Computing by subscription

A new breed of service company promises to deliver PCs, software, and great tech support for a low monthly fee. Should you get aboard?

Since the dawn of the PC age, medium-size and large businesses have gone through the same drill. You outfit your employees with a daunting jumble of computers, software, networking devices, and the associated items people need to do their work well. And then you pay a staff of IS experts to deal with the inevitable user questions, compatibility glitches, and other bumps in the road. Is there a better way? In this month's Enterprise Technology, we look at a new breed of service provider that claims to simplify life by providing a package of equipment and outsourced tech support--all for one monthly fee. We'll tell you how to determine whether one of these providers is right for your company.

Consider the copying machine. You pay a monthly fee to use it. Nobody thinks about it unless it breaks--at which point a tech visits, replaces a part, and disappears.

What if your company's computers, software, and local-area network could be maintained in the same offhand way? That's the proposition offered by new companies--dubbed outsourced infrastructure providers (OIPs)--that charge by subscription for an officeful of hardware, software, and networking. OIPs rent bread-and-butter IT by the seat. You pay a couple of hundred bucks per PC per month for someone else to shoulder the burden: desktops, laptops, servers, printers, routers and hubs, e-mail, backups, Windows and Office 2000, Internet connectivity, and help desk services.

Led by innovative start-ups CenterBeam Inc. and Everdream Corp., OIPs primarily serve small to medium-size businesses that would otherwise handle tech needs internally, rely on a patchwork of vendor support plans, or outsource to a local value-added reseller (VAR) or service company. However, their services may also appeal to large enterprises with small, far-flung offices that don't have on-site IT staffers.

But by no means are OIPs for everybody. For one thing, they support only the hardware and software they supply. In other words, you basically have to upgrade your entire office at once, and then donate the old stuff to charity or hand it out to employees. And because these companies are still in start-up mode, their customers are gambling that OIPs' business model will permit them to provide high-quality service over the long haul.

"It was a little hard to swallow at first," says Ravi Kulasekaran, CEO of Appshop Inc. in Fremont, California, and one of CenterBeam's largest customers. "We had to give up 25 new computers that we owned outright." But when he ran the numbers--and figured in CenterBeam's willingness to buy those existing PCs for US$300 apiece--Kulasekaran was sold. An application service provider (ASP) that in 2000 grew from 20 to 160 seats, Appshop has plenty of in-house tech savvy, but focusing that expertise on the core business made more sense.

HQ Global, the world's largest turnkey office provider and Everdream's biggest customer, is a good example of a large company that discovered that an OIP was a good fit. With 370 business centers across the United States, "it's extremely difficult to provide a high level of IT support," says Mike Grimm, HQ Global's chief technology officer. "I was able to show that through a reduction of head count, depreciation expenses, and an elimination of capital expenses, I would save more than 10 percent [using an OIP]." Grimm plans to turn over responsibility for 3000 PCs to Everdream.

The wisdom of disposing of IT infrastructure you've paid for and replacing it with rented hardware and software may seem counterintuitive. But in most organizations, the total cost of ownership remains high. According to the Gartner Group, the average business spends between $4500 and $7500 per PC per year in maintenance and amortization--though with upgrades and acts of God, it's difficult to predict costs year to year. OIPs typically charge between US$150 and $300 per month per PC, plus a once-only setup charge of several hundred dollars to move data from each old machine to each new one. That adds up to a cost of around $3000 to $4000 per PC per year, depending on peripherals, the type of Internet connection, PC configuration, and other factors. This fixed rental fee includes continuous software upgrades, data backup, hardware upgrades every three years, and one-stop, guaranteed service and support.

Whether an outsourced, computing-by-subscription solution makes sense for your company depends on several factors. If you've recently invested heavily in equipment and personnel, and you're happy with the results, there's little reason to start fresh with an outsourced solution. But if you're hemorrhaging uptime and fretting over how to recruit and retain good IT talent, OIPs provide an appealing option. Just keep in mind that in outsourcing a vital part of your business, you have to fully trust the OIP you choose.

Making The Leap Of Faith

The outsourcing of information technology is nothing new. Huge service providers such as EDS and Computer Associates have offered total computing solutions to big corporations for decades. And big customers of IBM, Compaq, and Dell can command special packages that involve a variety of leasing and outsourced IT arrangements. Among system vendors, comes closest to the OIP model; it offers various comprehensive solutions to small and medium-size businesses, including PCs by subscription and Web hosting, designed to integrate with a company's existing IT plan.

By contrast, OIPs take complete responsibility for the nuts and bolts of the IT infrastructure, but on a smaller scale and at a cost far lower than that charged by monster companies like EDS. When users have trouble, from an ugly PowerPoint presentation to a downed network connection, they call one number--the OIP help desk. "Everyone I work with has said that the CenterBeam help desk is great," says Angelique Faul, director of operations at Evans Partners, a public relations firm with offices in San Carlos and Santa Cruz, California, that turned to CenterBeam. "Before, we'd call our computer guy, and it might be two days till he could get here."

So how do you choose a partner that will deliver not only this month, but also years from now? "You want to pick a firm that has strong relationships with larger firms," says Rob Enderle, vice president of Giga Information Group, "so it can survive the consolidation that's going to happen in the market." By that measure, CenterBeam and Everdream--the only two OIPs with a national presence--lead the pack. Based in Santa Clara, California, CenterBeam has struck strategic deals with Dell and EDS, and it secured $115 million in blue-chip investment last November. Everdream, of Fremont, California, claims Hewlett-Packard and Ingram Micro as partners and last September received $50 million in funding from the likes of HP and Siebel Systems.

