A new term has recently come to the fore - xSP - where the 'x'
refers to any type of Service Provider. How can xSPs be defined in
the increasingly complex IT market in a way that aids the
understanding of potential customers? Butler Group's Maxine Holt
reviews the definition of xSP and explains the rise of one
particular type of xSP, Managed Service Providers (MSPs)
Introduction
The difficulty of defining the wide variety of Application Service
Providers (ASPs) has been apparent for some time now, and most
users are recognising the move towards xSP - defined as any type of
Service Provider. This industry is increasing on a daily basis - at
Butler Group we have been talking about ASPs for some time now and
there are others such as Managed Service Providers (MSPs), Storage
Service Providers (SSPs), and Enterprise Service Providers (ESPs).
In this Concept Paper, we have elected to discuss the up-and-coming
xSP term. We will also be looking at one of the major elements of
the xSP scene; that of infrastructure support providers, commonly
referred to as MSPs. These manage all or part of the infrastructure
of a business and provide associated Service Level Agreements
(SLAs) to the customer organisation.
xSP
The term xSP is not used to provide a definition, but more to
outline an industry area. It is more than simply a matter of
stating "an xSP is"; it is a whole (and sizeable) market comprising
differentiated players in terms of the services provided. It is
fair to say that all of these players would charge for their
services on a per usage- or seat-based model, and that a
one-to-many delivery method is standard. It could be argued that
there are a number of other factors that should come into the
equation, such as delivery over the Web, although at Butler Group
we have found this not always to be the case. Some
 | | "For less than $10,000 per month
one large company utilised an MSP that offered remote management,
plus a response and fix service" | | | | | |
| | Source: Butler Group | | |
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xSPs will deliver their services through leased line.
The boundaries between the various xSPs can be indistinct, as
frequently one cannot exist without the other. For example, ASPs
utilise Hosting Service Providers (HSPs) and Internet Service
Providers (ISPs) to deliver the applications. To assist the
marketplace and increase the potential of gaining customers, these
various providers must make it clear exactly where they fit in the
xSP chain, as part of the entire delivery.
It appears that the xSP business model is going to achieve greater
market acceptance than its ASP forebears. This is possibly because
the market is much more defined and understands what it can
deliver. Partnerships are more important than ever - players are
able to deliver more flexible solutions.
Taking ASP as an example, the value chain could, at one extreme,
become an intricate network of providers delivering solutions via
pure-play ASPs.
In this paradigm it is possible for different organisations to be
involved at every stage of the value chain. The ASP need not host
the application, run the help desk, or even do the billing; other
dedicated Service Providers can undertake these tasks in line with
an SLA. This allows the ASP to provide the end-customer with access
to a variety of applications, which are in turn provided from a
range of hosting companies. A host may provide a range of
applications for a variety of ASPs. Of course, it is entirely
feasible that there will be more elements to this as the market
evolves and customers accept, or decline, these models. This is
indicative of the importance of partnerships in the xSP arena.
The original outsourcing concept of the early 1990s has added value
through the location of equipment off the customer site (in most
cases). By having a centrally managed service, the xSP is able to
deliver the service to the customer more efficiently and
cost-effectively. This is achieved by utilising a centralised pool
of skilled IT personnel, expertise in a specific area and better
relationships with partners and suppliers.
The customer realises the benefits of utilising third parties
through being able to concentrate on its core competencies - which
is not always delivering IT. Furthermore, benefit is gained through
two financial avenues - the real cost savings and the improvements
to the company's bottom line. The first considers the cost of
purchasing/developing and maintaining an equivalent service
in-house compared to sourcing outside the organisation. The second
is where the net effect of having such a service is an increase to
the company's bottom-line profits.
At Butler Group, we expect the xSP market to partially follow the
same pattern as ASP in terms of consolidation, industry mergers and
failures. However, the ASP market promised a lot more than it could
initially deliver and was hyped out of all proportion. We expect
many of these xSPs to have learned the lessons demonstrated by the
ASP market. As such they will not promise unrealistic services and
results, not only to specific customers but also to the business
world at large. With common sense being brought into the equation,
there is more realism for customers (but still a little of the
marketing hype) to enable them to make an informed decision on
using an xSP.
