Hosted Services: Providing SMBs with Access to Advanced Technology

I D C V E N D O R S P O T L I G H T Hosted Services: Providing SMBs with Access to Advanced Technology May 2009 Adapted from Adoption of Software as a Service in U.S. Small Businesses: Crafting Effective Strategies to Capitalize on the Emerging Opportunity by Erin TenWolde, Merle Sandler, and Raymond Boggs; IDC #208875 Sponsored by Apptix Small and medium-sized businesses (SMBs) are facing greater business challenges than ever before, with a more rigorous competitive environment in a time of economic uncertainty. SMBs are increasing their use of technology to conduct day-to-day operations, whether it's infrastructure-related networking technology or communications-enhancing applications such as email and voice over IP (VoIP). But while pressure to expand technology use increases, available budgets and internal staff resources are not keeping pace. Hence, IDC asserts that software as a service (SaaS) and other cloud computing services will be increasingly adopted by SMBs due to issues related to cost, ease of deployment, and an overall shift in the way IT is procured. According to IDC, only when firms reach 50 employees do the majority have full-time IT staff, and even as firms cross 500 employees, IT staff can rarely keep up with the demands of help desks, new technology deployment, support of remote workers, and a wide range of other chores. One approach to traditional technology implementation is the use of SaaS and other hosted applications and services. With hosted services, SMBs get the benefit of the latest and most advanced IT solutions without the need to maintain and manage them onsite or make a capital investment. This paper examines the potential value of hosted infrastructure and applications for SMBs and discusses the role that Apptix has in providing hosted services to this market segment. The Potential Appeal of Hosted Services for SMBs Broadband Internet access is now pervasive, and SMBs often have to support a growing number of remote employees. Vendors are responding to this shifting dynamic by offering an ever greater variety of hosted capabilities and services, which in turn has caused the concept of hosted services to gain traction among SMBs. Technology has become a critical part of how SMBs conduct business. Whether it's infrastructure such as networking or end-user applications such as email, technology helps SMBs run smoothly communicating internally, engaging and serving customers, and providing business intelligence to the right people at the right time for informed decision making. Of course, SMB reliance on traditional technology sources comes with a number of challenges: Procuring and deploying enterprise-class software in-house, such as Microsoft Exchange, may be cost prohibitive. Many SMBs lack the IT staff needed to maintain and enhance IT systems and applications. Among those SMBs that have IT staff, many are generalists; they don't possess the specialized skills needed to run and maintain best-of-breed applications. IDC 783

Dealing with multiple vendors when problems/issues arise is particularly vexing for SMBs because they often don't have the personnel resources needed to foster and properly manage relationships with vendors (and often feel like second-class citizens as a result). Updating to the latest versions of software and applications can be difficult and time consuming for those SMBs with limited IT resources. Hosted services (also called on-demand, software as a service, and cloud computing) in which vendors are responsible for maintaining, managing, and updating technology and applications and delivering them to customers over the Internet will be increasingly appealing to SMB business decision makers, technology decision makers, and technology users. Hosted services include hosted messaging services such as email and VoIP; collaboration services such as Web conferencing and Microsoft SharePoint; and hosted infrastructure services such as online backup, archiving, storage, and replication. While interest in cloud computing is increasing, today's economic climate is specifically driving some SMBs to turn to hosted services. According to IDC, 4.7% of small companies (those with fewer than 100 employees) and 6.3% of medium-sized companies (those with 100 to 999 employees) are moving to outsourced/hosting IT services in response to economic concerns. IDC estimates there are 7.8 million small businesses and 106,000 medium-sized businesses in the United States. Hosted Services: A New Way to Procure Applications Hosted services are software and applications that vendors provide to their customers via the Internet. Such services are often available on a subscription basis, allowing customers to pay for only what they use and also avoid significant up-front investments. Popular hosted services address the following areas: Messaging (email, mobile email, instant messaging) VoIP Archiving Backup and replication Data storage Collaboration such as SharePoint sites and Web conferencing Business productivity applications (CRM, sales force automation, financial systems, and so on) The Benefits of Hosted Services Figure 1 illustrates the benefits and advantages that are encouraging SMBs to adopt hosted services such as SaaS. 2 2009 IDC

