August 04, 2008, 3:40 PM — Jonathan Snyder's five-person team at Dreambuilder Investments LLC isn't your typical IT organization. Or is it?
The New York-based company, which buys and sells defaulted residential mortgages, uses Salesforce.com Inc.'s Force.com as its financial services platform. It backs up data using EMC Corp.'s hosted MozyPro service. Dreambuilder's server is hosted by RackForce Networks Inc. in Canada, and its e-mail is handled by Apptix Inc., a hosted exchange in Herndon, Va.
Granted, Dreambuilder Investments is a five-year-old company that lacks the IT infrastructure that a typical Fortune 1,000 enterprise has built up over decades. But as Chief Technology Officer Jonathan Snyder sees it, his firm's core business is mortgages, not server maintenance and disk backups. "If it's somebody else's core business to handle an Exchange server, let them do that," he says.
It's not just small to midsize businesses that are following Snyder's lead. By 2013, at least one-fifth of enterprise IT workloads will be managed in cloud computing environments, according to Mike West, an analyst at Saugatuck Technology Inc., a boutique consulting firm in Westport, Conn. He says that big companies are increasingly handing over their IT infrastructure activities to traditional IT services providers such as IBM, Hewlett-Packard Co. and even recent market entrants like Amazon.com Inc. and Boomi Inc. The goal is to lower their costs, access enhanced functionality, sidestep skilled-labor shortages and reduce their data center footprints.
Moreover, building or installing commoditized applications or IT infrastructure services that don't provide competitive advantage has produced diminishing returns over the past few years, says John Dutra, CTO at Sun IT, a division of Sun Microsystems Inc. that's preparing to launch a hosted computing platform for developers called Network.com.
Companies "are no longer going to buy technology artifacts, like ERP systems," predicts Thornton May, a Biddeford, Maine-based futurist and Computerworld columnist. Instead, he says, "they'll commit to a service."
Cloud computing -- the ability to store files and data on a remote network using the Internet (see our QuickStudy for more on cloud computing) -- provides benefits such as lowered infrastructure costs and enhanced speed to market. Studies have shown that it would cost some companies millions of dollars to set up their own virtualized server and storage environments, says West.
With hosted IT services, West says, "you don't have to buy the hardware and software; you just subscribe. There's not a lot of capital outlay. The attraction to that is huge."
Moreover, hosted services providers such as Google Inc. and Amazon are making pricing transparent. Google Apps (which includes e-mail, word processing, spreadsheets, presentations and calendaring) is priced at US$50 per user per year, says Matthew Glotzbach, Google's director of product management. Amazon says its Simple Storage Service (S3) is priced at 15 cents per gigabyte each month.
"We've removed so much of the friction by being transparent about prices and not having to have lengthy contracts and negotiations," says Adam Selipsky, vice president of product management and developer relations at Amazon Web Services in Seattle.
Although the bulk of Amazon Web Services' customers are small firms, it has also signed up big players such as The Nasdaq Stock Market LLC and The New York Times, says Selipsky. In fact, he says that adoption among enterprise customers has happened "a little quicker than we would have imagined."
"The choices we have about what we do in-house and what we can have outsourced continue to improve," says Beach Clark, CIO at Georgia Aquarium Inc., whose Web farm is hosted off-site by a third party. But Clark says he believes that IT activities that are core to the mission of a business will continue to be handled internally.
For instance, Clark's five-person staff handles most of the aquarium's online ticketing support and much of its business intelligence work -- functions he deems critical -- even though some of the programming itself is outsourced.
Chance of Problems
The shift among enterprise IT organizations toward hosted infrastructure services is real, says Paul Major, managing director of IT at Aspen Skiing Co.
But even though he finds the prospect of outsourcing IT infrastructure support to third parties "appealing," Major raises one of the red flags that have played a role in curbing widespread adoption among big companies.
"My concern is what happens if [the service provider's] business model flops and someone comes in and buys them," says Major. "How do I go back in and get my data and format it? I'd rather keep it local and keep it under control."
For that reason and others, Storage Networking Industry Association Chairman Vincent Franceschini believes there will be "many shades of gray" when it comes to adoption of hosted IT infrastructure services among Fortune 2,000 organizations.
For instance, the chemical and avionics industries have vastly different business processes and data workflows. But at the core of both is intellectual property that companies "very much want to be controlling," says Franceschini. So while companies may outsource some level of rote IT infrastructure activities to third parties, he says that "it will take some time" for core business applications -- particularly those containing IP -- to move off-premises.
If anything is going to cause a slowdown in managed services adoption by enterprise customers, it's concern about data protection, says Nick Sharma, senior vice president of infrastructure managed services at Satyam Computer Services Ltd.
There are other reasons that many CIOs are still resisting the hosted IT services model. "I think there's going to be a swing back to a more traditional [on-premises IT support] model because IT departments are understanding that users want to interface with a real human being in English," says Carmen Malangone, director of IT at Coty Inc., a maker of fragrance and beauty products. "That's one area where these [managed] services fall short," he says, alluding to the use of offshore service reps whose English language skills may be spotty.
And those aren't the only inhibitors to widespread adoption. "One of the biggest barriers is the IT organization itself," says Sun's Dutra. "There is a cultural history of building things." There's also a bias among some business customers that have become accustomed to having their IT organizations own and operate systems, he adds.
"There are different degrees of progression down this [hosted services] path," says Bryan Doerr, CTO at Savvis Inc., a St. Louis-based IT infrastructure services provider. "There's a percentage of companies that don't think a virtualized solution is for them."
Even for IT organizations that do shift work to third-party providers in coming years, certain activities will remain in-house, including data management and business intelligence functions, says May.
Moreover, says Robert Keefe, CIO at Mueller Water Products Inc. in Atlanta, "you're always going to have some things [in IT] that need to be looked after -- nuances and pieces of technology that continue to change."
For example, IT organizations are likely to retain project portfolio management, says Chris Barbin, co-founder and CEO of Appirio Inc., a San Mateo, Calif.-based provider of products and services for hosted environments such as Salesforce.com and Google Enterprise. That means they will still need people who are adept at sourcing and staffing project teams.
"For me, it's my revenue-generating and customer-facing systems" that will remain in-house, says Major.
He cites a few reasons for this, including a dearth of vendors that provide hosted application services for those particular disciplines. Even when players do emerge in those areas, says Major, "they're going to have to come to me and explain why this is a great idea for me."
So while more and more enterprises are looking upward, most will probably test hosted services before losing themselves in the cloud.
"I don't think the on-premises [software] business is going away overnight; I don't think it's ever going away," says Google's Glotzbach. "If we've learned anything in IT over the past 20 years, it's that nothing ever goes away completely."