The Hosted Solutions Market — and Why Service Providers Need to be There

The IT and technical outsourcing market is rapidly growing in the enterprise. According to IDC, the outsourcing sector is expected to reach $168 billion by the end of 2007. As this market continues to grow and expand, it has the potential to become a new revenue source for service providers, resellers and system integrators that are willing to jump on board and offer these services.

Businesses today are looking for ways to reduce direct involvement in dealing with the complexity of communications. They are seeking flexible solutions that will lower costs and reduce IT department support requirements. Those service providers who are able to offer hosted solutions can secure a share of this expanding market.

In a market where products are increasingly more commoditized, hosted solutions can offer many benefits in terms of revenue, customer retention and satisfaction. There are several reasons why these services will become important for service providers in the very near future.

Hosted solutions are where the market is heading

The concept of hosted solutions is a business model that is rapidly gaining ground. Industry analysts expect more businesses to look for service providers, system integrators and resellers that can deliver complete packages including professional services and reliable applications. It is expected that customers in all segments will be looking to outsource communications services as networks and applications become more complex to manage.

The market is starting to demand more professional services for IP telephony and converged networks, not only for initial installations, but also for maintenance and other services throughout the lifecycle of networks. A vast majority of organizations have used or plan to use third-party services in convergence projects.

This is especially significant in the small- to medium-sized business (SMB) segment. By 2009, two-thirds of small businesses expect to implement hosted IP telephony services, according to InfoTech.

SMBs are looking to hosted solutions as viable options to help them compete in the marketplace by enabling them to act like larger enterprises at a price that is right for their budgets. Hosted solutions are also appealing because they reduce operating expenses and allow businesses to reduce the number of people dedicated to network and application integration activities.

Hosted solutions are what enterprises really want

When enterprises take new services into consideration, they look at several different variables. Cost savings are the number one reason that customers consider hosted solutions. In a time when capital and operating budgets are flat or declining, hosted solutions can save businesses a significant percentage of their communications expenditures.

Hosted solutions can eliminate the cost of updating existing equipment or refreshing technology.

They can eliminate the need to hire staff specifically to support the network and to invest in additional skills training. They can help enterprises keep pace with the latest in technological advances and maintain support across various geographic regions. And they can position enterprises to optimize bandwidth for multiple applications across a common network infrastructure.

In addition to cost savings, other variables in the decision making process are flexibility, simplicity and speed. And regardless of size, businesses still need to offer reliable, high-quality communications to all employees. IT managers and employees need to have control over their communications. Hosted solutions offer the advanced capabilities, multimedia, collaboration and mobility to deliver increased productivity while meeting these various needs.

Hosted solutions offer new revenue streams and competitive advantage

There are three powerful forces in today’s communications market to which no service provider is immune: commoditization, competition and changes in technology. Becoming a leader in the market will require a service provider to introduce next-generation applications, find replacements for decreasing revenue streams, and retain and grow customer base, all while responding to increasing competitive pressures. Hosted solutions can accelerate delivery of next-generation services and offer competitive advantages such as product differentiation, customer acquisition and retention, and accelerated introduction of new services.

Product differentiation — Hosted solutions can fuel growth and replace eroding revenues due to evolving technologies and competition. They can increase wallet share, average revenue per user (ARPU) and cash flow.

Customer acquisition and retention — Customer retention has always been an issue in this volatile industry and today’s competitive market is only continuing this trend. By offering hosted solutions, service providers are able to quickly provide new services and capabilities that will continually attract and retain customers.

Accelerated introduction of new services — With the addition of hosted solutions to a portfolio, service providers can reduce the time-to-market of new services to business customers. Financial risk is also minimized due to testing and introduction of new applications before making a commitment to a major investment. This ensures that customers are satisfied with new services and technologies without requiring service providers to make significant upfront infrastructure investments.

Hosted solutions maximize profitability

Profitability through hosted solutions begins with network convergence. Disparate networks are consolidated to form a single, IP-based network from which service providers can quickly and reliably deliver powerful and profitable applications. This converged network can service several applications, reducing operating costs and maximizing use of assets.

Enterprises that implement services such as IP telephony will look for various levels of hosted or managed services. An array of compatible solutions should be offered — both premise-based and hosted — to address diverse customer needs.

Profitability increases when more customers move from CPE-based to hosted solutions. Several factors drive this profitability, including service bundling, centralized services and better asset use.

Service bundling — Hosted and managed solutions include bundling of professional services, which results in increased revenue for equipment and also for professional services.

Centralized services — Service providers can take advantage of centralized services and staff to perform routine maintenance and upgrades more quickly and at lower cost.

Better asset use — Use of current assets is maximized, resulting in a reduction in the typical cost per port or per subscriber when moving to larger-scale hardware and software.

The right partner is crucial to success

Choosing the right partner can make or break a service provider’s hosted solutions business. A good hosted solution vendor should offer ready-to-go solutions, minimize upfront investments, and possess the necessary experience.

Ready-to-go solutions — Complete, pre-integrated and pre-packaged solutions — including all equipment, applications and services — are key to accelerating purchase, implementation and selling of applications. Partial solutions can result in significant additional cost to the service provider for integration, testing and implementation of the various parts.

Minimized investment — Vendor solutions should minimize upfront investment and reduce risk. Packages that can prove new applications and technologies before committing the service provider to significant capital investment can save time and expense while maximizing potential for market success.

Experience — A vendor with experience and a proven track record in migrating service provider and enterprise communications networks to IP-based networks is critical to success. This includes not only integration and implementation, but also assistance with demand generation for new hosted services.

Businesses of all shapes and sizes are increasingly taking notice of hosted solutions with embedded professional services. These solutions provide benefits on both sides of the table. They offer new revenue streams and differentiation for service providers, while offering cost benefits for the businesses that will implement them.

Hosted solutions can also pave the way to next-generation services for enterprises such as IP telephony and unified communications. As the demand for outsourcing increases, enterprises will begin to seek out those service providers, system integrators and resellers that can deliver hosted solutions to them.

Lee Koelbl is Director of Hosted Solutions Market and Business Development for Nortel (www.nortel.com). Koelbl is a 20-year veteran of the telecommunications, IP telephony and networking industry with extensive experience in product development, product management and business development. Koelbl holds a bachelors degree in engineering and a masters in science from the University of New Brunswick in Ontario, Canada.