Figure 1 Factors Encouraging U.S. Small and Medium-Sized Businesses to Adopt SaaS Pay for capabilities as needed Ability to integrate into current applications Ability to add new users without difficulty Ability to bring capability in-house Easier to support branch offices/ remote locations Remote management easing IT staff workload 0 10 20 30 40 50 60 (% of respondents) Small businesses (n = 560) Medium-sized businesses (n = 385) Note: Multiple responses were allowed. Source: IDC's Small and Medium-Sized Business Survey, 2007 Several other characteristics associated with hosted services appeal to SMBs, such as the following: No or low up-front capital costs Predictable monthly expenses Elimination of expensive maintenance contracts Access to best-of-breed, enterprise-class services Extended customer support services Control mechanism similar to that of on-premise systems In addition to general business benefits, SMBs can easily add incremental services with hosted services. In this way, SMBs can adopt a deliberate IT strategy to add capabilities and just as important, pay for those capabilities as they need to. In effect, SMBs can start with hosted infrastructure-related and communication services and ramp up to add specific hosted business applications as appropriate. This is in keeping with SMB purchase preferences buying only what they need at the time they need it rather than purchasing technology in advance. 2009 IDC 3

Market Trends According to IDC, SMBs are primarily sold on the specific features and benefits associated with SaaS rather than the delivery mechanism of SaaS itself. Based on a 2008 IDC survey, interest in SaaS is growing. Among survey respondents, 9.1% of medium-sized businesses and 3.2% of small businesses reported that they are currently using SaaS. Another 15.6% of medium-sized businesses and 3.6% of small businesses indicated that they plan to implement SaaS within the next 12 months. Many of the IT services SMBs consider to be a priority are available in a hosted model, including the following: Email. 60.8% of SMBs use email. VoIP. IDC research shows that 15% of SMBs currently use a VoIP solution, and IDC expects to see increasing, if incremental, adoption of IP telephony during the next 12 months. Videoconferencing. Interest in videoconferencing is growing. IDC research shows that over twothirds of U.S. SMBs have expressed some level of interest in videoconferencing services and that 15% have described videoconferencing as important or essential to their business. At the end of 2008, approximately 27% of SMBs reported using some form of videoconferencing. IDC predicts that by the close of 2009, that number will be closer to 35%. Storage. Less than 15% of SMBs currently use an online storage service, but IDC research indicates that storage that increases capability or improves management is a top IT priority for SMBs. IDC expects increased adoption over the next 12 months. A number of forces are guiding the direction and pace of the hosted services market. Larger, traditional software companies are investing in the delivery model and subsequently promoting their on-demand offerings, specifically as they pertain to SMBs. Of course, there is the inevitable challenge of developing a business model that can justify the more hands-on support needs of SMBs while still hitting essential price points. Typically, larger vendors often have difficulty developing a business model that can justify the more hands-on support that SMBs may require. Software companies are offering pure-play hosted services and building themselves around the hosted model. Although many of these companies originally targeted the SMB market, some are now seeing traction in larger enterprises. And high-end packaged software vendors are offering discrete industry-specific, on-premise applications but are not necessarily migrating en masse to an ondemand model. As hosted services providers move upmarket, they are running into these niche vendors, and they will begin offering functionality that competes with on-premise offerings. Ultimately, though, the nature of delivery is but one component of the value story for SMBs. Companies whether small or midsize will need to determine the best solution to meet their specific needs. Some SMBs have concerns when it comes to adopting hosted services (see Figure 2). In general, SMBs are especially concerned about the recurring cost of ownership and the level of functionality being delivered. Any new model of technology delivery will raise questions, and the integration of any new solution with existing resources will be a critical issue. 4 2009 IDC

Figure 2 Factors Discouraging U.S. Small and Medium-Sized Businesses from Adopting SaaS Concern about data security Concern about not owning software Concern about the recurring cost of ownership Concern about service reliability Still want to have software and data remain onsite Questions about the level of functionality being delivered Loss of control of IT department over applications Concern about reputation/business viability of service provider 0 10 20 30 40 50 (% of respondents) Small businesses (n = 580) Medium-sized businesses (n = 393) Note: Multiple responses were allowed. Source: IDC's Small and Medium-Sized Business Survey, 2007 In general, SMBs are less concerned with the technical aspects of hosted services (how things work) than with certain cultural/organizational issues. Therefore, a good relationship with a service provider can go a long way toward overcoming the barriers SMBs perceive in terms of adopting hosted services. Reliable channel partners or support from a vendor will be critical in distinguishing one offering from another, independent of functional performance. Considering Apptix Apptix, founded in 1997, provides hosted messaging, communications, and hosting solutions. The company is headquartered in Herndon, Virginia, and has nearly 200,000 end users at more than 21,000 organizations worldwide. The company claims to have one of the largest hosted Exchange user bases in existence, making it a major participant in the industry. 2009 IDC 5

