E-FM: tonic or treadmill?

E-business outsourcing is still in its infancy and realising its potential is proving unpredictable, writes Julia Vowler

E-business outsourcing is still in its infancy and realising its potential is proving unpredictable, writes Julia Vowler

What happens when you take a mature, successful phenomenon, well understood by users and suppliers, and couple it with an immature, high-risk venture, not well understood by either group? Will the offspring display hybrid vigour or mutant non-viability?

In the case of coupling the mature IT outsourcing industry to the immature electronic business industry, the answer is still to surface.

It isn't surprising that users are considering outsourcing their e-business delivery, given the question marks hanging over this challenge: How to do it well? How to do it at all? Why do it and, above all, how to make money out of it?

By doing so, users ring-fence their risk, reduce the capital cost of launching into e-business and fast-forward their companies into the white-water e-market.

With e-experience of any kind, even on the IT side, let alone the marketing and business side, at a premium - from development skills through security issues through server and bandwidth capacity planning - it's understandable that users are desperately seeking anyone who's at least one page ahead of them in the e-business manual.

That is certainly the argument used by Richard Archer, managing director of Computacenter's e-business outsourcing division, the iGroup. The iGroup is running insurer Direct Line's new e-business venture, the Jamjar motoring site. Huge enough to require an initial 13 Sun Solaris servers, Jamjar is a non-trivial set-up.

Archer says, "Direct Line needed it up and available fast, and they had to be able to guarantee very high availability and the people to support it. It was better to do it by outsourcing because of the demand for [e-business] skills.

"Maximising [hardware] utilisation, load balancing and building security were also problems we took away from them. They just had to put their application on the top," Archer adds.

Because outsourcers run e-business for more than one company, the argument is that their e-business learning curve both on designing the appropriate technical architecture and the operational reality of running a live site is inevitably considerably faster than for any one company dipping their toes in this enticing but shark-infested market.

Archer also argues that the e-business outsourcer can also act as a conduit for a useful exchange of knowledge between clicks-and-mortar ventures and dotcom ventures, each of which will come to the Web with vastly different, but possibly mutually beneficial, outlooks.

Learning curve

The learning curve argument also applies to the operational nitty-gritty of e-business. By using performance monitoring software across their client sites, the outsourcer can start to accumulate the currently extremely scarce metrics on key indices such as processor utilisation and site response times.

"We're using BMC software to monitor sites and gather performance statistics on things like disc speed and database performance - that's part of the service we can offer," says Archer.

Once the reasons that determine site performance are well understood, e-business outsourcers and Web-hosters can start to provide more sophisticated service level agreements than most are currently prepared to do. Right now, most only sign up to guarenteeing connectivity to the site - but users want more from an e-business outsourcer. They want the kind of performance guarantees they can get when they outsource traditional IT - but the problem is that no one can guarantee what they don't know.

Archer also points out that the drive to more comprehensive service level agreements will push e-business outsourcers back from mere Web-hosting into Web application development.

"There needs to be very tight linking between the application and the service provider," points out Archer, for example by designing in more scalability into the software. "Web developers don't sufficiently take on board the performance aspects of the software."

"If we find that an application needs more mips [millions of instructions per second] to make it go faster, then that has to be in the infrastructure plan," Archer argues.

E-business users can take advantage of traditional outsourcing aspects - the price and availability of on-the-ground support and maintenance, and leveraging the outsourcers' purchasing power, for both hardware and, of particular relevance to e-business, telecoms tariffs. The iGroup, for example, claims it is the first to offer users guaranteed bandwidth to ensure customer access to the site, but only charges for what the site uses in practice.

Finally, at a time when even the major corporations, such as the Royal Bank of Scotland, Direct Line's owner, are ring-fencing their e-business ventures - either to insulate their core business from potentially dangerous exposure to the e-market, or, more conspicuously, in order to float off a successful e-business spin-off for loads of IPO cash - outsourcing can reduce the capital cost of entry to the market. For the new breed of dotcoms, especially in the wake of the stock-market reality check, this can be a significant factor, says Archer.

"To build a really heavy duty, robust e-business, you're looking at the thick end of a million pounds," he warns. "If you do it for half a million you'll struggle."

That means, he argues, that "providing lease financing, rental deals and monthly service [charges] so you do not need to make a capital outlay can be compelling for a new dotcom - it's getting much tougher to find cheap cash for start-ups, so dotcoms are looking much harder at their up-front costs".

So, does this mean outsourcing your corporate e-business is a no-brainer?

Not so, warns Robert Morgan, managing director of outsourcing consultants, Morgan Chambers.

"The e-side of outsourcing is full of danger and caveats," Morgan says. "It's one of the fraughtest issues in outsourcing - a smoke and mirrors game is being played in the market."

The fundamental problem, says Morgan's director of consulting, Philip Morris, is that there are two levels of immaturity exacerbating each other. E-business is immature, and outsourcing e-business is even more immature. Everyone, but everyone, is feeling their way in the dark.

And it is precisely because e-business itself is immature that suppliers trying to form the e-business outsourcing market are having difficulty devising a stable offering - or even any offering at all. Until costs and profitability of e-business are understood, those of the outsourcers - which inevitably feed off the former - cannot be ascertained either.