Of course, xSPs will not be the best choice for every business.
Security is still a big concern, be it over access to data or
corporate applications. Customers do not want any part of their
network to be accessed by intruders, and although 80% of security
breaches occur in-house, external hackers and viruses are
considered to be a major threat. This is where the breakdown of xSP
can be very useful to customers. Companies in the Finance, Banking,
and Insurance (FBI) sector are extremely reluctant to use third
parties to store their data or deliver applications (SSPs and ASPs
respectively). However, these companies are becoming more confident
in MSPs, who do not actually take anything away from the customer
except the management of its infrastructure. Undoubtedly there will
be cases for utilising the different xSPs in different vertical and
horizontal sectors.
Another concern is reliability - external companies are perceived
by some customers as being unlikely to place the same emphasis on
service delivery as their in-house counterparts would. Butler Group
believes this to be untrue; the xSP would lose business if it did
not deliver, and market share and profitability are its main
business drivers. Additionally, the SLA is becoming part and parcel
of the contract between customer and service provider, and this SLA
will include performance and availability (and consequently
reliability) guarantees. If these agreements are not met, the SLA
would include clauses to recompense the customer.
Customers are more interested in the SLA from the point of view of
guaranteed availability, although they view punitive damages as an
incentive for the xSP.
Today, xSPs will be suitable for some companies, and as the market
and technology matures, more companies will find themselves able to
use this model. Current examples of utilisation include individual
projects in large organisations, and also businesses that have used
xSPs for non-core functionality. Today, outsourcing is generally
not taking place where the service is business-critical, loss of
control is a major concern, or savings in excess of 5% are not
achievable. It is not wise to jump into using third-party providers
because of the short-term gain; long-term loss could be the
outcome. As such, going through the usual business-case process is
important to ensure this does not happen.
One thing that xSPs agree on is that in the vast majority of cases,
it is not possible for a customer to simply make an overnight
switch to using a service provider, particularly where e-business
is involved. Use of business processes is vital to ensure success,
and this needs to be thoroughly analysed before any transfer takes
place. We expect that the current business processes would be
tailored to fit the new processes (if a change is required) in
advance of implementation. This is an area that many potential
customers are not aware of and the xSPs must make it clear at the
outset.
Overall, xSPs present a new way forward for the IT industry to
support the needs of business. The economic slowdown in the US is
filtering across to Europe and it is becoming increasingly
necessary to focus on costs and how they can be reduced. In many
cases, xSPs offer an opportunity for the Total Cost of Ownership
(TCO) to be reduced, and this is something which Butler Group
expects to drive the industry.
Managed Service Providers (MSPs)
Managed Service Provision is a fast-growing industry, providing
system (and possibly application) management as a hosted or
remotely managed service. Even MSPs can be split into further
sub-categories according to the services they supply, such as
e-business, enterprise, and desktop MSPs. However, for the purposes
of this Concept Paper we will look at the group as a whole.
Why is infrastructure so important? Many companies have survived,
and even thrived, on delivering and managing their own IT
infrastructure. Butler Group regards the advances that Internet
technology have given business as all-important - no longer is it
simply sufficient to have a Website, an online catalogue and an
e-mail contact system. The technology available allows companies
(mainly large and enterprise-class to date) to use the Web to
reconstruct their business processes, and a number are grasping
this opportunity. The infrastructure that is in place, and the
availability of that infrastructure, is vital to ensure these
Web-based processes will be successful.
There are three significant levels an organisation needs to have in
place to use the Web to reconstruct its business. These are:
Infrastructure- The hardware and basic software,
plus location and maintenance. Examples include the Web server and
database server, as well as any security deployed.
Applications - Software and services, such as content
management, transaction engines and customer support.
Integration- Taking existing business processes,
such as applications, sales and supply, and drawing them together
via the Web.
MSPs are designed to address the various components of the
Infrastructure level. Examples include the hosting of the service,
the various server types involved, and any load-balancing and
caching requirements. The one thing which is apparent from this is
that infrastructure is becoming more of a minefield as company
emphasis moves towards e-business. It is increasingly difficult for
businesses to provide the necessary infrastructure and support
in-house, not least because of the complexity of the requirements
coupled with the lack of availability of appropriately skilled
staff.
