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So You Want to Outsource Your Messaging?

Written By: P. Hayes
Published On: November 20 2000

So You Want to Outsource Your Messaging?
November 20, 2000

Product Background

Application Service Providers have arisen on the Internet in response to such corporate messaging woes as support expenses, misbehaving application and server down-time. Assuming an organization ports all application functionality to an ASP, the only real concern for internal IT individuals would be ensuring a rich and stable connection to the Internet. ASPs use a "Thin Client" configuration, which means that any hosted application accessed by an end user, such as e-mail or word-processing application, is transmitted to the desktop via a series of streaming screenshots, thereby minimizing the need for excessive bandwidth and software installations on the client machine.

The downside is the long-term cost of "leasing" the service. One of the primary benefits of outsourcing is the initial negation of "up-front" costs associated with the implementation of a production system. However, after a typical 3-year cycle in a 1000 user company, the outsourced system will cost over $250,000 more than an "in-house" production system. An analogy may be made to a group of 3 college roommates who need a big-screen television to watch football. Each roommate pays $20 per month for 3 years, totaling $2160 when the television could have initially been purchased for $1200. The appeal is immediate gratification coupled with reduced initial financial pains.

Outsourcing Advantages

Features
Benefits
Implementation speed Reduced setup and configuration time.
Remote access A user can access his/her files from any location with a connection to the Internet.
No need to upgrade All upgrades applied to ASP servers. No need for client or desktop upgrades.
Reduced Support Cost Reduced need for internal IT support.
Reduced Initial Operating Costs Limited funds required for initial startup.

Outsourcing Disadvantages

Features
Benefits
Implementation Decreased control over infrastructure and deployment.
Remote access Limited to Direct Access Points for your ASP or need for secondary internet access account depending on user travel plans. (Additional $20 - $30 /per user /per month).
Upgrades Little to no control over hardware and software upgrades. One of the key questions is will your ASP upgrade their software and/or hardware more quickly than you would? Answer, probably not.
Support Cost Support costs are essentially negated and a monthly per user charge is assumed (Average $24.95 per user per month )

Cost Analysis

The following figures assume the following:

1. Company of 1,000 Users

2. Outsourcing Messaging Only

3. Messaging Platform is Microsoft Exchange (Lowest TCO @ $65 per seat)

4. 3 Servers 5. Assumes a 3 Year Cycle.

Internal Costs

Hardware
Software
Support
Total
Year 1 $70,000
$50,000
$155,000
$275,000
Year 2 $0
$0
$175,000
$175,000
Year 2 $0
$0
$180,000
$180,000

Total 3 Year Internal Cycle = $630,000

External Costs

Hardware
Software
Support
Rental
Total
Year 1 $0
$0
$0
$300,000
$300,000
Year 2 $0
$0
$0
$300,000
$300,000
Year 2 $0
$0
$0
$300,000
$300,000

Total 3 Year External Cycle = $900,000

External = 900,000
Internal = 630,000
Cost Differential = $270,000 + the tax benefits of amortizing the hardware.

Graphical Representation of Break Point - 3 Year Internal Hosting to Outsourcing Comparison.

Product Challenges

The main challenge facing most ASPs is how to drive down long-term costs while accumulating a solid revenue stream. One of the cost inhibitors for ASPs is the amount of dedicated bandwidth they must maintain to support thousands of users. Another challenge facing ASPs is Service Level Agreements (SLA); if for some reason the ASP loses Internet connectivity, you will lose connectivity to outsourced production systems, which negatively impact your internal SLAs.

Vendor Recommendations

ASPs should target smaller organizations, startups and home based businesses where the cost factor outweighs the benefit of an in house system. A 10-user company is far better off with an ASP than to purchase hardware and software and deal with the administrative headaches associated with support. The key to an ASPs success will lie in the targeted marketplace. Those ASPs targeting large organizations will most likely fail (probability 75%) or scale back their profit margin in order to gain business. Those ASPs who can successfully market to small organizations while providing good technical support coupled with frequent software and hardware upgrades will experience good success.

User Recommendations

Small startup companies and home based businesses consisting of fewer than 100 employees requiring enhanced e-mail should consider this as a viable alternative to implementing a new messaging system. Once an organization moves past three hundred users, consideration should be given to migrating to an internally hosted messaging system.

Larger organizations (>1000) should always look at the long-term bottom line, and disregard the "masked" benefit of reduced startup costs. Through a combination of solid administrative management and reasonable software and hardware purchases, an in-house system should be more reliable, faster and save tens of thousands of dollars over a three-year period.

 
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