Hosted Services And Great Expectations

July 18, 2011 Dan Burger

For 10 or more years, we’ve been hearing how hosted or managed services, software as a service, and cloud computing is sweeping across the business landscape picking up customers like a Hoover sucks up dirt. But what is “the dirt” here? In the IBM i user community quite a few ISVs offer shared computing models. But it doesn’t seem like the world is beating a path to the managed services door.

Not long ago, I read a survey-based article that indicated one out of every four small to midsize companies are using cloud services. The article forecasted that one out of two SMB companies would be using cloud services very soon. Really? I would be very surprised to know that anything close to this is occurring in the IBM i community, which, by the way, is comprised of approximately 95 percent SMB companies. Just another obvious sign that IBM i users are Neanderthals, the outsiders would say. And I would say those statistics are loaded dice. If it looks like it’s too good to be true, it probably is.

Best I can tell, there’s a demand for shared computing models in the IBM i community that exceeds what existed five years ago, but it’s nothing like the runaway train that is described in survey results that I believe are purposely manipulated. Reports that hosted services are being adopted right and left are overblown. And small to midsize companies running core business applications on IBM i are not the last folks to jump off the turnip truck.

The topic of hosted services came up in a conversation I had with Doug Fulmer a few weeks ago. That majority of that conversation led to an article titled Winners and Users: IBM’s ISV and SMB Choices, which appeared in the June 27 issue of The Four Hundred. Fulmer’s insights and opinions about hosted services fit in with my topic for today. In case you don’t know Fulmer, he worked for IBM for many years, a span that stretches from before the introduction of the AS/400 until 2006. He knows the platform well: the AS/400, iSeries, System i, the IBM i independent software vendors (ISVs), and business partner (reseller channel). He’s an old-school man of the IT world. His knowledge of the small to midsize companies that run IBM hardware and use third-party software is based on petaflops of first-hand experience.

As we talked about IBM i users that don’t make it into the enterprise category, the viability of hosted services was run up the flagpole. Is that market a fertile ground for hosted services or not? We started with the smallest of the SMB companies.

To begin with, the IBM i users with the fewest employees might have one IT person designated as a system operator. They are just about as likely to have no one. They have a business computer they probably refer to as an AS/400 (or colloquially, “The Four Hundred,” and hence the name of this newsletter) and it runs without much intervention. If their system operator is good, he or she handles ERP software upgrades, OS upgrades, and pays attention to PTF updates. If not, the company knows who to call for help with those things. It’s only a guess, but possibly 50 percent of the SMB companies using an OS/400 or i platform fit into this category.

These companies are the ones that would most like to use hosted services. There’s only one glitch: They can’t afford it. From Fulmer’s perspective, these companies already have lean IT budgets. There’s little or no fat to trim. It seems unlikely that any provider can offer a service at a price that is an incentive for the buyer, or the seller for that matter. So roughly half the IBM i SMB are unlikely candidates. The one thing that could change this is volume. Gather enough of these companies into an amalgamation, and then there is some buying power . . . and some interest from the hosted services vendor community.

After subtracting the smallest companies in the SMB, the remaining half can be split more or less evenly with one side setting hosted services budget limitations at approximately $2,000 per month and the other half willing to spend up to approximately $4,000 per month. Obviously these are rounded-off estimations, but they are based on Fulmer’s numerous encounters in this field speaking with IBM i users specifically about hosted services.

Back when the terminology for vendors offering these services was referred to as application service providing (ASP), the two big roadblocks that arose were cost (of course) and trust (not surprising). If a hosted service provider can cut costs by 50 percent, that’s when an IBM i shop starts to show interest. A provider can’t offer that kind of savings when a customer is thinking of a price point around $500 per month, Fulmer says. Providers would need a boatload of customers to make that a profitable endeavor. A few vendors might be able to string together enough customers–particularly those with a sizeable existing customer base–to make this price point work for them, but helping the customer save 50 percent on hardware and/or software expenses seems unlikely.

The comfort issue–turning data over to a third-party vendor–is not insurmountable. One example of a software company with a successful managed services business that has the trust of its customers is the banking software provider Jack Henry & Associates. Jack Henry, in conjunction with its business partner Vision Solutions, hosts business continuity solutions (electronic vaulting for data backup) for small and midsize banks and credit unions.

Other vendors are having success in the field of hosted disaster recovery as well. They include Vault400, Data Storage Corp, i365, Vision Solutions and Maxava. The successes of these hosted services vendors stand out in the IBM i community and may ultimately pave the way for other managed services to follow. Apparently the backup and recovery aspect of IT, which traditionally has depended on tape and the time required to do tape backups, is a big enough pain point for companies. For some, the advantages in terms of cost and convenience are already there.

On the cost consideration side of the decision, even a $2,000 monthly budget is not likely to buy any companies their freedom from IT. By that I mean a complete outsourcing of IT: no hardware or software to buy and maintain. And at this point, there’s little indication that companies are looking for that, unless it comes at a price point that really makes their eyes light up.

It’s more likely that hosted services will come in bits and pieces. Some small companies that can’t afford to buy the hardware and the software licensing for an ERP solution might turn to a vendor that can provide a data center and an ERP solution with a menu of functionality that can be tailored to business needs and budget. This is more or less the approach used by ERP companies such as Infor and VAI with a business model that works for them and their SMB customer.

This business model, however, has been in play long enough to create more excitement than what we’ve seen. Do you blame price points or is the reluctance tied to a fear of letting go of proprietary data?

Competition is always good for more favorable pricing, so with more vendors getting into this line of work there’s that potential. In the hosted backup and recovery field there is plenty of competition, which may be one of the reasons that niche is doing better than any other.

Fulmer suggests a hosted provider arrangement with potential could play out with smaller IBM i resellers that are bound by geographic territories forming partnerships that give them the potential customer base that could make hosted services a more workable business plan for them. In this scenario they would share a data center and work with software vendors on package deals that could serve customers.

I think a lot of this is the ASP model that didn’t make it the first time around. But times have changed (technologically speaking), the name of the game (ASP) has changed, and the mindset of some CEOs has changed (a wounded economy can do that) as well. When more companies in the SMB space start making decisions that $4,000 per month dedicated to hosted services is a wise choice, vendors are going to counter with some attractive services. Although the crossroads of customer service expectations and vendor business expectations have yet to be reached, this time hosted services is closer to becoming a serious option.