InformationWeek

November 17, 1997

Case For Intranet Outsourcing

Better services, desire to cut costs fuel trend

By Nick Wreden

utsourcing of intranets and extranets has reached the intersection of two rapidly rising trends: global demand for outsourced Internet-related services and a projected increase in external hosting.

Dataquest, a market-research firm in San Jose, Calif., estimates outsourced Internet-related services will reach $5 billion by 2000. And, according to Forrester Research Inc., an IT advisory firm in Cambridge, Mass., nearly 90% of the companies it has polled are considering external hosting, and 40% plan to outsource push servers over the next two years.

One company that outsources its intranet is Eastman Software Inc., which 18 months ago decided to shift away from direct sales to a worldwide network of resellers. To give its hundreds of employees and business partners rapid access to boiler-plate proposals, product information, and even software code, Eastman Software asked its IT department to develop an intranet.

Its answer was a familiar lament, one that echoes a cross every corporate cubicle: "We want to do it, but it will stretch our resources."

So Eastman Software, a Billerica, Mass., division of Eastman Kodak, joined the growing ranks of end-user organizations contracting to others the hosting of their corporate intranets and extranets. Some, like Eastman Software, are outsourcing them to relieve overburdened IT departments. Other companies want to quickly gain higher bandwidth for anticipated traffic or new applications, while still others want to plug in to an existing infrastructure without incurring the high costs of building national or international connectivity.

Relation To The Core
"The primary test for determining whether an activity should be outsourced is its complexity and distance from core competencies," explains Frank Casale, executive director and founder of the Outsourcing Institute, a professional association in New York for executives involved in outsourcing. "If an activity is highly complex or subject to frequent changes while be ing distant from a core competency, then it can be outsourced. For most organizations, intranets and extranets are neither simple nor a core competency, which makes them prime candidates for outsourcing."

Eastman Software-which provides enterprise workflow, document management, and other work-management software-began developing its intranet, known as the Knowledge Exchange, in 1994. Since then, Eastman Software has expanded it into an extranet that is accessed by 500 business partners and customers in more than 100 countries.

Constant Access
"We required continuous global access, 24 hours a day, 365 days a year," recalls Ron Arenson, director of sales operations for Eastman Software. "We looked at doing an intranet ourselves, but the inter-nal IT department was already stretched thin." The company scrutinized its internal operating costs, Internet experience, and potential returns before deciding to outsource Knowledge Exchange to GTE Internetworking. Eastman Software spent less than $600,000 to setup the Knowledge Exchange.

Some 90 users log on daily to Knowledge Exchange's intranet system and download about 300 documents-rates that are increasing by 10% monthly. Files are posted in native format using an internally developed authoring tool called Author Aid and are available for viewing within two hours of being sent to an internal administrator.

Access to information via an extranet can make the difference between unqualified success and dismal failure. For example, Emirates Computing, an Eastman Software business partner in Dubai, United Arab Emirates, won a challenging project: to automate the local police force's handling of visas and immigration documents.

The project had to be in placeby Dec. 2, 1996, to mark the 25th anniversary of the current emir's rise to power. That meant the company had just six weeks. The project's completion was complicated by several factors: the nine-hour time difference between Dubai and Billerica, plus the fact that weekends in the UAE fall on Thursdays and Fridays. As a result, Emirates Computing had an urgent need for software code on the Saturday before the celebration, when Billerica's offices were closed.

To quickly solve the problem, the company downloaded the required code from Knowledge Exchange, translated the screens into Arabic, and had the system up and running in time for the celebration.

While some organizations outsource to supplement in-house resources, others take advantage ofan existing infrastructure. Mede America, an East Meadow, N.Y., clearinghouse for medical and pharmaceutical claims processing, has outsourced its health-care transaction network to CompuServe Network Services. This way, the company has avoided the astronomical costs of leased lines and other connectivity required to link more than 60,000 pharmacies, 1,300 hospitals, and 18,000 physicians and dentists nationwide to its data centers in Twinsburg, Ohio, and Uniondale, N.Y., as well as to multiple insurance companies and other customers. "We can concentrate on trans action processing, and we can quickly serve the small health-care provider market that cannot afford leased lines or dial-up delays," says Linda Ryan, VP at Mede America, "while CompuServe concentrates on network operations."

Mede America offers its QuickLink services for a monthly fee of less than $200. During a typical transaction, a pharmacist swipes a customer's insurance pre- scription card through a card reader, or a druggist enters the information into a PC. Either way, the card reader, continuously connected to the CompuServe network via local access points of presence, transmits the information through CompuServe's networks to multiple routers located at Mede America's data centers. These routers are connected to the CompuServe network via local-loop T1 (1.544-Mbps) lines running X.25. Mainframes at Mede America format the transaction according to the requirements of the appropriate insurance company or other payer, then route the transaction to that company.