MSPs recognised this gap in the marketplace and have rapidly moved
to fill it. As we said earlier, there is still some hype in the xSP
market - we consider it is vital that xSPs, specifically MSPs, can
deliver on the promises made. Without this delivery the market will
become even more sceptical and could take a long time to turn
around. As previously stated, MSPs can be defined in various
sub-categories, and because of this the services offered by each
one must be clearly defined and deliverable.
When MSPs are managing a company's infrastructure, this increases
the availability and reliability to the business, and its
customers, in a number of ways. By monitoring any potential
problems, these can often be fixed proactively before any impact is
felt. If a system does fail, then speedy recognition of the
problem, coupled with either the MSP fixing the problem itself, or
targeting the appropriate administrator to fix it, ensures the
system is back up and running as soon as possible. When e-business
and/or the infrastructure is vital to a company's success, then
constant availability and continuous reliability become equally
important.
Additionally, if such a management solution were to be implemented
and deployed in-house, it would require either 24-hour surveillance
by skilled IT professionals or the installation of an automated
system that pages the appropriate administrator to fix any
problems. The former is obviously expensive: skilled IT staff are
costly and difficult to obtain. The latter is a system that could
break down, thus not achieving the desired results of high
availability and reliability.
Furthermore, an in-house management solution is expensive to
purchase. Network monitoring tools, such as Unicenter from CA, and
Tivoli, must be bought and installed, and in-house expertise is
required to run them. A number of MSPs use these (and other)
management tools on a one-to-many basis and consequently can
deliver this as a service at a lower cost. The expertise lies with
the MSP, and its skilled staff can be used to manage multiple
customers, therefore lowering the cost.
Of course, not every MSP uses such network management tools; many
have built their own. These use the Simple Network Management
Protocol (SNMP), often require fewer overhauls of a customer's
systems and can be implemented extremely quickly. The argument for
using proprietary solutions is strengthened by the fact that
commercially available management applications are not suitable for
use over the Web. The case for this remains to be proven; many of
these commercial applications are in use already, with successful
results.
One configuration which we are increasingly seeing is the model
where a server is located on the customer's site to capture
information. As such, if the link between the MSP and its customer
fails for any reason, the data is still being collected. Although
this does not allow for remote management, it does ensure that any
differences between the monitoring before and after the link failed
can be accessed by the MSP and appropriate action taken where
necessary.
Generally, if an organisation is considering outsourcing its
infrastructure, going through the service and associated SLA in
fine detail is vital. The SLA will contain information regarding a
number of different areas, and these are generally the same across
different MSPs. For example, the service level can be defined in
terms of monthly and/or annual availability, with any exclusions
specified. Also, any downtime is going to be tracked by the MSP,
and how this occurs should be stated in the SLA. There are many
other elements that go into the composition of an SLA and a number
of guides are available for both customers and xSPs.
Customers should, however, be aware of exclusion clauses. For
example, some MSPs will not remotely manage a system if the
customer can influence that management through access to the
system. Some other providers may not include certain hours of the
day or week as downtime, even if the system is unavailable. The
availability of a service will always be defined in the SLA.
Our research indicates that there is significant variation between
the allowable down time on what seem to be small variations on
performance levels. Of course, the customer will be charged more to
have a 99.99% guaranteed availability level than 99.9% and, as
such, it is a trade-off for the customer. For example, an
organisation is guaranteed an extra 39.42 minutes per month if it
chooses 99.99% availability over 99.9% availability. However, this
extra performance will cost more per month.
SLAs often include access to a help desk. Again, running a help
desk in-house can be expensive, and having front-line support from
an MSP, although not eliminating the need for an internal help
desk, will certainly reduce the staffing requirements. The methods
of contact are specified in the SLA, as are the response times,
resolution times and any escalation processes. At Butler Group, we
consider help desks to be a valuable addition to the service
offered.
