Why WAN Outsourcing Providers Must Offer Applications Services: Results from a CIR End User Survey

INTRODUCTION

With increasing competition, companies have turned to outsourcing solutions to free capital for focus on core strategic activities. Managers have learned that competitive leverage can be gained by transferring non-core businesses and activities to service providers with a differential advantage and retaining/emphasizing businesses where internal advantages exist. Like downsizing, outsourcing can be an efficient means for managing necessary, but not core, business activities.

Both WAN management and Web-related applications are excellent candidates for outsourcing---both are necessary (critical, really) and neither is typically a core business activity. Huge capital investments in both equipment and expert staff are required to design and manage a firm’s WANs. Web hosting and related applications also requires significant investment in software and (scarce) IT professionals. Outsourcing of such functions potentially transfers competitive leverage to end users, insures up-to-date network configuration and applications software and increases day-to-day efficiencies. Thus, outsourcing WAN management and applications services clearly creates competitive advantages for client firms.

An emerging class of WAN management providers now offer both network management and Web-related applications to outsourcing clients either directly or through alliances with Applications Service Providers (ASPs).

Results of a recent major end user study conducted by Communications Industry Researchers (CIR) suggest that such strategies have the potential to significantly grow the market for WAN management outsourcing, and that service providers of WAN management outsourcing which can offer Applications Services are poised to assume market leadership. CIR's survey suggests further that even the groups of end users who are relatively price sensitive tend to put this behind them when they are offered certain Applications Services.

Much of the information in this paper is taken from a research study recently published by CIR: Inside the Market for WAN Management Outsourcing: Penetration, Motivations, Benefits Sought and Strategic Implications. Further details of this study can be obtained from Rob Nolan at rob@cir-inc.com or 804-984-0245 x15.

Analyses of data from a recent CIR survey of over 200 network and IT managers from all major industries suggests a bright future for outsource providers that can offer Applications Services. Although access to Applications Services is not managers’ primary motivation to outsource, it is a significant secondary motivation. While availability of Applications Services alone is not sufficient to persuade firms to outsource management of their WANs, it is determinant when offered in conjunction with other outsource package benefits. The offer of Applications Services as a part of WAN management outsource packages:

• Dramatically increases the share of firms who elect to outsource WAN management,

• Attracts formerly uninterested clients from Benefit Segments who would otherwise not outsource, and

• Allows value-added differentiation of WAN management outsource package providers.

Together, these responses imply that WAN management outsourcing providers who can offer Applications Services can develop outsourcing markets, increase their shares within those markets, enhance profitability of outsource contracts, and insulate themselves from price-based competition.

Currently, 27% of firms with WANs elect to outsource their management. A significant proportion of managers who currently outsource WAN management are dissatisfied and expect to defect. While this is compensated for to some extent by a group of managers not currently outsourcing but which expects to adopt, the growth in WAN management outsourcing is expected to be lackluster. The CIR survey suggests that the introduction of applications services will change this. In particular, CIR's survey results suggest that the offer of certain Applications Services as features of WAN management packages would increase the share of outsourcing service providers (and hence, the market for WAN management outsourcing) by 20%. See Exhibit I below.

Exhibit l

Adding either virtual meeting and videoconferencing capabilities or Web hosting to the basic WAN management outsourcing package attracts an additional 5-6% of the potential market. Offering both virtual meeting/videoconferencing capabilities and Web hosting attracts an additional 14-15%.

The CIR report of the survey of existing and potential outsourcing services users identifies five Benefit Segments---market segments seeking particular benefits from WAN management outsourcing packages. All five benefit segments value Applications Services---either Web Hosting, or virtual meetings/videoconferencing, or both. This broad appeal presents outsourcing providers with an opportunity to add these desirable benefits to outsource packages, in lieu of other benefits---say, cost reduction. Outsource providers could elect to pursue a differentiation strategy by offering high quality (i.e., availability) outsourcing with value added by Applications Services. Some proportion of all five benefit segments could be attracted to such a configuration, since managers in each are willing to trade away some benefits in order to get others.

To illustrate this strategy, suppose that an outsource provider were to offer an outsourcing package with (I) typical availability of one hour downtime per year guaranteed, (ii) near realtime report frequency, (iii) Web Hosting, or virtual meetings/videoconferencing, or both---but no reduction in costs. What response would such an offer evoke?

Under such circumstances, the data from the CIR survey indicates that

two of the benefit segments contain managers who would not outsource management of their WANs unless the outsource package included Applications Services. This is shown in Exhibit II.

As Exhibit II shows, adding Applications Services to a basic outsourced package attracts clients in all five benefit segments, although response is particular great among managers in three of the Benefit Segments: 1) the Cost Conscious/Availability Segment (red), 3) the Availability/Virtual Meetings/Videoconferencing Segment (gray), and 4)the Cost Conscious/Virtual Meetings/Videoconferencing Segment (purple). Thus, this incremental business would be significant.

In addition, the CIR survey indicates that adding Applications Services changes the value proposition of outsourcing from the end user's point of view. Managers in Benefit Segments 1, 2, 4, and 5 are cost conscious. Yet significant proportions of each of these segments is willing to trade away cost reduction for Applications Services (Web hosting and virtual meetings/videoconferencing). Outsource providers can attract incremental business by adding valuable Applications Services, instead of reducing prices (and eroding profits).

One especially good piece of news is that Applications Services attract formerly "Uninterested" managers who do not currently outsource and did not expect to outsource, particularly in the three most responsive Benefit Segments. Experience/intentions groups within these three particularly responsive Benefit Segments are shown in Exhibits III-V, below. The most responsive experience/intentions group of "Uninterested" managers is represented in red:

X

In Benefit Segment 1, the addition of Applications Services attracts new "uninterested" clients, particularly if both virtual meetings/videoconferencing and Web hosting are offered. "Defectors" who expect to quit outsourcing are retained with the offer of virtual meetings/videoconferencing.

In Benefit Segment 4, "uninterested" clients respond to either Web Hosting or virtual meetings/videoconferencing, yet response to the offer of all three far exceeds response to limited offers. Repeater clients would choose an outsource package that includes virtual meetings/videoconferencing, whether or not Web Hosting is included in the offer.

Applications Services provide the incentive to convert to outsourcing, to continue outsourcing, and to choose an enhanced outsourcing package.

WAN outsourcing providers have much to gain from offering Applications Services or forming alliances with ASPs. One way or another, those providers who can offer Applications Services will attract new clients---both from the Uninterested group not currently outsourcing, and from Repeaters who will switch to gain Applications Services.

That potential clients are willing to trade away cost reductions and availability in order to gain Applications Services offers providers desirable choices. Rather than lower outsource package prices (and erode profits), the addition of Applications Services can be used to support higher prices. An enhanced client base, and the associated economies from increased scale, further enhances profits. Under such circumstances, can WAN management outsource providers afford not to offer Applications Services?

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This White Paper was authored by Dr. Cynthia Fraser Gasman. Dr. Gasman is director of research at Communications Industry Researchers, Inc., a Charlottesville, VA-based market research, forecasting and strategic planning firm focussing on new opportunities in optical networking. For more details, please contact Rob Nolan at 804-984-0245 x15 or ROB@CIR-INC.COM. More information about CIR can also be obtained at www.cir-inc.com.