After approval, disapproval, or anot her disposition determined by the payer, the process is reversed, and patients find out within seconds how much their prescriptions cost. "The connectivity over the CompuServe network is completely transparent to the doctor or pharmacist," says Ryan.

In some cases, though, it's not cost-saving or accessibility that spurs a move to outsourced networks, but the cutting-edge characteristics of the Internet.

DHL Worldwide Express, a $5 billion privately held air-express carrier in Redwood City, Calif., has outsourced its Web server to Exodus Communications Inc. in Santa Clara, Calif., to complement an internal frame relay network and various Internet service providers used worldwide. The DHL server, protected by a dedicated firewall, is linked to the DHL data center via a single T1 line for remote application and server management.

DHL customers use the Exodus server to download a 7-Mbyte application that lets them track packages. DHL has other applications planned, set to be in place by early next year, b ut declines to specify what they are. Exodus guarantees greater than 99.96% availability and 10-Mbps access, but DHL pays only for the bandwidth actually used.

"Exodus can buy Internet bandwidth in bulk," says Shawn Farshchi, director of infrastructure engineering at DHL. So, installing the server at Exodus is less expensive. In addition, DHL gets a 10-Mbps connection to the Internet. It also lets DHL segregate Internet traffic from data traffic, which gives customers better response time accessing company services. "It was surprising to see how smoothly the function could be outsourced," Farshchi says. "Potentially, this set-up can be used to provide customer access to various back-end services, which will be announced later."

Price Tag
Generally, the fees for outsourcing vary. Forrester Research estimates that while simple Web hosting costs customers $1,000 to $12,000 annually, outsourcing can run $24,000 to $120,000 for each application, or be calculated on usage-based pricing. An entry-level customer for Exodus pays approximately $24,000, while fees for many customers come to about $90,000 per year.

Other reasons companies may be driven to outsource their intranets and extranets include the need to change applications to handle increased links to suppliers and customers, and rising bandwidth requirements from new applications such as teleconferencing over the Web. Mark Bonham, marketing VP of Exodus-citing a dramatic rise in the number of dedicated servers-predicts that two-thirds of corporate Internet sites will migrate to a new class of service provider known as Internet data centers.

Internet data centers are emerging as a way to handle the rapidly expanding infrastructural, staffing, and other demands of corporate intranets and extranets. They do more than provide simple access like ISPs, yet they lack the hot site and other advanced complexities of traditional outsourced data centers.

"Fortune 1,000 companies are moving to outsource intranets and extranets because they realize they h ave to focus on their business, especially as the demands, applications, and number of servers grow," says David Cooperstein, a Forrester analyst. "Companies often start with one Web server for content hosting. Then once they understand it, they don't want to have to deal with it."

Growth will come from leaping the high hurdles set by large companies for supporting key operations, says Cooperstein. Once those standards are met, the functionality of outsourced extranets will expand from providing just-in-time documents to supporting value-chain links among suppliers and customers.

Eric Paulak, a senior analyst with Gartner Group Inc. in Stamford, Conn., says IBM already provides access to SAP applications. Forrester Research predicts that one day the big car manufacturers will outsource supply-chain servers to third parties to help synchronize their vendor delivery schedules.

As these intranet and extranet applications become more complex and critical, systems integrators will become even more important than they are today. They will handle connectivity to legacy databases and issues surrounding enterprise business processes will emerge. For example, technology and business-planning strategies that complement the firm's outsourcing services are already an emphasis at the Internet & New Media division of EDS in Plano, Texas, explains its president, Butch Winters.

Staggered Needs
Winters suggests that selective outsourcing could spread as the use of high-bandwidth community technologies such as video streaming grows. "Some technologies may not be needed regularly," he says. "However, companies may want to do a global sales conference via the Internet once a month or hold a shareholder meeting every quarter."

Despite the advantages of an Internet data center, there is a downside: It's one more function to manage. As a result, Exodus' Bonham says that merging internal activities with external resources will drive a need for what he calls collaborative enterprise management.

"Companies are going to require complete control over the architecture and performance of all their network operations, whether internally, at remote sites, or with third parties. As new technologies become increasingly resource-intensive, the critical issues are how they can be managed effectively and how management controls can be applied to Internet applications," says Bonham.

The question of outsourcing hinges on balancing in-house resources and core competencies against the advantages and costs of Internet data centers. However, the outcome seems to be apparent: Given the advantages, more and more companies will opt to outsource their intranets and extranets.

See related story, " Make Outsourcers Commit ."

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