The Managed Hosting Horizon

TH: There are various definitions of managed hosting. What is RoundHeaven’s definition?

DA: Our definition of managed hosting is that we assume the responsibilities of the system administrator. So we take over the management of the various aspects of a customer’s mission critical Internet operations - applications, security, and the operating systems. That would also include the servers, the network and their requirements for storage management - such as back up and restoration. These are the key areas that we assume full responsibilities. A lot of companies, when they talk about managed hosting, are really only providing managed services setup attached to their co-location or network services. So if customers go to some other brand of managed services, a lot of the time, they still need to have a lot of internal IT expertise, because they still have their system administrative responsibilities.

TH: Right, so having your server co-located with maintenance or security monitoring wouldn’t necessarily be managed hosting.

DA: That’s correct. If you have your servers co-located and then let’s say your service provider provides some dedicated firewall, servers, or some backup service to you, to us, that’s not really what managed hosting is about.

TH: Ideally, customers would already have a web presence before seeking out RoundHeaven’s services?

DA: Yes, sometimes they already have their web presence and they just want us to go in there and manage it because they want to make sure that the website performs smoothly or to the highest standards. A lot of the times it is just around the period when they are about to have their web presence and that is just before they go into a production phase and then they come and talk to us and then we just go in and we help them make the smooth transition from a testing to a production phase. The third instance is there are a number of customers out there that are redesigning their website for a major launch of a new e-business initiative for example - which would involve the company revamp of the mission critical website.

TH: And you have alliances that would help out in terms of software such as for e-business?

DA: Yes, we work with a number of major technology vendors and a lot of the times they refer customers to us - such as Microsoft, Sun, Oracle, to name a few. We also work with some of the “big five” or “big six” IT consultants. For example, they typically have customers that have managed hosting requirements and they (the consultants), don’t provide the services themselves so they come to us. We sometimes go in and submit a joint proposal to a customer or they refer the customer to us and we go in and try to understand what they are trying to do. Recently, I think there is a lot of demand on disaster recovery planning solutions and also corporate intranet solutions.

A lot of companies are really looking at true backup solutions for their operations and I think in these times - especially with the economic slowdown - a lot of the companies are looking more at trying to achieve internal cost efficiencies rather than being too aggressive in expanding in their operations.

TH: So companies like PricewaterhouseCoopers, if certain companies hired them, they’d consult you to make a business case for outsourcing the IT needs - with RoundHeaven serving more or less of an infrastructure partner?

DA: That’s correct. We would come along and we provide the secure infrastructure and then on top of that we provide the management - what we call the service level management - expertise to help them manage their operations. These are ongoing requirements and typically, this is really not their main focus, and they really don’t have the resources to do it for the customer. So we work with them, for example, to provide complete solutions to their customers.

TH: Some of the market research firms predict a huge shift towards managed hosting. What things are driving the market?

DA: There have been a number of recent reports about the different segments of the hosting market and I think the most recent one is probably from Forrester. It is quite clear that there is a trend is toward managed hosting, which will increase in the next three to four years. I believe that the Forrester projection for revenue generated from the hosting industry in Canada by the year 2006 is about $2.5 billion Canadian dollars and out of that I believe they projected over 53 percent (estimate) will be from managed hosting. There is a clear migration path especially for the established companies to go to managed hosting because it’s really about the challenge of having an entire IT department devoted to just the ongoing management of mission critical Internet operations or applications rather than devoting their time to core business functions or helping the companies develop their own internal applications. So it’s very complimentary. Our solutions are very complimentary to a large company, even a company with a relatively large IT division in house. Because typically what we do is we take away the “chores” and let them focus on their core competencies.

TH: Companies such as IBM, TELUS and WorldCom have huge footprints in this particular sector of the market. How does a company like RoundHeaven, starting in 1999, compete with these guys? Is it going to be a tough marketplace to succeed in?

DA: Actually this is just an emerging market. If you look at the three companies that you cited for example, IBM certainly has a lot of experience in IT sourcing but IBM does very well in the customized solutions, so if they took over the outsourcing of your internal operations, that would involve systems integration, work stations, everything. And since it’s a very large organization; it’s not very easy to work with them and they are less flexible - and their services are typically more cost prohibitive. Companies such as IBM are better for very large companies that need traditional IT outsourcing rather than outsourcing involving the newer Internet technologies - which is what the trend is moving toward. TELUS, for example, is a telephone company — it’s has been around for a long time. It’s providing different types of communication services to many different customers including the residential consumers. It doesn’t really have a long history of providing mission critical customer service or e-business solutions to customers, so in terms of their traction in the market in this specific area, their traction is not very good. They certainly have the name and the history of providing communications services, but not so much in Internet technology or outsourcing services. WorldCom is more or less the same story. It’s another telephone company.

If you look at TELUS and WorldCom, WorldCom is still in a more of a co-location space, and while TELUS is certainly trying to get involved in the managed hosting side of things, they are going to see some challenges - they really have to have that kind of contact with customers to understand the customers’ evolving needs. Such flexibility is not what they are really known for. So I think it’s going to be quite challenging for them.

TH: IBM Global Services had $1 billion worth of web hosting contracts in the first six months of 2001. That surprised me considering that the whole of IBM Global Services took in about $33 billion revenues for the year 2000. Did that surprise you?

