Specialized Hosting Providers are Gaining Momentum: Why you Should Take Notice

Small Man_Big BusinessWhat most organizations ask of their hosting partner is a commitment that their IT environments will run as smoothly as possible, with very little system downtime, to ensure continuity of their business operations. These requirements have led many organizations to conclude that only well-known, branded, hosting providers can appropriately provide the level of service they require. In an industry where large hosting providers still take the lion share of the market, it is often difficult to move pass the “brand effect” and seek a well-established hosting partner outside of the IBMs, HPs, and AT&Ts of the world. However, based on several recent UpperEdge engagements, the trend seems to be slightly shifting in favor of smaller, more specialized and lesser known, hosting providers. More and more organizations, across a broad range of industries (including Aerospace & Defense), choose to consider more specialized hosting providers with strong capabilities such as Freudenberg IT, Secure-24, Virtustream, Symmetry, and Velocity. In fact, most of our clients that recently went through the process of evaluating and selecting a hosting provider ultimately opted for the underdog instead of the perceived favorites. Here is why:

Ability to establish strong executive relationships from Day 1

Given their size and underdog status, smaller hosting providers tend to leverage their top executives to engage with your organization and conduct one-on-one meetings with key decision makers and influencers as early as the evaluation stage (it is not unusual to see the CEO involved and attending some of the key meetings and presentations). Unless you are one of the largest organizations in the world (and even so, large providers will be unlikely to engage with you at a CEO level for a hosting initiative), you will probably never meet your large provider’s top executive team and you will have to push your way through the countless escalation and approval points in order to see some of your key requests and requirements properly addressed within a reasonable time frame. The advantages of a strong executive relationship are meaningful. It will impact your evaluation and provider negotiations by streamlining the process and helping you achieve a highly competitive deal construct. It will also have a positive effect on your go-forward partnership by providing your organization direct access to the individuals who actually have authority; which may result in a plethora of benefits ranging from expedited resolution of certain key issues to realization of synergies between you and your hosting provider’s capabilities that may result in significant added value for your organization (e.g. optimal technology and efficiency improvements).

Smaller providers tend to approach the evaluation and negotiation process differently

We see it in every path of life; the underdog will go above and beyond to achieve their goals and steal the show. If this applies to sports and life in general, it also very often applies to hosting providers and how they approach the evaluation and negotiation process. More specifically, we have observed the following:

  • Smaller hosting providers tend to demonstrate a high level of responsiveness throughout evaluation and negotiations: Although most organizations take responsiveness for granted (after all, candidates for your hosting RFP are trying to earn your business), you would be surprised at how irresponsive certain service providers can be during the evaluation and selection process. When it comes to scope adjustment requests, last minute clarification calls, onsite availability during contract finalization, scheduling of top-to-top executive meetings; the smaller hosting providers tend to remain at your disposal and show a high level of adaptability throughout the process.
  • Smaller hosting providers tend to provide a higher level of transparency into their estimating model: Most hosting providers are hesitant to fully disclose the various cost drivers built into their proposed solution. Here again, the smaller providers tend to show the right attitude by willingly providing their full estimation sheet, inclusive of detailed pricing on a component basis and corresponding volumes. This is not to say larger hosting providers never provide similar transparency, but based on our experience, smaller providers will be more prompt to share any requested information with your organization without needing too much convincing. It will give you the necessary ability to understand the hosting pricing and associated configuration baselines and ultimately a solid foundation to rationalize any changes that may be made as you move through your hosting initiative (including capacity changes).

It is often easier to achieve a more compelling deal construct with smaller providers

This is no secret. If you want to compete as an underdog in an industry dominated by large well branded hosting providers that all have the capabilities and expertise to provide quality services, you will have to find a way to stand out and show what makes you the best choice. In addition to taking a more collaborative and transparent approach during the process, small hosting providers will often try to lead the race on the commercial side by deviating from standard commercial practices and offering highly competitive levels of commitments during the negotiations. Most specifically, you may see your smaller hosting providers with an edge in the following areas:

  • More compelling pricing: Based on the hosting engagements that we have seen within the past couple of years, this will almost always be the case. Organizations are able to achieve significant discounting by going with a smaller niche hosting provider and avoiding the price premium that comes with larger hosting providers. To put things in perspective, on average, our most recent hosting engagements show a cost variance ranging from 15 to 25% between smaller and larger hosting providers. Of course, a larger hosting provider will likely remind you of the broad and unique skillsets and service offerings that they bring to the table (this is often true), however, a smaller hosting provider with strong niche capabilities that align well with the requirements necessary to host your environment can certainly do the job, and do it well.
  • More competitive long term price protections: Most organizations place a high level of importance on cost certainty and predictability. It is especially true with hosting services, as you will likely end up in a long term relationship with your chosen partner (ideally) and see your negotiation leverage decrease year after year. Few organizations will be in a position to bear the cost and operational impact of a transition towards another hosting provider 3 or 5 years down the road. In many cases, the pain is not worth the gain and you will want to ensure you have the right price protections in place from the get go. We have seen several smaller hosting providers grant up to 8 years of price protections, with all hosting fees and rate cards contractually locked during the initial contract term as well subsequent renewal terms, along with highly competitive committed year over year productivity improvements that drive the cost down after a certain period of time. In comparison, the industry standard revolves around a lock of the hosting fees during the initial term, with caps applied on subsequent annual increases.
  • More competitive service level agreements (SLAs) and service level credit structures: Service levels drive much of the value your organization will receive from a hosting provider. A comprehensive service level matrix along with meaningful service level credits will reflect your hosting provider’s commitment to provide quality services that will meet your organization’s requirements on a consistent basis and give you a level of guarantee that your systems will be up and running to ensure the continuity of your business operations. Smaller hosting providers tend to offer complete service level matrices and associated service level credit structures. This includes, but is not limited to, SLAs such as availability, incident response times, Disaster Recovery, and Back-ups. They also tend to show a willingness to work creatively around their standard business practices and customize their offerings to better meet your organization’s specific service level requirements. Based on our experience, it can be more difficult to negotiate your SLAs and service level credit structures with larger hosting providers as they tend to stick with more restrictive standard offerings that primarily cover system availability and show less accountability in the event of failure.

As described above, smaller and more specialized hosting providers often have a lot to offer. This being said, please keep in mind the observations made here are based on trends and reflect what has been learned during recent hosting engagements. Large hosting providers also show an appetite to meet your business and commercial objectives and the benefits we discussed may be achieved with different hosting providers, regardless of their size and “brand.” This of course is often contingent upon the ability to execute the proper sourcing strategy and creating the proper level of negotiation leverage as well. Additionally, many organizations feel more comfortable relying on the scaling abilities and the bench depth and skill sets that come with larger hosting providers. At the end of the day, your organization’s internal requirements should drive the evaluation and selection of your hosting partner, and the candidates for your hosting RFP should only be selected based upon their ability to successfully support your business case. Keep in mind and do not forget; underdogs may be viable candidates for your organization.

If you found this article insightful, please share with someone else who might find it useful. If you are currently going through the evaluation and selection of a hosting provider (or plan on doing so in the near future) and would like to benefit from UpperEdge’s hosting evaluation and negotiation expertise, please contact UpperEdge or email [email protected] for any questions and concerns on how we can help.

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