As e-business gets under way, the key characteristic displayed so far, says Morris is its unpredictability.

"The business requirement point of view for e-business demands far, far more flexibility than ordinary business ventures - it needs to be able to flex massively up and down," he says.

Sites may take off or they may bomb. They may even be victims of their own success, as the platform collapses under unexpectedly high usage.

"The need for commercial and technical flexibility creates an additional danger for e-business outsourcers," says Morris.

It's the opposite of outsourcing the corporate datacentre - where the cost is known down to the minutest detail - a very mature business model with very low risk for outsourcers. Capacity planning and costing in e-business are, as yet, imprecise quantities.

Moreover, Morris points out, there is a similarly fundamental difference between e-business ventures that are merely providing a Web-based channel to an existing market, and those that are creating an entirely new business beast - the risk profiles on each, both for the user and the outsourcer, will be quite different.

Manoeuvres

With e-business ringing up dollar signs in the eyes of people worldwide, it isn't surprising the IT supplier community is trying to position itself in respect of the potential that e-business outsourcing undoubtedly portends.

The manoeuvres, says Morris, fall into three categories. To begin with, the big four consultancies, one of which is KPMG, are busy putting together working partnerships with companies like Compaq, in sectors such as offering a business to business service. Be warned, says Morris - these partnerships are not in it for the long term.

"Their objective is to construct themselves, trade successfully then float successfully. It would worry me that they want immediate gain [out of the outsourcing business]," he observes.

Then there are the vanilla flavoured Web-hosters - traditional box-based facilities management, says Morris - and thirdly the Internet service providers that are getting into offering management services.

"These type of bureaux have been around for decades - now they are offering Web skills," he says.

How are the traditional big outsourcers reacting to e-business? Some, like IBM, says Morris, are taking a limited risk position and concentrating on providing e-business consultancy and products. Other majors, he says, are, putting it bluntly, running scared. Their lawyers are warning them of the dangers of absorbing risk in this sector.

"Outsourcers are very risk averse," asserts Morris. "They like [evidence of] assets and historic turnover, they don't like explosion/ implosion type business."

The key message for IT directors considering outsourcing their new e-business ventures is, says Morris, that there is no obvious route to take yet.

"There's not a mature outsourcing supplier marketplace - a lot of the partnerships are woven [together] by necessity," he points out.

Some are put together merely to respond to an incoming bid, or they are still out scouring for their first customer. That might mean there are good prices to be had as alpha sites, but being a guinea pig for an eager supplier is not for the fainthearted - especially if your main purpose is to provide pre-flotation revenue for the supplier.

Whatever you do, urges Morris, insist that the contract is flexible - very flexible. "Don't buy a fixed solution," he warns.

You also have to have a clear understanding of what kind of e-business you are launching - an extra channel or a completely new business. The difference will affect both your real risk exposure and your tolerance to it, into which the outsourcing question has to be inserted.

One extra caveat: if you are outsourcing your non-e-business IT, the impact of adding an e-business channel may be to reduce demand on existing channels - which may reduce your need for capacity to support it. You may therefore need more flexibility in outsourcing contracts outside the e-business venture but which may be affected by the e-business venture.

One phenomenon Morris is noticing that he says is unique to e-business, is the growing involvement of the venture capital community funding dotcom start-ups. They want to check out launch and running costs of their ventures - including outsourcing. "I've never seen that happen before in IT," says Morris.

Only when the supplier has a direct financial interest in the success of the venture will he be sufficiently motivated to give of his best.

But perhaps, in these pioneering days of e-business, it's also salutary to remember that risk cuts both ways. With the huge financial volatility of dotcoms, it can be risky for the outsourcer to sign them up as customers.

"The risk [to us] is certainly high in some areas - we don't overcommit ourselves or leave ourselves exposed to too many intangibles," agrees Archer. "In the worst case we can always rebuild the application layer and operating system environment to use it for someone else."

Pros and cons of outsourcing e-business

Pros:

  • E-business is risky, outsourcing reduces risk (in principle)

  • Outsourcing reduces capital investment required for e-business entry

  • Outsourcing cuts the time to the e-market

  • When all e-business experience is thin on the ground, outsourcers with several clients will know more than you

  • Outsourcers with multiple clients can have better Web performance statistics than you

  • Outsourcers can amortise the cost of scarce e-business skills over several clients

  • Outsourcers can juggle bulk-bought telecoms bandwidth more flexibly than you

    Cons:

  • The e-business outsourcing market is extremely immature

  • Outsourcers may not know much more about e-business than you after all

  • Traditional outsourcers are being very cautious about getting involved in e-business - they're still working out the risks

  • Some suppliers are putting together "instant partnerships" to catch the e-business wave, but they may be looking for a quick, profitable exit once they have your custom

  • E-business outsourcing is basic Web-hosting

  • Right now, you won't get much in the way of service level agreements from outsourcers - they're not committing to much except guaranteed connectivity, rather than guaranteed performance levels

  • Outsourcers traditionally make their money when you change the scenario - e-business is inherently changeable at the moment, so unless your contract reflects that you could be stiffed on the deltas

  • Outsourcing contracts are traditionally difficult to set up and manage - in an unknown area like e-business this is triply so

  • Outsourcers may consider you too financially risky to take on.

  • Read more on Business applications

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