Act Now to Secure Your Web Hosting Research Brief Abstract: The financial and corporate stability of your Web hosting provider is vital. But top-tier providers are not always the best choice to safeguard business continuity. Consider using a second supplier as a contingency.. By Michal Halama Recommendations Organizations using Web hosting services should: Re-evaluate contingency plans in case their Web hosting service provider fails. Develop a strategy that considers the risk of a service provider failing as a business as well as failing on part of a service-level agreement (SLA). Prioritize SLAs according to importance and treat any failure to meet them as a warning to activate their service provider contingency plans. Review your service provider critically and build a relationship with another provider to act as a backup. Ideally, this alternative will provide a complementary service in advance of problems. Evaluate the quality of the business and service relationship with the provider before changing to another just because of doubts about its financial stability. Be prepared to pay a fair price for the provider's services and pay on time. If you cannot afford to, you must accept some risk. Avoid treating Web hosting as a basic form of business continuity after a disaster, unless you only want basic business to continue. Treat any events that trigger warnings about a service provider to bondholders and other investors as a sign to consider setting aside the service provider contract. Publication Date: 10 July 2003
2 Act Now to Secure Your Web Hosting A Crowded Market Web hosting service providers backed by telecommunications companies invaded the market in Western Europe in the late 1990s. The operators hoped that hosting services would add revenue streams to core network business by increasing network use and customers' bandwidth requirements. Operators already had a broad customer base, so it was easy to attract business customers up the value chain to subscribe to hosting and application services. This enabled them to compete strongly with specialist Web hosting service providers, which lacked such broad customer bases. User organizations had good reason to consider these operator-backed players for hosting services. The operators were household names and, apparently, had reliable revenue from their other business areas, like network services, to help ensure financial and corporate stability. But the arrival of operator-backed Web hosting companies in a market where independent providers and system integrators like EDS and IBM were already competing meant there were too many players. Because demand for hosting services had not had time to fully develop, the market share for each player was meager. Operators' Financial Crises Shake User Confidence Then came the financial woes of KPNQwest, Cable & Wireless, Energis and others, which have shaken users' confidence in operating companies. System integrators have also experienced bad publicity, though to a lesser extent. This uncertainty has spilled into the Web hosting market in Western Europe, where many of the affected companies had Web hosting operations. Operator-backed Web hosting service providers created much of the marketing push and awareness of Web hosting, using revenue from other operations. This benefited independent providers and system integrators, many of which did not have such financial resources. Now, uncertainty about the financial health of telecom operators has badly affected user organizations' confidence in the Web hosting market. Chapter 11 "The Weakness Protection Scheme" From the users' perspective, if a service provider is under bankruptcy protection Chapter 11 in the United States or in administration or other status in Europe, this gives them a short opportunity to evaluate the provider's position and implement a contingency plan while still receiving service. When a service provider is in financial trouble, someone has to pay for it. Users face the real risk they will be let down, but when the provider goes into Chapter 11 protection and administration, it is the investors that will be hit financially. Users should not relax completely, as company liquidation of service providers can be swift. They should make contingency arrangements with an alternative service provider and, depending on the stage of their existing service contract, or if contract terms have actually been breached by the service provider, perhaps change to a new provider. New plans should include a contingency against the failure of the new provider. Delayed Reaction User organizations were slow to react to the general uncertainty surrounding Web hosting service providers. Some did not understand how the providers' plight would affect them. Others were unsure what to do about it. Still others waited until their contracts came up for renewal before even considering their options. End-user organizations are now more proactive, evaluating alternative providers rather than simply renewing contracts with existing providers.
Many users will continue to react even once general uncertainty in the telecommunications sector has disappeared. Now that bad publicity has sown the seed of doubt, users are likely to plan to assess their provider at a certain point. But they will still fail to evaluate the provider's current market position or react flexibly to any changes. Organizations should make business decisions about their provider based on current market performance, not in reaction to other users' delayed responses. Those that plan to delay taking action should still monitor their existing provider, in case their situation changes. 3 Gartner Dataquest Perspective Some users of Web hosting services have started to shift their concerns from everyday technical issues to the possibility of their service provider failing as a business. While this rebalance of concerns is most evident when users are deciding what to buy, they should also frequently review the business performance of their provider. The level of concern varies according to how much users depend on the services provided. Those using Web hosting companies for colocation of servers will be less concerned about the service provider's longevity than those relying on a managed Web hosting service. "Gold Standard" Operators Not Necessarily the Best Many users have changed service provider, panicked by bad publicity. They tend to choose established companies, like former or incumbent telecom operators, rejecting specialist data center service providers and other operator-backed companies. While this strategy suits risk-averse users, it is not the only strategy. "Gold standard" operator-backed Web hosting service providers and system integrators can be expensive, especially in uncertain times. They charge more than independent competitors for like-for-like services, usually claiming to offer better quality. And they do not usually offer lower-value services like colocation other than as part of a wider services contract. Only users that are considered strategic accounts will have power to negotiate prices with such providers. Those without this influence are likely to be paying more than they need competitors can often supply the same quality and assurance of service. What Is a "Gold Standard" Operator? The term "gold standard" can be used to refer to large telecom operators (usually incumbents) and system integrators that are well established. Examples include BT and IBM. Such companies have the strength to remain in business despite adverse publicity. Users are attracted to them because they inspire confidence, being large and well known. But users should not assume that these companies will provide the best services. But operator-backed or system integrator Web hosting service providers have not exploited the situation by raising prices for several reasons: They have capacity that they are keen to utilize, competition still exists and the time lag in end-user organizations' reactions have not yet created localized excess demand that would enable players to successfully raise prices. Prices are, however, stabilizing after sharp falls in the past. Should excess demand materialize then telecom operators will exploit it by raising prices charged, probably disguising the price rises in new product packages. Gartner, however, does not expect excess demand to arise in the near term.
