Experts say outsourcing Web hosting is the smart way to go, yet every day more companies move hosting in-house. Are corporate control freaks making a big mistake? In this article, readers will learn What kind of companies benefit most from outsourcing Web hosting How to choose the best outsourcer The wrong reasons for keeping Web hosting in-house Marc Hansen, Vice President of systems architecture for J. Crew, has sat through hours of sales pitches from Internet service providers. Dozens of salespeople have marched into his Manhattan office and tried to persuade Hansen that their companies can run J. Crew's Web servers more reliably and more inexpensively than his own staff can. Those servers pull in tens of millions of dollars per year for the clothing retailer, and with so much at stake the decision of whether to outsource server maintenance, troubleshooting and operating system upgrades takes on enormous weight. And dizzying complexity.
Hansen currently contracts with Digex, a well-regarded national ISP, for Internet connectivity and the physical housing of server hardware, but he keeps his servers under his own roof and under the watchful eyes of his staff.
Although salespeople keep calling and Hansen keeps listening, he hasn't bitten.
At least not yet.
Many Internet decision makers are in Hansen's shoes. Now that Web servers have bottom-line importance, more companies are reluctant to let control of them get out of sight. A one-hour outage, for example, costs electronic commerce pioneer Dell Computer Corp. more than $US 125,000. According to "To Host or Not to Host?" a report by Forrester Research released in June 1998, 57 per cent of Fortune 1000 firms host their own Web servers. That's up from 33 per cent since 1996.
The odd thing about this apparent trend is that, according to many experts, it is moving in the wrong direction. David Cooperstein, the author of the Forrester report, believes that the skills and services offered by outsourcing firms are improving faster than those of in-house IS departments and will continue to do so. Even today, firms like GTE Internetworking and PSINet guarantee 99.5 per cent uptime with money-back guarantees, and Forrester predicts that by next year top hosting outsourcers will offer "telco-like" 99.99 per cent uptime guarantees. Cooperstein argues that in the interest of their own survival, full-service ISPs - those that offer Web server management along with connectivity - will master the latest version of, say, Open Market's Transact e-commerce application faster than the typical IS staff. If they don't, says Cooperstein, they will be eaten by the competition.
But should someone like Hansen, who presides over a mission-critical Web site, take a chance on an outsourcer today? Answering that question, today, is like trying to tell someone which style car to buy, compact or a sport utility vehicle. To some extent, it depends on your needs. And to some extent, it depends on your driving skills. Joseph Gagnon, a partner in Ernst & Young's centre of technology enablement based in New York City, agrees with Cooperstein that most companies are better off with outsourcing than with bringing yet another complicated function in-house.
"The bigger fish to fry over the next couple of years," says Gagnon, "is figuring out how to extend your enterprise applications. Let's go with your core competencies and leave this core competency to others." Gagnon says outsourcing makes particularly good sense for three kinds of companies. First, says Gagnon, are the companies that for reasons of size or budget are unable to attract the talent needed to host their Web activities in-house. Second, the consultant says, are companies that foresee a likelihood of rapid increase in Web traffic. "If you can predict that your transaction volumes are going to go through the roof and you don't want to deal with the capital costs of scaling up the hardware," says Gagnon, "then outsourcing is the likely alternative." Finally, says Gagnon, outsourcing makes sense for companies that require a 24/7 global presence. "The fact is," says Gagnon, "very few companies are really positioned to do that themselves." Paradoxically, however, relatively few companies are willing to surrender control of Web hosting. The most frequently cited reason in the Forrester study to self-host was a desire to have direct control of Web servers and the applications housed on them. Sixty-five percent of respondents said they wanted more control. Only 14 percent said they self-hosted to save money. It was that prospect of direct control that led Leif Johnston, president of Fredericksburg, Va.-based Resource Company, which develops Internet-accessible financial, payroll, time management and document-sharing applications, to bring his hosting in-house last fall. Johnston, former CIO for Internet services and developer Proxicom Inc., had outsourced his hosting to UUNet for several months, sharing an NT server with one other company. The $US 700 monthly fee, which included Internet connectivity and server management chores including software updates, didn't seem unreasonable, and Johnston believed that he was too busy developing his products and services to dedicate staff to server management. But after a nerve-wracking weekend last September, Johnston lost confidence in UUNet and outsourcing.