DA: Actually, that didn’t really surprise me because they typically deal with the large scale outsourcing that involves every aspect of a large company’s information technology operations - from the workstations to the mainframe computer to the legacy systems, the system integrations - a lot of customized work. They usually have contracts that run multiple years so a contract could be a five-year, six-year type of contract and it only involves the largest organizations. But even the largest organizations have different projects or initiatives that require different types of attention and that’s where we (RoundHeaven) can do it best. We look at some of the larger companies with newer intranet or Internet or disaster recovery planning initiatives and they need companies that are young and nimble and can respond very quickly, while still possessing the technology organization that can back up these operations. My experience with IBM is that if you go with IBM, you do get good customer service through their sales and support organization but you don’t have quite the same working relationship with the technical team because IBM is a very, very large organization - which prohibits that “personal touch.” With mission critical Internet applications and initiatives you just need to have that personal touch with very qualified technical people - which is how we compete.

TH: I’m wondering with IBM’s huge marketing muscle and strong strategic alliances if your job becomes a bit more difficult. Is that the case or do you have a segment that you are definitely targeting? Are your services differentiated to the point where you feel very confident that you can attack that market?

DA: We actually do feel very confident about our abilities to attack specific market segments. As I said, even some of the largest organizations in the country or North America, it’s not untypical that they have some kind of in house IBM system but we are finding that they are not willing to stick with just one vendor solution provider. They like to use different types of vendors, so even though they may have IBM systems, they would also have an Oracle database or Sun servers or Microsoft applications etc. When it gets outside of the IBM sphere for example, that’s when it becomes an open market. I think there is a general perception also in the market that when you go with IBM typically sooner or later you will be lured into using IBM hardware and software, which a lot of companies are wary of - preferring to keep their options open.

TH: The way that you described IBM, you really described what I thought Microsoft was doing to the PC market with Windows.

DA: I think the unique thing about the Microsoft situation is that Microsoft has a fair degree of control over let’s say the PC desktop market- because the penetration is so high, it’s over 90-something percent I think. But if you think about the server market, it’s still very open. For example in the Unix server market, Sun still has the largest market share by far but then it’s a market share I don’t believe is more than 35 percent - so there will still be other players. And when you look at Intel servers, certainly Microsoft is the main player - the market there is probably a 50-50, or at best a 60-40 percentage division between the Microsoft Intel based server and the Unix based servers. So when you look at IBM - its market share with respect to the two other platforms, it’s not really that significant.

I mean sure, IBM can leverage large service organization but it is sometimes the technology, the operating system, and the platforms that become more important– more of the driving force– rather than the service organization. So I would view our expertise in Sun, Oracle, and Microsoft as giving us a definite advantage in competing effectively in the next few years.

TH: And you also have a lot of employees working for you in various departments from these companies?

DA: That’s correct. We have employees that come from some of the companies that have been around for quite some time. They are very experienced, and for a young organization we have a very large percentage of engineers that are industry certified - and that is very important especially when we go out there and start talking to the customer. Having a team with credible skills is the first thing a potential client looks for when evaluating our company.

TH: You have your own IDC right?

DA: Yes. It’s actually in the Internet hub of Vancouver. That’s in the Harbour Centre.

It’s called the British Columbia Internet Exchange - where the Internet traffic from different backbone carriers is exchanged. In terms of getting bandwidth for high-speed network connectivity, it’s the best.

TH: I’m sure you’ve read some of these studies or some of the press pieces that have been going around about potential glut in the market for Internet data centre space. Certainly we can use the recent Exodus example. Exodus stopped construction of ten data centres but other companies continue to build. There seems to be a perception, that a lot of these data centres aren’t even one third full. What do you think about that?

DA: I think that’s true especially in the US market. There is certainly a lot of excess physical space. It is also somewhat true in Europe. I know that there has been some frenzied building activity going on in the last few years. In Canada I think the situation is a little bit different. I don’t think we have an excess over-capacity in Canada of very high quality data centres. I mean I don’t think that’s the case. We have actually looked into the Ontario market and we don’t see a situation of over-capacity in terms of high quality physical space. But having said that, I would say that in the next few years the customer demand will not be driven by how much the price tag of a data centre (is).

I mean certainly we have come across press releases from different large companies saying that they have opened new data centres here and there, but customer demand is increasingly going to be driven by the level of technical expertise and in terms of the customer solutions — what kinds of solutions a company can provide customers and not the physical data centre. It would involve the management of applications and security systems, storage resources network and all these things together that will be bound by a high level service level agreement. So in other words the technical capabilities are what is going to count. Even now we are increasingly seeing customers that are more interested in the expertise, in the solutions rather than just a physical space or just a price tag or whatever. You mentioned people have read a lot of press releases about companies that have a few dozen high-end data centers - and they have subsequently failed. So I think customers are becoming more sophisticated.

TH: You have to wonder about the financial shape of these companies too.

DA: There are companies out there with a lot debt capital. Look at TELUS, they have raised capital through debt financing so with the debt capital what they are trying to do is to go out there and generate the cash flow. I think it’s a very risky undertaking because we have seen companies that have raised a lot of debt in the States and rushed to build capacity ahead of time and have failed. So I think this is a very risky venture that TELUS is taking. But if you look at our approach with some of the newer companies it’s quite different now especially with the institutional backing. The mentality certainly has changed. With our venture capitalists for example, the focus is on responsible growth. Not building excess capacity ahead of time. We are going to focus very much on delivering good solutions and a high level of customer service to customers - and we are going to expand according to demand. You’re not going to see us start populating the landscape with new high-end data centres. That to us is not a very efficient use of capital and is not responsible growth.

TH: So it’s going to be more conservative management, maybe even buying things with equity to keep the balance sheets strong?

DA: Exactly. It’s going to be more conservative management and our focus is to keep the balance sheets strong. We’re going to keep an eye out on the market trends and we’re going to make sure that we get the right message to the market. But we’re not going to make bold move in terms of building excess capacity. Some of the Telcos are still doing that and this is certainly a cause for concern.

TH: And specifically for RoundHeaven, what are the immediate challenges that you have right now to execute your business plan?