Hosted IT: It's Big for Small Business

by Drew Robb

Let someone else manage your applications, storage, backup or even your hardware infrastructure? It’s a major trend in the small-business world.

A few years ago, small businesses began trusting companies such as SalesForce.com and Mozy.com with basic tools for contact management or data backup. By letting the service provider host the hardware and software on its premises, companies freed themselves from the necessity of buying all their own gear, finding a space for it, powering and cooling it and employing the staff to maintain or operate it.

As this trend accelerates, even more sophisticated applications are on offer through this hosting approach. Further, the hosting providers themselves – many of them firmly in the SMB category – are beginning to host some of their non-core functions with other providers. The hosting practice has even extended as far as having hardware resources on tap – just like buying electricity, water or gas from a utility,

Take the case of Kaseya, a provider of IT automation software headquartered in the British Isles. Its customers initially had to operate physical servers on their premises to run Kaseya applications. After considering short- and long-term infrastructure requirements, Kaseya decided against further beefing up its hardware. To make it easier to harness its software, the company partnered with Florida-based Terremark, which takes care of the IT infrastructure demands on a hosted basis.

“In the case where the infrastructure requirements are not overly predictable and you require flexibility, hosting is a viable solution,” said McMullen. “It lets you gain access to the latest technology as you need it without the upfront capital costs and significant resource pool to implement and sustain this infrastructure. Memory, storage and CPU power upgrades are so much easier, and there aren’t any hardware failures.”

In other words, Terremark owns and operates the hardware resources and Kaseya makes use of them on an as-needed basis.

“This provides the ability to use some of the functionality running in a Kaseya data center for a monthly fee,” said Tim McMullen, C00 of Kaseya. “Customers can have a perpetual licensed version running in a Kaseya data center.”

Hosting Trends

AMI-Partners has conducted extensive research on hosting trends. Over the past three years, small business adoption of hosted services has been growing at a fast pace. 

“Hosting among small businesses (1 to 99 employees) moved from 13 percent adoption in 2006 to 25 percent in 2008,” said Avinash Arun of AMI. “In medium businesses (100 to 999 employees) adoption of hosted services grew from 21 percent in 2006 to 41percent in 2008.”

He attributes the main reasons for this growth to the fact that a large proportion of SMBs do not have full time in-house IT staff. But there are other factors at work, too. By shifting the onus of application implementation and ongoing support to the vendor, SMBs can avail themselves of round-the-clock support.

Further, SMBs can scale adoption rates up or down based on available budget. If they want to begin with only a few seats to see how it goes, that’s easy to arrange. Once they have confidence, it is a relatively simple matter to add more users.

Another reason is more efficient management of the IT infrastructure. Joe in accounting, or a lone IT guy, may be a jewel to treasure when it comes to fixing computer glitches. But with new functions, applications or even servers and storage offloaded to an outside provider, it typically means less downtime, more reliability and the convenience of automatic upgrades. The money side can also be attractive.

“Hosting enables payments to be stretched rather than front-loaded,” said Arun. “Most importantly, the current economic environment favors hosted services.”

Meanwhile, the use of hosting services among small business is evolving and maturing. While basic services such as e-mail, Web site and data backup prevailed in the past, we’re moving into an era of more sophisticated hosted business software applications such as enterprise resource planning (ERP), customer relationship management (CRM), accounting/financials and Business Intelligence (BI). There’s also an increase in adoption of hosted collaborative solutions such as document management, Web conferencing and project management, according to Arun.  

Interestingly, the sweet spot for hosting appears to be in companies with more than 100 employees but less than 250.

“Smaller firms with fewer than 20 employees usually don’t have the resources (no Internet, cash flow) or the need to deploy hosted services,” said Arun. “We also see the numbers dip slightly once the employee size reaches more than 200/250 employees, since these firms have the IT staff and the knowledge to keep things in-house. In addition, larger firms are more cautious of data residing off-site and are more prone to compliance issues.”

Staying with Hosting

With so many SMBs having tested the hosting waters, you’d think you could find plenty of companies with tales of woe who had gone online for some application and lived to regret it. Yet few seem to have gone back to running their own hardware and software.

“I have not seen anyone implement or start to implement a hosted approach, run into problems, and then abandon those efforts,” said Chip Nickolett, a consultant with Wisconsin-based Comprehensive Consulting Solutions.

What he has experienced, however, are SMBs that abandon this approach during the initial analysis. Concerns about security, for example, are a common reason for companies backing off from hosting. Perhaps they are worried about ownership, access or encryption of sensitive data, or there are problems with regards to audit trails.  Other deal breakers are reliability and availability. Businesses with very high performance needs, for instance, may not be able to find good enough service-level guarantees.

“The fear, uncertainty and doubt around those issues have been enough to cause many SMBs to sit back and let the early adopters identify and address those types of problems,” said Nickolett.

Anyone considering hosting, therefore, would do well to observe certain best practices.

Service Level Agreements (SLAs)

Careful scrutiny of service level agreements from hosting providers is a must. SLAs are an insurance policy and the hosting company should make it easy to understand its SLA.

“Your hosting provider should put its money where its mouth is in the event you might experience any issues, such as downtime,” said Lew Moorman, Chief Strategy Officer at Rackspace, a Texas-based IT hosting provider. “And don’t agree to a hosting provider’s SLA if you can’t understand it.”

Generalize Don’t Specialize

SMBs should offload commonplace software applications and infrastructure as opposed to attempting to find a hosting provider for specialty applications or gear. E-mail, storage and collaboration tools, for instance, are ideal candidates.

“Companies with highly specialized infrastructure that is not a commonly supported platform may be better off doing it themselves,” said David Cottingham, senior director of hosting and managed services, at CDW. “But even in those situations, it may make sense to have a provider take care of critical business applications such as messaging and off-site storage.”

Conduct a Complete Cost Analysis

Hosting may look incredibly attractive upfront, but it merits a very close inspection of all costs involved over time. For example, data backup is often charged by the GB, as well as by device and server. Total expected costs per month over a three-year period and compare this to the cost of upgrading your existing gear. Don’t forget to take into account the personnel costs involved in maintaining software and hardware.

“If SMBs are comparing the monthly cost from the hosting provider to only a subset of the total expense associated with doing it themselves, it may not look like such a good deal,” said Cottingham. “Companies that have already made significant investment in facilities they are tied to long term, however, may also not be a good fit.”

Pay as You Go

The average small business typically has a server or two that run e-mail, fax and business applications. A little bigger than that and you often find a server closet stuffed with overheated, under-maintained, and poorly backed-up gear. For most companies, however, adopting the latest and greatest technology is out of the question. They just don’t have the money or resources.

“The appeal of the plug in, turn on, get IT service is compelling in an economy that forces companies to look away from capital acquisition in favor of off-balance sheet methods like leasing and the cloud pay-as-you-go model,” said John Webster, an analyst at Illuminata.

Drew Robb is a Los Angeles-based freelancer specializing in technology and engineering. Originally from Scotland, he graduated with a degree in geology from Glasgow's Strathclyde University. In recent years he has authored hundreds of articles as well as the book, Server Disk Management by CRC Press.

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This article was originally published on Wednesday Jun 24th 2009
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