Johnston called UUNet's service centre around noon one Friday and told a customer service agent that he needed to update a client's application by noon on Saturday. Johnston says he told the agent that he would upload the data overnight. He claims that UUNet told him they could meet the deadline. When they didn't, Johnston spent two days soothing the nerves of a very unhappy customer. It wasn't until late Monday afternoon that Johnston's requests were fulfilled.
Paul Hoffmann, director of sales and marketing Web services for MCI WorldCom advanced networks, says that Johnston's request probably could have been honoured sooner if he had spent an extra $US 1,500 (for a total cost of $US 2,200 per month) for a dedicated server. Some types of application updates on NT servers require rebooting, Hoffmann explains. On a shared server, UUNet must wait until a reboot will least disturb the other clients hosted on the server, he says.
Ponying up that kind of extra cash for a dedicated Web server is often worth it, says Bill McCarthy, editor in chief of Boardwatch, a publication that tracks the ISP industry. McCarthy warns that sharing a server can impair speed and will make it harder to scale up for increased traffic.
McCarthy, who compares hosting outsourcers to used car salesmen, says Johnston's dissatisfaction with UUNet is typical of many who outsource hosting.
Much of that trouble, he says, could be avoided if the terms of the contracts were better understood. As things are, negotiating a service contract that meets one's particular needs can be exasperating because service offerings and pricing vary from outsourcer to outsourcer. That variety, which sometimes forces the customer to try to compare apples to oranges, is one of the things that persuaded J. Crew's Hansen that it's easier to keep the whole operation in-house.
"Pricing has been all over the map," says Hansen. "Some quotes have been in seven figures, others have been substantially less. I actually find some of the [low-ball] bids alarming because who knows what you're going to get?" Hansen says that some outsourcers even proposed the unusual strategy of collecting their fees based on a percentage of J. Crew's Web sales. More troubling to Hansen than inconsistent pricing plans were the wacky service guarantees. One provider said it would refund a day's worth of service charges if Hansen's servers went down for a day. Hansen nearly laughed out loud at the proposal. That refund, he says, wouldn't make a dent in lost sales.
For extremely high-end installations, such as those at Yahoo, ISPs charge up to $US 75,000 per month for the full range of hosting services. But does paying that kind of money guarantee top-quality service? Not necessarily, says Ernst & Young's Gagnon. Gagnon won't name names, but he says that some well-known IT and telecommunications services providers have gouged some of his clients. One client, for example, was quoted $US 3 million for a Web project.
When the bill came in at a jaw-dropping $US 9 million, the parties split the difference. Gagnon believes the overcharge was the result of the provider's incompetence in devising an estimate and plain greed. One common mistake, says Gagnon, is signing on with a vendor because of a previous business relationship. Web hosting is new and different, warns Gagnon, so it's important to make sure the ISP has the skills required.
Cooperstein offers another reason that explains why choosing a hosting outsourcer is one of the toughest decisions a corporation can make: ISPs all look alike. According to Boardwatch, there are now over 5,000 ISPs worldwide.
And they are definitely not all alike. Cooperstein says many companies' first exposure to hosting outsourcers was "either college hacks running Apache freeware or a design firm that set up a few servers in the cafeteria." Those mom and pop outfits were fine when companies wanted to post information, but they frequently can't cut it when companies - particularly large companies like a Dell or a J. Crew - have ambitious e-commerce agendas.
Choosing a hosting outsourcer - particularly when you want to outsource server management - requires some serious investigation. Because no ISP has a track record longer than four years, there is no long-term data on reliability, and there's no Good Housekeeping guide to Web server software management services. Experts recommend calling several references and asking the following questions: -How quickly do outsourcers respond to service requests? -How quickly and effectively have they fixed crashed servers, operating system bugs and other technical glitches? -If they promise to provide, say, sophisticated traffic analysis with some fancy new tracking application, have they actually delivered that service to others or are their technicians still struggling to learn the software? There are also some objective ways to evaluate ISPs. Some companies measure how long it takes to download a page from different locations around the country and even from overseas locations. Phil Gibson, director of interactive marketing for National Semiconductor, uses Keynote Systems Inc. to compare the performance of his site with performance of other sites especially of his competitors'. Keynote, based in San Mateo, Calif., measures Web page download times for about 400 major corporations from 65 locations around the world. This information gives Gibson some hard numbers with which to assess his outsourcer.
