The Costs and Risks of Unmanaged Services

Factors to consider when procuring hosted solutions

While it is too early to measure and make accurate comparisons of whole-of-lifecycle costs, Hydrasight notes that current value assessments for online managed services are predominantly being made on capital acquisition and short-term operational costs.

Whole-oflifecycle costs are determined not only by the benefits of internet delivery and multi-tenancy applications, but also by the provider’s commitment to solutions over time.

Hydrasight observes that online service providers, outsourcers and consulting companies all continue to ‘market test’ customer demand rather than necessarily intending and committing to supporting hosted applications in the long term. These services often include collaboration tools, document and records management systems, content management environments and email archiving. While these are often less critical than transactional systems, the cost of change to these solutions when products or services are established – and later withdrawn – is considerable.

Moreover, the high cost is usually hidden in migration projects or others that fail to state the full impact (or dependence) on previous efforts.

Similar to source code held in escrow, hosted software solutions provide no guarantee of continued service. While escrow at least guarantees access to the code, hosted solutions do not provide this longer-term ‘insurance policy’. Though most cancellations of hosted offerings by service providers to date have included reasonable wind-up periods, Hydrasight believes these windows for migration efforts will shorten as hosted service providers aggressively acquire and merge through 2012.

Hydrasight believes IT organisations must therefore maintain their own historical data and experience, to provide an estimate of the likely whole-oflifecycle application costs, rather than rely on service providers and outsourcers to recommend, supply and measure the value of their own solutions. Those organisations that do will likely discover higher whole-of-lifecycle costs for both their on and off-premise solutions.

Hydrasight believes that these service providers, outsourcers and consulting companies who do not own or control the core software assets within their hosted software offerings, place their customers at a higher risk of increased support and forced migration costs over the software lifecycle. Moreover, and despite the ‘failure’ of application service providers during the early part of this decade, Hydrasight notes that outsourcers and service providers are increasingly offering clients hosted applications. This includes both systems integrators and consulting companies alike. These offerings are either based on open source code and marketed to organisations as ‘lowering risk’ due to their openness, or third-party commercial software. However, Hydrasight’s recent research shows that many offerings have been withdrawn or significantly scaled back within brief periods (often less than two years).

Hydrasight predicts that service providers who host their own software assets, and therefore have a greater dependency on them, will provide potentially lower viability risks for IT organisations.

Hosted solutions continue to be seen as attractive for vendors because they provide a low barrier to entry. However, they also provide a lower barrier to exit. Hydrasight therefore recommends organisations look to vendors that are both reliant upon hosting as a business model, as well as owning and managing their own intellectual property assets for that specific hosted solution. This does not, however, reduce the general risks of vendor viability, but we believe it will reduce the potential risks associated with managed service providers. It will also have a greater impact of wholeof- lifecycle costs for software assets. Furthermore, architectural alignment between on-premise and off-premise solutions will further reduce the risks. As an example, IBM is intending to provide managed hosting services for its Lotus Connections product later in 2008. If deployed as intended, this may reduce the risk of enterprise deployment over Microsoft’s hosted solutions that are expected to remain architecturally divergent from their on-premise product options (i.e. Microsoft’s Live and Online family of software services).

Hydrasight’s view is that architectural similarity, for hosted and on-premise solutions of the same product, represents a significantly lowered risk – even than for more popular services that may be seen by business sponsors as the default choice or de-facto standard due to media coverage or apparent market interest. Organisations must ensure they continue to consider a range of factors when procuring hosted solutions including the architectural alignment, vendor viability, depth of market knowledge and product support, as well as functional fit and integration requirements.

About the Author

Michael Warrilow is Managing Director of Hydrasight. He is also a global authority on enterprise management, having spent 15 years as practitioner, vendor and industry analyst for Woolworths, IBM and META Group respectively. Throughout his career Michael has been in constant demand by leading commercial and government organisations, both in Australia and globally.