Outsourced Services Should Adopt Consultant Model

By Adam Eisner, theWHIR.com

May 17, 2002 -- (WEB HOST INDUSTRY REVIEW) -- Many challenges surround the complex Web hosting sector in the short-term, but industry participants can rest assured that long-term opportunities lie in wait.

According to a recent announcement made by Gartner, a leading IT strategic consulting services firm, up to 80 per cent of leading enterprises will include outsourcing in their business strategies by 2005.

Corporate America will continue to select IT outsourcing in order to cut costs while simultaneously expanding network services. Due to current economic uncertainty however, many Fortune 1000 companies will not immediately begin allocating operating budgets to new outsourcing opportunities until a turn-around in overall economic conditions is in sight. This will mean that only the best-operated firms, both large and small, will survive the slowdown.

There is ample evidence that many complex hosting firms are on the precipice of collapse due to a combination of unfavorable capital market conditions and poor long-term management. A long list of firms has already experienced market failure, including PSINet, Exodus Communications and 360Networks. Many other firms such as XO Communications and Globix have been battling to avoid bankruptcy. The key to profitability in the long-term for complex hosting companies will be to reshape financial guidance and service delivery so that they can survive the short-term in order to prosper in the future.

Frost & Sullivan, a consulting and training firm, said in a recent report that Web hosting companies must reposition themselves in the wake of the dot-com downturn in order to find new opportunities from traditional brick and mortar companies. This repositioning must include taking a new approach towards service provision. According to Gartner research, while the grand majority of leading enterprises will continue to outsource their technical infrastructure, many will opt not to select their current external service provider for the job. It must thus be the continuing priority of hosting providers to offer the best services, utilizing new delivery models, at a reasonable cost, while concomitantly adhering to a price structure that ensures profitability.

This new service model must be that of consultant. Service providers have been traditionally criticized for deploying solutions that are not reflexive of the needs of their clientele. Outsourced Web hosting will need to become more customized to the requirements of their recipients. If services are too simply provisioned, then they will be considered a simple commodity service, and will result in restrained profit margins. The consultant model can enhance profits by creating more revenue opportunities based on the concept of added service and value.

To reiterate Frost & Sullivan's outlook, Web hosting firms must make revenues and building a stable client base a top priority, in order to prime the industry for long-term growth.

While many hosting firms in the past have made tremendous investments in service infrastructure and towards capturing critical market share, such strategies cannot be adopted in the near term. Service providers must create ways to impart maximum value to the customer by developing, implementing, and successfully selling new value added services. According to Frost & Sullivan, the hosting industry generated revenues of $4.6 billion in 2001 and is projected to reach over $20 billion in 2008. Conceivably, the increased projected revenue will come from a bevy of new added-value services utilizing the consultant model. Hosting firms that perceive their products and services as a simple commodity based on extravagant infrastructure outlays will suffer the wrath of a constrained capital market and frustrated clientele, leading possibly to their failure.