Inverse Network Technology Inc. also provides reports on how often users connect to a site on the first try, e-mail service quality and page download times.
One thing that must be considered by every company facing the outsourcing dilemma is the relative difficulty of integrating services offered on an outsourced Web site with their legacy systems. That consideration is the major obstacle standing between J. Crew's Hansen and his many outsourcing suitors.
A hosting outsourcer would have to be familiar with J. Crew's back-end systems to keep them harmonised with Web servers. That trick, Hansen says, is a lot tougher than it sounds, because most companies that were in business before anybody knew what "http" meant have old mainframe programs that track inventory, shipment status and other essential order fulfillment functions.
Those systems were either unique, home-grown or modified so much from their original package version that they might as well be home-grown. Hansen's staff would have to train an outsourcer on those systems, and Hansen is so far unpersuaded by cost and time estimates offered by vendors.
Hansen's caution is based partially on nightmarish tales of hastily assembled integrations. Lee Morgan, director of e-business for the IBM global services division, has been called in more than once at the 11th hour to bail out CIOs facing poorly planned Web front-end to back-end system integrations, a consequence, Morgan says, of executive demands without executive understanding of the complications of such integrations.
Unlike J. Crew, National Semiconductor's Web transactions follow an indirect route to its back-end systems. Consequently, outsourcing Web server management makes sense. National Semiconductor receives 98 percent of its orders via electronic data interchange (EDI) from middlemen. Customers first visit National Semiconductor's site for product specifications. They then place orders with middlemen that enter back-end order fulfillment systems via EDI, not from Web servers. So the outsourcer, Exodus Communications Inc. of Santa Clara, Calif., doesn't need any training on National Semiconductor's back-end systems to run its Web servers. That, says Phil Gibson, is good news in Silicon Valley.
"Out here, it's a firefight to hold on to technical people," he says.
Gibson won't say what he pays Exodus, but he will say that if his company self-hosted and provided its own Internet connectivity, the tab would "easily run $US 400,000 to $US 500,000 per site per year." The company has about 20 mirrored sites around the world, using another outsourcer, Digital Island Inc., for most overseas sites. Global reach, as mentioned by Gagnon, is another reason to outsource. Why negotiate for Internet connectivity with dozens of foreign telecommunications providers yourself when an outsourcer has already done it? When it comes to control, Gibson has an interesting opinion: "I have more control over the [Web site] with Exodus than I would with central IS." Gibson insists that that statement isn't a knock on his company's IS department. Their mission, he says, is to keep manufacturing and operations systems running smoothly. "It's important to our company that they stay focused on that," Gibson says. IS does have some Internet expertise, but for now at least the company doesn't see any advantage in bringing hosting in-house.
Like all smart Web decision makers, Gibson reevaluates his hosting arrangement at least once a year. Don't get locked into long-term deals, advises Ernst & Young's Gagnon. With the industry in flux, he says, next year's pitches and service quality are likely to be more enticing.
Both Gagnon and Cooperstein admit that some large Web merchants such as Dell and J. Crew have good reasons for self-hosting. But, they say, companies like those are exceptions. And their exceptional status may be short-lived.
Even J. Crew's Hansen hasn't ruled out outsourcing forever.
Which Host Has Most?
Why do it yourself?
Staff has expertise
You do high-volume electronic commerce
The service level agreement is inadequateThe price of outsourcing is too highAvailable outsourcer lacks experience in key technologiesWhy outsource?Internet technology is not a core competencyOffloading risk is importantAttractive service level guarantees are offeredYou need to scale up quicklyThe gain of 24/7 global presence is a benefitSenior Writer Peter Fabris can be reached at email@example.com.
Join the CIO Australia group on LinkedIn. The group is open to CIOs, IT Directors, COOs, CTOs and senior IT managers.