4 Act Now to Secure Your Web Hosting Assessing the Competition Even risk-averse users should investigate alternative service providers before choosing a more expensive gold standard operator. Though such operators are often a good choice for managed hosting services, many organizations will find that their competitors have a better fit of corporate cultures. There are also more tangible reasons for choosing a competitor. Prices charged by operators and systems integrators may be higher than those of some competitors with perfectly adequate financial and corporate stability. They can charge more because of their brands, but usually do not seek low-value shared and colocation business. Brands reassure users that are unwilling, or lack resources, to investigate competitors for a better deal. Organizations too small to be strategic accounts for former incumbents may be large enough to be a key account for another provider. But they should be wary of the provider's sturdiness while it is good to be treated well, users in small organizations should be warned if treated as vital. Users should not assume that top-tier or any other service providers will meet their basic hosting requirements in a basic solution. Many services may cost extra a wide portfolio range shows availability rather than inclusion. Technical issues like security are still of concern to users and they expect providers to solve them. However, providers will often charge extra for such services, so the actual basic service offering does not change. Web Hosting and Business Continuity Many users choose Web hosting believing their data and applications are totally safe. They believe this safety enables full recovery and business continuity after a disaster. Users are often shocked to learn that having bought a "safe" Web hosting solution, they need to buy extra services to make them "secure" and enable more than just basic business continuity. Key Criteria Used to Evaluate Web Hosting Services Gartner Dataquest recommends that all these criteria are considered when selecting a service provider, in addition to monitoring its financial and corporate stability. These criteria are also vital to users in their everyday use of services and for their planning. Pricing remains the most important evaluation criteria when choosing between services and service providers. Product portfolio and product strategy show the current choice and future flexibility that a provider offers. Sales and marketing material helps users to compare service providers' ability to continue offers and develop new services. Technology exploitation shows how effective and efficient these new and existing services will be. SLAs, penalties and upgrade options inform users of the performance level they can expect. Management and reporting strategy important to users auditing penalty payments and managing other services relying on Web hosting services. Where time and other resources allow, customers should attempt to negotiate on standard prices, SLAs and penalties before choosing a service provider or ruling out potential providers.
All the issues that ever concerned users of Web hosting services remain, but their relative importance is now rebalancing, with providers' financial and corporate stability becoming more of a concern. Users need to rethink which type of Web hosting provider or providers will really give the best service. Those that assume top-tier providers will allay all their concerns may find themselves needlessly out of pocket. Action for User Organizations Users can limit exposure to the risk of service providers' failure. Strategies range from assuming ownership of domain names to organizing a retainer relationship with a competing Web hosting company. One cost-effective safeguard is to select an alternative provider as a backup and test it by requesting a service that complements that of the existing provider. If data is mirrored by both, this will provide an extra layer of assurance and contribute to disaster recovery should one provider fail. This helps justify the extra expense but far more is required for a full disaster recovery service. The presence of a substitute service provider is likely to lead to improvements in product portfolio and other evaluation criteria. This will be at a price, but with service providers suffering, buyers are in a good negotiating position. But users should beware of driving such a hard bargain that they damage the provider's financial stability. Most organizations should negotiate shorter contracts, though major companies prefer longer-term contracts to avoid repeated negotiation costs and ensure stability. To avoid being locked into a long-term relationship with an unstable provider, major clients should agree on clauses allowing them to cancel or renegotiate the contract in certain cases. Examples include if the service provider is taken over, debt-to-equity ratio rises above specified levels or the number of customers or revenue-to-debt ratio falling below fixed levels. Any events that trigger warnings to bondholders and other investors should also provide large organizations with the right to set aside a service provider contract. Action for Web Hosting Service Providers Web hosting service providers should take this shift of emphasis by buyers into account when developing their products and pricing. Lower-tier providers can improve their chance of being chosen as part of a contingency plan by developing products that complement those of the top players. They should reflect the shift in user emphasis and persuade customers of the benefits they can offer to complement top-tier players' services. Not only are users fearful of losing data because of their own facilities are inadequate, they are also concerned they will lose data if they have not bought all a provider's security options. Key Issue How will the worldwide public services market develop, and which forces will drive market growth and future opportunities? 5
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