciences Corp., NaviSite Inc. and Electronic Data Systems to telcos such as AT&T, which bought ASP USinternetworking, and niche providers such as SunGard and Secure-24 Inc., which specialize in SAP.

For one, most contracts have specific renegotiation time frames that can't be broken unless you already have clauses written into your contract for special circumstances such as price decreases of at least 10% for similar services in the market, or less-than-stellar service delivery, Chamberlin said.

Your ability to renegotiate will also be affected by the scope of the service and agreed-on cost base line, the service-level agreements (SLAs) and associated terms and conditions, the duration of the contract and penalties and benchmark clauses, Gartner said.

Chamberlin said users can build a business downturn clause into a contract to account for layoffs or the sale of a division so they don't have to continue paying for capacity for those users. But to realize a lower price, CIOs may have to make concessions, such as signing a longer contract, signing on for a broader scope of services or agreeing to lower SLAs or partial offshoring of the services, according to "Potential Impact of Economic Downturn on IT Infrastructure Outsourcing Prices," a Gartner survey.

The relationship the CIO has with the hosting provider will also factor in, such as having a weekly meeting with a dedicated account rep, as is the case for Louis Ventura, who said he has been able to reduce the price of his contract with NaviSite by up to 40% in the last four years.

Ventura, vice president and CIO of Champion Enterprises Inc., a $1 billion modular home and commercial building manufacturer with 4,000 employees, has progressively outsourced more services to NaviSite. For example, he added disaster recovery services in his last contract.

When Ventura joined Champion Enterprises, the Troy, Mich.-based company had about 25 to 30 plants running their own versions of ERP systems. He wanted to take all these systems and centralize them in a hosted environment.

Andover, Mass.-based NaviSite now hosts two flavors of Microsoft ERP for Champion Enterprises: Dynamics GP (formerly Great Plains) for accounting; and Dynamics NAV (formerly Navision) for manufacturing and ERP. NaviSite manages from the OS layer down, including patches and updates for the applications and user account controls, in addition to providing the underlying infrastructure.

"We've developed a great relationship with them and have been able to renegotiate aggressively … and that is based on there being a lot of competition out there such as cloud providers," Ventura said.

We've developed
a great relationship with [our hosting provider] and have been able to renegotiate aggressively … and that is based on there being a lot of competition
out there
such as cloud providers.

Louis Ventura
vice president and CIOChampion Enterprises Inc.

NaviSite is well aware that competitors such as SaaS and cloud providers are creeping into its territory, but vice president of hosting Mark Clayman disagrees that competitive pressures are forcing his company to chop its pricing.

"I'd be surprised if we looked back over the last few years and saw more than a 5% decrease in our pricing," Clayman said.

What is changing is how the application and managed service provider charges for its services.

NaviSite, which hosts Oracle's PeopleSoft, Siebel and JD Edwards as well as Microsoft Dynamics and Exchange, is testing more "SaaS-like," or utility pricing models, Clayman said. Before, customers typically signed a per-user contract for three years. A new model is to charge per user, per month over a three-year period.

"It is becoming more like a utility model, where there is no capex for hardware, no recurring maintenance fees and upgrades are built into the solution," he said.

Expect more of the traditional application hosting companies, also known as application outsourcing companies, to offer flexible pricing options as some of their service offerings become more like those of utility service providers. But a benefit of staying with application hosting providers is more customization.

"The concept of utilities is different from traditional sourcing. In fact, clients have to accept a standard without room for customization if they want to leverage the benefits [of a price reduction]," said Frank Ridder, a research director at Gartner.

Indeed, the deeper level of service that a provider gives you, the less chance you have for getting lower pricing.

"Generic vanilla offerings that can be done cheaper in the cloud versus with a hosting provider are coming down, but where [pricing] is not coming down is with managed services where you just don't have Exchange hosted, for example, but the provider does the integration work, some specialized security, hosts your application in three countries and archives data for you," said James Staten, an analyst at Cambridge, Mass.-based Forrester Research Inc.

Still, pricing in general is expected to come down. "The rising number of solutions will challenge especially the [application hosting] providers, which do not offer a utility alternative yet. This will in general drive down pricing," Ridder said.

Let us know what you think about the story; email: Christina Torode, Senior News Writer

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