According to Apptix, it provides SMBs with a one-stop shop that offers an affordable, reliable, and secure alternative to purchasing and managing software applications in-house. Apptix sells its solutions through the Web, through a direct sales force, and via a growing reseller network that leverages the company's service management platform to offer white- and private-label solutions. Apptix's offerings are based on a flexible per-user, per-month subscription-based model. This enables SMBs to pay only for the IT services they need at a given time. Also, Apptix focuses specifically on the small and midsize markets. After more than a decade of mining the experiences of its user base, the company has learned the IT and support needs of SMBs. Apptix offers the following hosted business communications and IT services: Hosted Microsoft Exchange email services Mobile email services across common devices, including BlackBerry, iphone, Palm, Treo, and other smartphones Web conferencing and secure instant messaging (IM) utilizing Microsoft Office Communications Server 2007 R2 Business VoIP phone services, including desktop fax Hosted Microsoft SharePoint collaboration services Online backup through a partnership with EMC's Mozy Web site hosting, as well as domain registration and DNS hosting Virtual private servers (VPS) The company strives to differentiate itself from other hosted vendors in five areas: Service level. Apptix has created a world-class, fully United States based customer support team that provides 24 x 7 technical support. Reliability. Apptix has deployed a fully redundant clustered environment that maintains 99.99% uptime, which is guaranteed through service-level agreement credits. Complete solution. Apptix provides SMBs with a suite of services to get online, communicate, collaborate, and store their data often within 24 hours all from one vendor, on one bill. Customer focus. Apptix has emphasized a customer-first mentality by fostering an environment that aims to establish a culture of excellence from engineering to support to sales. Value for money. Apptix provides cost-effective services designed to minimize a customer's investment in both capital and resources. Opportunities Apptix sees the following opportunities to expand its presence within the SMB market segment: Hosted services are increasingly appealing to SMBs in the current challenging economy. As IT departments are asked to do more with less hosted services free these limited resources to focus on strategic initiatives and core competencies. Microsoft's focus on the SaaS market enables partners, such as Apptix, to offer SMB customers an expanded suite of popular enterprise-class business productivity tools. Microsoft will help create greater market awareness of and acceptance for hosted services, potentially leading to 6 2009 IDC

greater adoption by SMBs. In addition, Apptix's involvement in Microsoft's Technology Adoption Program (TAP) ensures that the needs of its customers are integrated into Microsoft's development process. Apptix's significant user base provides it with the financial viability as well as upsell and cross-sell opportunities to continue to grow during the current economic climate. Ongoing two-way communication with this user base enables Apptix to offer products and services SMBs consider to be high-level communication and IT priorities. A new provisioning platform and an expanded suite of offerings enable Apptix to be a "one-stop shop" for SMBs' IT needs. As a result, Apptix has the opportunity to gain market share from SMBs looking for one contact for service and support. Challenges Among the challenges facing SaaS providers, including Apptix, is the current economy, which is causing companies of all sizes to pull back on their IT spending. While there is increasing interest in SaaS and hosted applications, the current usage of SaaS among small companies those that Apptix is targeting along with midsize companies is modest. In particular, small companies are concerned about the recurring cost of ownership with SaaS and about the level of functionality that is delivered with SaaS offerings. To sway these customers, Apptix needs to overcome these perceptions. As companies adopt some SaaS applications, there will be challenges moving forward, such as training and cultural issues. In addition, the support of senior management as well as IT management will be especially important for successful implementation. Consequently, Apptix will need to work internally with customers to deploy its technology successfully. Conclusion Like their larger counterparts, SMBs depend heavily on technology to conduct their day-to-day business operations. However, unlike enterprises, SMBs typically don't have the internal IT resources needed to maintain, manage, and upgrade infrastructure and applications. Hence, using hosted solutions for specific IT needs can prove particularly effective for SMBs. By adopting hosted services, SMBs can implement and pay for the IT functionality that they actually use and also can adopt applications incrementally, as needed. IDC believes the market for hosted solutions will continue to grow in importance. To the extent that Apptix can address the challenges described in this paper, the company has a significant opportunity for success. A B O U T T H I S P U B L I C A T I O N This publication was produced by IDC Go-to-Market Services. The opinion, analysis, and research results presented herein are drawn from more detailed research and analysis independently conducted and published by IDC, unless specific vendor sponsorship is noted. IDC Go-to-Market Services makes IDC content available in a wide range of formats for distribution by various companies. A license to distribute IDC content does not imply endorsement of or opinion about the licensee. C O P Y R I G H T A N D R E S T R I C T I O N S Any IDC information or reference to IDC that is to be used in advertising, press releases, or promotional materials requires prior written approval from IDC. For permission requests, contact the GMS information line at 508-988-7610 or gms@idc.com. Translation and/or localization of this document requires an additional license from IDC. For more information on IDC, visit www.idc.com. For more information on IDC GMS, visit www.idc.com/gms. Global Headquarters: 5 Speen Street Framingham, MA 01701 USA P.508.872.8200 F.508.935.4015 www.idc.com 2009 IDC 7