Older Wiser And Winning ASPs

"People were pointing to a handful of the big names as the 800-pound gorillas that were going to gobble up everyone else within a couple years, and it freaked us out," Delunthal explains. "As a small, private VAR operation, we just didn't think we had enough size or scale to compete with a lot of the big names out there."

Fast-forward more than three years: Many of those big ASPs are dead or bankrupt, and the ASP industry is a fraction of itself. Fairfield, Conn.-based Connect Computer, however, is still here. Not only that, Delunthal says his company's hosting business, which now represents half of Connect Computer's revenue, grew a remarkable 100 percent last year. "We were a private, lean and mean firm, and our cost structure was superior," Delunthal says. "We were able to outlast a lot of start-ups that were in debt to the venture capitalists."

It's not just Connect Computer, either. A number of VARs has seen its once-small or nonexistent managed-services business bloom in the past year by combining application-hosting and outsourcing with existing offerings in the SMB market. Now the older guys are succeeding in an area that was deemed best-suited for hot start-ups and titans like EDS and Hewlett-Packard. Here's how they're doing it.

Dynamic Diversity

To get an idea of how much the outsourcing market has changed, witness the number of solution providers that has increased businesses in that market. VARBusiness' 2002 State of the Market study showed that just 11 percent of solution providers surveyed marked outsourcing as one of its top three core businesses. However, the 2003 SOM research shows that 39 percent of solution providers offers outsourcing or managed services for customers' IT functions. In addition, nearly half of VARs with annual revenue of $10 million or more provide outsourcing or hosting services, thanks to the increasing need for enterprises to cut costs and focus on core businesses instead of IT management.

Perhaps the biggest advantage for solution providers looking to increase their share of the outsourcing and managed-services market is their diversity; having other core competencies and established client lists have proven most valuable for older VARs looking for new revenue in the outsourcing game. In many cases, these solution providers started in the late '80s or early '90s and grew out of traditional reselling operations or IT integration. Connect Computer, for example, had a sizeable network-integration business before the company decided to branch out into server-based computing solutions and, eventually, outsourcing. Years later, Delunthal still does network-building to supplement his company. "If outsourcing were all we had today, it would be tough to be successful," he says. "We had a longtime customer that, after we completed their network upgrades and integration, said, 'Take my network, please!' So that business has helped drive the outsourcing."

This leads to the next point: Additional practices give solution providers an advantage by offering an installed base of customers. "Most of our customers have come from our existing businesses in infrastructure and application development," says Jennifer Horrocks, president and CEO of Vis.align, a solution provider based in West Chester, Pa., which offers managed services and help-desk outsourcing. "Today we usually do managed-services and application-development projects for the same customers because they like to have one solution provider," Horrocks says.

Likewise, Alvaka Networks, which was founded in 1982, originally began as a computer VAR and then molded into a network-integration company. Today, however, the vast majority of Alvaka's revenue comes from professional services and managed-services contracts. "Most of the pure-play MSPs have gone out of business, but now a lot of integrators and IT consultants that have been around for a while are getting into managed services," says Oli Thordarson, president of Alvaka Networks. "A lot of those guys, even the small 15-person shops, have proven management and good customer relationships, and that's more valuable than venture-capital dollars."

Financial Focus

After making the decision to start a managed-services practice in 1999, Connect Computer spent two years "scraping together capital," Delunthal says, and methodically planned not only how to go to market, but how to financially support the new business. While having a diverse set of offerings helped Connect Computer, the solution provider also benefited from a very conservative operational spending and a cautiousness to jump into the market full force. "We decided to grow the business slowly and build expertise over a couple years before really spending a lot of effort going to market," Delunthal says.

After a hosting or outsourcing business is started, another obstacle is the high-cost data centers. Peter Ayedun, president of IntelliSuite, an ASP based in Schaumburg, Ill., believes most small VARs and solution providers should stay away from investing in building their own data centers. "We chose not to waste our money there and instead partnered with AT&T," Ayedun says. "[Data centers] are expensive, and it's easier for us to manage customers remotely. Besides, clients would much rather have on-site data centers than visit my little shop all the way out in Schaumburg."

Solution providers also can take advantage of server-based computing tools to make their remote-management jobs much easier. Citrix's MetaFrame has become a favorite in ASP and outsourcing circles, as has SoftGrid, Boston-based ISV Softricity's flagship product, which complements Citrix environments by automating application upgrades and installations. Both IntelliSuite and Connect Computer use Citrix and Softricity technology to power their operations.

"We didn't see a lot of ASPs or hosting companies coming to us a year ago, but we're getting a lot of VARs that want to build out their managed-services offering and want to use SoftGrid," says David Greschler, co-founder and vice president of Softricity.

Sharp Skills

Many ASP and hosting start-ups made the common mistake of trying to do too much. There's a fine line between hosting applications and remotely managing e-mail servers, as many failed managed-service providers discovered. "People confuse applications and data, and it's a fundamental error," Greschler says. "Media like XML, JPEG files and video are held to standards, but no two CRM applications are the same."

Even when solution providers decide to focus on application-hosting, like IntelliSuite, there are many integration obstacles. Ayedun says the common temptation is for ASPs to focus on the breed of application, such as e-business software or ERP; it's better to concentrate on one or two ISVs or a common software architecture, he points out. IntelliSuite keeps it simple by partnering around Microsoft and specializing in Microsoft applications and common Windows-based software. "There's an enormous risk in trying to be an expert in everything," he says. "You can't do it."

Developing expertise in a specialized area also can benefit managed-services providers. Vis.align, for example, constructed an "organizational effectiveness" practice within its outsourcing business, which focuses on clients going through operational transitions, such as mergers, acquisitions and downsizing. In addition to focusing on the IT-integration aspects of

its customer projects, Vis.align's OE practice also features business-consulting metrics and frameworks to help clients reduce cost, more effectively measure employees and better manage internal operations through transition periods.

Catching Clients

Solution providers need a hook to get outsourcing or hosting contracts, and these days many solution providers are attacking the midmarket with compelling pricing and cost-effective contracts. For example, IntelliSuite focuses on small and midsize businesses that cannot afford to manage complex applications; it approaches customers by offering them flexibility with their IT investments. "We can always cancel or scale back a service for a customer," IntelliSuite's Ayedun says. "But when customers invest in a bunch of servers and application licenses and data centers, they're stuck with all of it whether they really need it or not."

The SMB market is a sweet spot for smaller VARs looking to provide outsourcing services. "We've done well in the SMB space because those customers just can't spend a lot of time on IT. They need to off-load that burden," Delunthal says.

Even in the SMB space, solution providers can find large and lucrative services jobs for hosting or managed services. Vis.align has much of its business in the midsize market, but most of its customers average between 2,500 and 5,000 desktops or systems, which makes for not-so-small engagements.

For its part, Vis.align has renewed 100 percent of its managed-services contracts during the past two years. Part of the magic for the solution provider, Horrocks says, is that the company offers customizable contracts and pricing instead of a cookie-cutter approach, which rarely goes over well in the SMB market. Because Vis.align often works with clients undergoing some kind of internal transition, whether it be a merger or downsizing, it became necessary for the solution provider to offer short, flexible contracts that can be restructured on the fly. In some cases, that ends up to be costly for Vis.align. But Horrocks doesn't mind. "We had a utility customer that was going through a merger, and the company unexpectedly had to restructure its managed-services contract. It may have cost us some services fees in the short term, but we kept the customer, and we'll probably keep it for a long time," Horrocks says. "We go after some deals that even EDS and IBM are now going after, but we can offer those midmarket customers that kind of flexibility, and that gives us a big edge."