Strengths

Outsourced managed hosting makes sense for many companies who want more than basic, no-frills services but do not have the expertise and resources – or the strategic need - to do it themselves in-house. Managed hosting companies can leverage economies of scale to provide services at a price which will continue to make selective outsourcing an attractive proposition for many organisations.

The increased need for IT departments to be accountable means that the savings enabled by managed hosting cannot be ignored either in boom years or economic downturns.

Managed hosting companies are benefiting from the consolidation and standardisation of technologies which makes it easier for providers to keep their operating costs down whilst still being able to cater for the requirements of most businesses.

The managed hosting market is benefiting from increased spending on e-commerce and internet-related services. This trend is the consequence of changes in customer behaviour brought about by the all-pervasive nature of the internet and the increased penetration of broadband.

Vendors generally offer a suite of services, enabling them to offer customers the chance to take as much or as little as they want. This means that the customer can enter into the relationship on a gradual basis, without having to run the risk of outsourcing everything at the same time.

The market is highly competitive which means that providers have to provide an excellent service or run the risk of losing their customers – and their best employees.

Weaknesses

The largest companies - with the biggest IT budgets - will often prefer to do the job in-house rather than outsourcing managed hosting services.

While mid and large-sized companies are a fruitful market for managed services providers, smaller business will often be unwilling to pay for anything much more than a commoditised service. Smaller organisations may find that many managed hosting providers are prohibitively expensive.

Whilst outsourcing represents an opportunity to cut costs, businesses may be reluctant to change the status quo of in-house management of services because of internal political and perceived technological barriers.

An internet service provider offering services around a single network can be vulnerable in the event of a major failure. Malicious third party attacks can jeopardise the services of even a larger ISP.

In their quest to achieve economies of scale, some hosting companies will find it hard to address the specific needs of all their customers in unusual circumstances.

From the customers’ point of view, it is ultimately they who will suffer more than a provider if services fail. Providers will rarely compensate companies for lost revenue in the event of a system failure or sub-optimal service. Although service credits are offered by providers in the event of shortfalls in service delivery, these will rarely make up for the impact on a business if something goes seriously wrong. On the plus side, the best managed hosting companies are increasingly winning the confidence of businesses through their increased ability to deliver.

Opportunities

The commoditisation of basic hosting services due to falling prices of bandwidth and rack space means that providers have been forced to find new ways of adding value and standing out from the crowd.

Some managed hosting companies have chosen to focus on a particular area of technology, such as open source or Microsoft, which gives them an opportunity for differentiation in the marketplace.

Whilst the very biggest companies may choose not to outsource to a managed hosting specialist, there is a large swathe of high value customers who will continue to find these services both appealing and compelling. Managed hosting providers can offer expertise and systems which the IT giants such as IBM and EDS may not be able to offer at a competitive price to companies outside the blue-chip bracket.

Managed hosting companies are increasingly working in partnership with the major IT providers, providing them with potentially lucrative partnerships and an additional source of revenue.

Vendors have the opportunity to cross-sell and up-sell to existing customers if they are able to build confidence in the quality and reliability of their services.

Managed Hosting companies can grow with their customers by building long-term strategic relationships. For example, if their clients expand geographically either regionally or globally, then the provider has the opportunity to win that business and grow accordingly.

The utility model is set to become more widespread within the UK as customers recognise the financial advantages of paying for the services they consume, rather than developing infrastructures which are rarely fully utilised.

Threats

The major IT providers, who offer managed hosting as part of a much wider portfolio, are a threat to managed hosting specialists because they often have an all-encompassing relationship with their customers which puts them in a better position to win high-end business. Systems integrators and hardware resellers are adding to the competition in this space.

As with any outsourced service, the major threat to the business model is if companies decide to develop the same skills in-house, in this case employing their own technicians to manage their network connection and servers. Providers must therefore continue to develop their value proposition to ensure that outsourcing continues to be the best option.

There are many hosting companies who claim to offer managed hosting when, in reality, they offering nothing more than a commoditised service. There is nothing wrong with a no-frills, low-cost service because this is what many customers want. However, it reflects badly on established managed hosting players when less credible companies give the market a bad name by failing to deliver.

Some vendors are over-burdening their power supply by cramming in too many servers into their data centres. Customers need to be aware that some providers may be taking more risks than others.

Some potential customers do not see the advantages of best-of-breed managed hosting because they have not yet experienced the repercussions of doing things “on the cheap”. Similarly, existing customers may wonder whether continued investment is worthwhile because they are living in blissful ignorance of what would happen if they had a poor service which went wrong. As with spending in security, it is sometimes hard to see a tangible ROI from the money you are spending.

While on-demand services make sense on paper, many companies are inherently conservative with internal political barriers and a legacy infrastructure which stand in the way of the take-up of these services.

Businesses which try to sell a broad suite of managed services simultaneously may struggle because it is easier for a customer to make a decision to outsource a specific and well-defined aspect of their business. The challenge for providers is in identifying the decision makers within an organisation.