The marketplace for hosting and managed services has changed dramatically in the last year. With high-profile bankruptcies and business line divestitures commonplace, many service providers found the challenging market dynamics too overwhelming. Their fundamental operating assumptions, overly optimistic demand expectations, excessive capital outlays, expansive service offerings and undisciplined operational processes were so flawed that failure was inevitable.

As a result, a shakeout in the hosting services market occurred, allowing only the strongest and the smartest to survive. But the market shakeout left many enterprise customers that were considering hosting and managed services to wonder if the potential benefits of outsourcing are offset by the risks of a service provider’s long-term ability to delivery on its promises.

Choosing the right partner becomes an exercise in risk mitigation for the enterprise. However, vendor assessment proves quite difficult in a competitive landscape that is littered with Chapter 11 filings and uniform marketing messages. Fortunately, some survivors are looking inward to build better business practices that learn from the failures of the past.

Such providers understand that a stable operating model - one dedicated to providing consistent, compelling service at a reasonable price and supported by scalable, efficient operations - is essential to the survival of the hosting proposition. The market’s tendency to throw excess resources - whether they be human beings, CPUs, or bandwidth - at inherent operational problems is no longer sustainable. Instead, these survivors rely on increasing task automation and resource utilization rates to allow operational scale and competitive pricing.

Likewise, today’s service providers rely on standardised solution portfolios (which focus on in-house expertise and enable the consistency of service quality) to replace the 'be-all-things-to-all-customers' approach that diluted service quality with undisciplined one-off projects.

Outsourcing the ongoing operation of an enterprise’s Internet applications has its advantages, such as lower total cost of ownership, access to best-of-breed resources, focus on core competencies and mitigation of growth and technology risks.

But these value propositions are realised only if the service provider business model is run properly. Therefore, enterprises convinced of the benefits of outsourcing must choose their partners wisely. In today’s uncertain hosting service market, potential customers should consider the commitment, operational efficiency, and stability of potential providers:

Commitment
Although the high-flying potential of the hosting market may have been tempered in recent years, remnants of the headier times still exist. Several years ago, companies ranging from hardware and software vendors to IT consultants and telecom providers raced to grab a slice of the hosting market, but many lacked the necessary expertise. In today’s market, businesses need to understand the legacy of a hosting provider, the source of its hosting knowledge, and its reasons for competing. Hosting providers that rely on organic expertise from years of experience are a safer bet than market newcomers that seek a channel for their own hardware, software, or network capacity.

Operational Efficiency
Just about any service provider can host a server, but can it provide hosting services 24×7×365? Can it provide these services without downtime 99.999% of the time? Can it provide these services for hundreds or thousands of customers, but make you feel like you are the only one? Can it provide these services while bringing costs down for you? For many hosting providers the answer is no.

However, some smart providers are working to ensure the long-term competitiveness of their offers. Research indicates three growing operational trends - standardization, automation, and modularization - that will drive the transformation of these services:

• Standardisation Leveraging resources and tasks over many customers drives the service provider business model. By productising the service offering and the platforms on which they run, the provider can focus better on its expertise. No longer will hosting providers 'yes' customers to death just to win business. Instead, providers will look to deliver service efficiently through defined products, repeatable procedures and highly disciplined execution.
• Automation Today, human beings perform too many IT management functions. The costs of excessive human intervention are a major reason for the failure of many providers. The costs are twofold: undisciplined processes lead to inconsistent service quality, and higher operational costs. For highly repetitive tasks, many service providers are developing ways to automate processes.
• Modularisation The potential downside of standardisation is a lack of flexibility regarding the services and products offered. To avoid this, smart providers are adopting a modular approach and standardising functional tasks rather than entire solutions. A modular construction of standardised building blocks helps the service provider up-sell and cross-sell new services to meet changing customer requirements. In this way, providers are actually gaining increased flexibility by staying modular, as they can react more quickly and more confidently to customers’ needs.

Customers need to understand if, and how, their provider is improving its operational environment. The answer will ultimately prove evident through the consistency of the provider’s services or the prices at which they are offered.

Stability
As the technology industry fell into turmoil, many buyers of hosting services opted for a 'flight to quality', choosing well-known brand names to shelter themselves from market uncertainty. However, even large global providers were far from insulated from the market disruption. Customers are advised to research how stable a potential hosting provider is likely to be before signing up - by referring to its financial statements if possible.