John Whiteside
August, 2004

As the importance of email has grown – from a medium used by a few technical people to the primary form of business communication, more important than even the telephone – the outsourced segment of the messaging market has grown as well. Driven by cost pressures, the requirement for 24x7 availability, the increasing complexity of messaging platforms such as Microsoft Exchange and IBM Lotus Domino, and the rapid introduction of new messaging technologies (mobile devices, content filtering, message archiving, and more), a growing number of organizations have come to view outsourcing as the best strategy for ensuring a reliable, cost-effective messaging environment. The Radicati Group, a leading messaging analyst, has projected a 33% growth in hosted business email revenue from 2004 to 2007.

Although the messaging outsourcing market has all the features of an attractive opportunity – strong growth, clearly defined customer needs, and a strong value proposition understood by many customers – there are few examples of successful messaging outsourcers. To some degree, the messaging services space has been a victim of the factors that led to a shakeout of IT service providers in the last several years – financially weak providers, customer concerns about service provider viability, and hype. However, we believe that another issue for the messaging market has been the traditional definitions of outsourcing market segments and resulting inability of providers to focus on the most attractive segments.

While messaging outsourcing is a viable option for most organizations, the type of outsourcing that makes sense – and the types of outsourcing that a service provider can profitably deliver - vary. There is still tremendous opportunity in messaging outsourcing, but the ability to successfully play in this space will depend on three factors: a clear understanding of a provider’s target market, successful delivery of the right types of outsourced messaging services for that market, and a service delivery model that makes the business profitable. The strongest segment, we believe segment is utility messaging for small and medium sized businesses.

Three Types of Outsourced Messaging

There are three distinct models of outsourced messaging, each with its own ideal customer and service delivery model.

Traditional outsourcing:

Technically the simplest form of outsourced messaging. In this model, messaging resources (hardware, software, and staff) are “rebadged” by an IT services provider, usually as part of an overall IT outsourcing initiative. In terms of actual infrastructure and messaging environment, there is little change; servers sit at user sites, and IT staff manage the infrastructure and messaging applications, just as before. The benefit for the organization that selects this model is the removal of the distraction and expense of managing IT, leaving that task to the outsourcer. However, this model does not allow the service provider to leverage significant economies of scale in the messaging environments it supplies to customers.

Custom messaging application management:

This model could be called the “complex managed hosting” of the messaging world. In this model, a service provider designs a messaging environment for its customer, consisting of dedicated infrastructure located either in the service provide data center, at the customer’s facilities, or a combination of both. Service provider staff manages the messaging environment and the user organization pays monthly fees. There are many financial models for this type of outsourcing; an organization may pay for its licenses and hardware, rent them from the service provider, or set up separate leases for equipment in the service provider data center. Similarly, the messaging environment itself can be highly customized, with options such as disaster recovery, geographic redundancy, integration with other applications, and split management responsibilities between customer and service provider IT staff.

Utility messaging or on-demand messaging:

This model of messaging treats the messaging application as a commoditized service. The service provider manages shared messaging infrastructure in its data center, then provides email and other messaging services for a per-mailbox fee to its customers. Infrastructure costs are spread over a large base of customers, and all application management (excluding administrative tasks such as adding and deleting users, resetting passwords, and the like) is performed by service provider staff.

Utility Messaging is Different:

Utility messaging is fundamentally different than other kinds of messaging outsourcingfrom both provider and user perspectives. Commoditization, while it may be perceived as a negative term, actually benefits both.

For buyers of messaging services, the purchasing process is greatly simplified. The provider offers a specific set of services and options at clearly defined price points, typically including all software, hardware, and management. Buyers can select options from a standard menu of services – larger mailboxes, spam filtering, Blackberry or PDA access, and so on. The service can be implemented very rapidly (typically within a few days) with little or no initial investment.

For service providers, utility messaging provides a clearer path to a profitable messaging business than other forms of outsourcing. The initial investment in infrastructure is spread over a growing base of customers, with a well-defined break-even point and growing profitability. Many of the costs of the shared infrastructure are fixed, making new customers increasingly profitable. Finally, the sales process is far simpler. Instead of an extended sales process involving technical solution design and review, utility messaging can typically be sold in a telesales environment with skilled representatives who can evaluate customer needs and answer technical questions about the existing infrastructure.

Utility messaging is not for everybody

Obviously, utility messaging is not for all customers. Those for whom this model is inappropriate fall into two general categories:

Very large organizations which could build similar infrastructure with similar economies of scale. A company with 50,000 employees would require infrastructure larger than that of most messaging providers. While outsourcing might make sense, such organizations will not benefit from using shared infrastructure, and in fact would be giving up the flexibility to customize their messaging environment by doing so.

Organizations with special technical requirements. An organization of any size that has specific requirements that go beyond the functions of a shared messaging platform will need a custom-managed solution. Some examples of these requirements are redundant infrastructure for failover in the event of disaster, or integration with CRM or ERP solutions.

Most organizations do not fall into either of these categories. Paradoxically, organizations with specialized needs have often been among the first to consider outsourcing, because they were more likely to experience difficulty managing their complex messaging environments. However, serving these customers profitably has been very challenging for messaging providers, as a look at the financial histories of some of the companies that have focused on this business reveals.

Utility Messaging for small and medium sized organizations:

However, among small and medium sized organizations, messaging requirements are predictable and interest in outsourcing is growing. These organizations have compelling reasons to consider outsourced messaging:

Managing platforms such as Exchange and Domino internally is tremendously expensive for these organizations. While larger organizations may believe that they can manage their messaging environments as cost-effectively as service providers, the price of entry to the major platforms is prohibitive for smaller organizations.

At the same time, these organizations are looking for functionality beyond basic POP email – calendars and scheduling, real-time mobile device access, spam filtering, and so on.

Selling to the smaller organizations is typically faster that selling complex messaging infrastructure to large organizations, helping providers scale up to profitability more rapidly.

Despite the potential of utility messaging for small and medium sized customers, we have not seen providers approach this market as aggressively as might be expected. In future articles, I will discuss the challenges facing service providers in this market segment, and the changes we are likely to see in the types of providers serving smaller organizations’ messaging needs in the coming years.

Contact John Whiteside: johnw@whitmancg.com