By utilising an MSP the savings can be quite dramatic. One company,
with its headquarters in the US and satellite offices around the
world, required 24x7 availability of its network. To implement
in-house would have required approximately $1.5m (£1.07m) in
hardware, software and skilled personnel costs. For less than
$10,000 per month this same company utilised an MSP that offered
remote management and a response-and-fix service.
MSP Association - buyers guide
The MSP Association has
recently launched its "buyers' guide", and this is split at the
highest level between e-business and Enterprise MSP services. The
association's Website describes e-business solutions as supporting
"a company's transaction-intensive, Internet-based business
capabilities Web servers, storage and performance management".
Enterprise solutions are defined as supporting "a company's
internal IT-managed infrastructure desktops, servers, networks".
The association also makes a differentiation between self-service
and outsourcing. Self-service is where the monitoring is performed
by the MSP and the customer manages arising issues, whereas
outsourcing is when the MSP also resolves the issues.
Butler Group considers that although this is useful as a starting
point, the enterprise and its e-business operations are converging
more than ever. In the buyers' guide, five of the eight categories
(for example, network) appear on both the enterprise and e-business
list. However, upon using the guide and searching on both sides for
MSPs that can support servers on an outsourced model, there was
only a one-third crossover; that is, approximately one-third of the
MSPs that appeared on the e-business list also appeared on the
Enterprise list. This further emphasises the earlier point that
there are a number of ways of defining MSPs and the services they
offer.
An extension of this is that MSPs are likely to partner in order to
deliver the requirements of their customers. Butler Group is of the
opinion that this will be vital in order for these MSPs to achieve
what many of their customers will require in the near future.
It could be suggested that MSPs should expand their range of
services to cover as many eventualities as possible, but we would
not advocate such a move. This would reduce the specific expertise
inherent in an individual MSP and only the very largest players
could carry this off. The other side of the argument is that it is
likely that aggregation and consolidation could be a result of
customer requirements for multiple MSPs. Therefore, as customers
require more varied services, niche MSPs might suffer and
consequently be acquired by the larger players.
Conclusion
The xSP market is now becoming more defined
and looks to be here to stay. We still believe the ASP model to be
a viable business proposition, although this is likely to be only a
small part of the overall xSP market. Understanding has now been
built into the equation - that is, xSPs understand what they can
deliver, and the potential customers are beginning to understand
all aspects of using an xSP.
The benefits of the model include financial ones, and we consider
that many customers will seize upon the potential for an increase
in bottom-line profits. This is going to become increasingly
important as the world's largest economy, the United States,
suffers an economic downturn that is already rippling across to
Europe. Competition is extremely strong today as many customers
compete on a global basis, and any additional foothold that can be
gained will be grasped swiftly.
Of course, it is not only the large and enterprise class companies
that can benefit from xSPs. Many Small to Medium-size Enterprises
(SMEs) could also benefit, for example by using commodity
applications through an ASP, or Website hosting through an HSP.
There are many opportunities for a wide variety of businesses to
take advantage of this model.
However, Service Provision is not going to be suitable for every
company, and some companies may elect not to take advantage at all.
Companies in the FBI industry are noticeably reluctant to involve
third parties in the delivery of any part of their business as a
result of concerns over security and loss of control. Individual
businesses need to take stock of their individual circumstances
when considering committing part of their business to a Service
Provider. This should not take place as a one-off consideration,
but be revisited regularly as improvements are made.
MSPs are certainly one area of the xSP model that have seen
significant take-up in recent months. Part of this is because of
the advancement of e-business: no longer is the Web a separate
trading channel, it is now being used to conduct a company's
business. Therefore, any customer organisation with a reliance on
e-business could consider outsourcing the infrastructure support to
an MSP. At the same time, it is important to ensure that any MSP
selected can either provide, or work with another MSP to provide,
the necessary infrastructure management within the enterprise.
This leads us towards the final conclusion that xSP, as a whole, is
a combination of providers that will have to work together to
achieve the requirements of their customers. It is unlikely that
one type of Service Provider will survive without using others - we
have already demonstrated that ISPs are used by ASPs and are also
used by many other providers. Partnerships are an important part of
the IT industry, and vital for xSPs.