In today’s IT universe, infrastructure services are Internet services and, increasingly, vice versa. That should be good news for companies that make their living providing outsourcing and interoperability services. But the service side of IT has always been highly cyclical and vulnerable to hype: ASPs, remember, were hailed as saviors one day and cursed as pariahs the next as they struggled to develop sustainable business models in a volatile economic climate.

During the April 15-16 IT Infrastructure & Management Services expo in Boston, one executive succinctly summed up customers’ biggest concern: “what happens after the contract is signed.” Having promised to provide consistently high levels of service, just how can providers today profitably deliver?

Commoditization continues to drive down the price of what used to be a dependable source of recurring revenue: hosting, first of Web sites and then of applications. Servers and storage may be cheaper than ever to buy or lease, but customers are well aware of that fact and expect to pay rock-bottom prices. Spending on Internet and infrastructure services took a hit last year along with the rest of the IT world. This remains a buyer’s market, where customers are themselves feeling the heat to wring business value from every IT dollar. Consequently, customers are demanding utility-based pricing, where cost is directly tied to transaction volume and business value.

Spinning in the On-Demand Orbit
Major industry leaders everywhere exert a powerful gravitational force on solution vendors and service providers, and the market for Internet and infrastructure services is no exception. The terms “utility computing” and “on-demand e-business” these days seem to appear in virtually every press release we see from IBM, as Big Blue trades on its long history in enterprise infrastructure software to boost the power of its WebSphere brand and related services.

The idea IBM is pushing is that enterprises – particularly large ones – should be able to access the technology they need when they need it and pay only for what they are using. IBM’s on-demand management arsenal now includes industry-specific consulting, auditing tools to calculate cost savings from management improvements, new WebSphere development tools to transform legacy applications and an Application Portfolio Management service.

How much is infrastructure and Internet management worth to IBM? Let’s start the estimate at $2.1 billion, the price that Big Blue paid to acquire Rational Software, with its tools and practices for developing infrastructure software. The recent alliance between IBM and PureEdge Solutions represents another move toward dominating the management market, this time from the content side. 

Clearly, IBM can be a powerful ally for Internet and infrastructure service companies, but its sheer size also has set the bar very high for service providers in terms of quality assurance, pricing flexibility, and perceived stability.

And IBM isn’t the only market mover exerting force in this space. BEA is pushing its WebLogic platform as a comprehensive solution for building enterprise Web services. HP is promoting a management-steeped initiative targeting what it calls the "Adaptive Enterprise." Telecom carriers, including Sprint, are touting outsourcing services, including hosting and application portfolio management, possibly as a prelude to offering more comprehensive wireless interoperability services. IT transaction outsourcing pioneer EDS is billing itself as a provider of “business process outsourcing,” offering to shoulder management of such entire human resources, customer relationship management or finance operations. So the roster of players is growing, and pushing in from multiple directions.

New Providers Stepping Up
So how are smaller providers of Internet services and Internet service tools responding to these conditions? Here are some examples culled from recent trade show presentations, news announcements, and analyst briefings.

• Atomz, which provides online Web publishing, search, promotional and alert capabilities – won the 2003 AIIM Best in Show award for Web content management. This is a sign the industry recognizes the benefits of “Web-native” versus server-based business models for Internet and infrastructure services.

• Citrix Systems, in the server-based service arena, beat Wall Street expectations for its first-quarter results, reporting net income of $30.3 million compared to Q1 2002 net income of $29.3 million. Software license revenue was up 8.5% over Q1 2002 and professional services revenue was up 25%. Citrix had just announced it would offer end-to-end enterprise access infrastructure under its MetaFrame brand, tied to the release of Windows Server 2003. 

• G2 Telecom has joined an increasing number of companies (among them RampRate and PrimeSourcing Advisors) staying ahead of the commoditization curve by selling their auditing and negotiating skills rather than software or hardware. These companies help enterprises purchase the most cost-efficient Internet services, and in many cases take a portion of the money saved as payment. 

• Inforonics has adopted what it calls “predictable pricing” based on actuarial models to ease prospective customers’ fears that spikes in online business volume will overwhelm service budgets (case in point: the 2000 Presidential election scandal kept network Web sites flooded far longer than anticipated in the original service contract). 

• Navisite is expanding its application and infrastructure management offerings through acquisition. This month, Navisite wrapped up its acquisition of Conxion Corp., a specialist in software distribution and security. Earlier this year, Navisite signed an agreement to acquire Avasta Inc., a provider of application management to mid-sized enterprises. 

• Opticom is releasing Version 5.0 of its iView business-analytics software with a clear focus on optimizing service delivery, both for enterprises and for service providers and integrators. Opticom has mapped its product architecture to the IT Infrastructure Library (ITIL), a de facto international standard that includes standard terminology for measuring service delivery, along with guidelines for implementation and for process roles and responsibilities. 

• Customer-facing applications will increasingly depend on Web portals, and the ability to build and maintain the necessary Web infrastructures internally will continue to lie beyond the scope of most enterprises;

• Large IT environments will have to be cured of redundancy and made far more interoperable and Web-friendly in order for their owners to compete globally. Internal politics will not be allowed to stand in the way of advantageous outsourcing arrangements, including application management and even business process management;

• Software companies looking to maintain their margins will turn to services as a way to diversify and add value to their current operations. Larger firms may do so directly; others likely will do so via partners. Some may offer hosting as part of new “try before you buy” sales strategies.

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