Among other benefits, these alliances enable CenterBeam and Everdream to deliver on-site service where necessary. Everdream's contract with Ingram Micro's VentureTech Network of VARs gives the company a national on-site service organization. And similarly, through its relationship with Dell, CenterBeam can call on Banctech technicians for on-site service nationwide.

The packages that CenterBeam and Everdream offer diverge in three areas: minimum number of seats, default Internet connection, and networking options. CenterBeam won't support offices that have fewer than ten seats, while Everdream will take on a one-person office. On the other hand, if you opt for CenterBeam's base price of $225 per month for a Dell 600-MHz Celeron desktop, you get a DSL connection and a Lucent wireless LAN setup as part of the package. Everdream's $159 base price includes an HP 866-MHz Pentium III system with a 56-kbps dial-up connection and no local network. XO Communications provides DSL as an option, but Everdream prefers to let its Ingram VAR network make the sale and do the setup for networking. Both OIPs partner with T1 and frame-relay providers.

Other providers that tout similar deals are fast emerging, notably MindShift in the Baltimore-Washington and Chicago areas, and IReadyWorld in the southeastern United States.

These days, even big-company alliances don't guarantee success. CenterBeam's CEO, Sheldon Laube, scoffs at the possibility of business failure but notes, "In the worst case of all, if we disappear, what you're left with is Cisco routers, Dell servers...the same stuff you would have bought most probably anyway." That may be, although the OIP, not the customer, owns the equipment--leaving a particle of risk that your hardware could be repossessed. That nightmare scenario doesn't seem to bother Appshop's Kulasekaran, who asserts that he'd port the data over to new machines and have everything back to normal "inside of a week."

Their Problem, Not Yours

OIPs and their customers cite responsive, one-stop service and support as the biggest benefit. "Most problems are fixed within 2 minutes," enthuses RoseMary Anderson, accounting manager for West Coast Office Interiors of Santa Clara, California, a CenterBeam customer. And Everdream is so confident of its help desk, the company will refund a month's per-seat subscription fee if its support line isn't answered within 90 seconds. OIP customers routinely report that the remote support is so good, on-site technicians are seldom needed.

How can OIPs guarantee high-quality service? Everdream's Gary Griffiths extols the virtues of the advanced tools his techs use to diagnose and solve problems over the Internet: "We have nine patents that are pending right now and another dozen or so that are in the pipeline, and they're all related to improved levels of service." That technology, along with the self-diagnosing software preloaded on OIP systems, helped sell HQ Global's Mike Grimm. "Everdream has done a lot of things to solve problems proactively, before they fester into bigger problems," he says. "For example, when your PC boots up, it automatically compares all the DLLs and executables on the hard drive to a standard configuration. If it sees an error, it will correct that proactively."

Beyond technology and crack call-center management lies another explanation for OIPs' quality service and support: These companies handle the software and hardware they ship to customers and generally ignore all other hardware, software, and networking. That strategy means fewer choices for customers. Go with CenterBeam, and you get Dell desktops, notebooks, and servers; go with Everdream and you get HPs. You get some flexibility on configuration, such as memory and monitor size, but not much. Both include Windows 2000 and Office 2000 in their standard packages, along with virus protection, system utilities, audio/video players, an e-mail account, and online tutorials. Accounting software and Web hosting are optional. CenterBeam ships Lucent wireless LAN hardware and Windows 2000 networking by default; Everdream suggests a consultation before you choose a LAN setup. The limited selection is a trade-off, but there's nothing stopping you from deploying other stuff--the OIP just won't support it.

Weigh Your Options

From a pure cost standpoint, the ideal OIP customer would be a start-up that hadn't spent a dime on IT and wanted to keep capital expenditures low. OIPs, however, prefer to focus on a less risky and more prevalent customer base: existing businesses with IT problems and an office full of outdated equipment.

CenterBeam customer RoseMary Anderson faced just such a situation. When CenterBeam made its pitch to her, "We had a very ancient set of computers, from 386s all the way to Pentium-133s," she says. In addition, after employing a series of "incompetent" IT contractors, she was now carrying the support burden herself. "I had reached between 80 and 96 hours a week and I couldn't take it anymore," says Anderson. Skeptical at first, she grew impressed by CenterBeam's tech-savvy pitch and emphasis on security and reliability. But cost made the decision a no-brainer: "We pay under $48,000 a year for our 21 computers," she says, networking included. "That's less than I would have to pay for a single IT person."

Escaping the upgrade rat race is another key benefit. Included in Everdream's subscription price is an automatic upgrade to more powerful hardware every three years. That pace might be a little slow for an engineering company, but with ordinary office applications it's pretty much ideal. Better, OIPs deliver bug fixes and new versions of productivity applications as soon as they are available.

Angelique Faul factors the cost of downtime into her evaluation of CenterBeam's solution. A year ago, her IT situation had deteriorated to the point where she was losing "an hour to 2 hours of billable time per employee per day." According to Faul, now that she's contracted with CenterBeam and downtime is a rarity, recovering those billable hours offsets the monthly subscription fee.

Where the OIP model begins to falter is in larger offices--and not only those that might need to scrap a big IT setup. For example, Appshop has grown so quickly that Kulasekaran wonders when the volume discounts his company can demand, along with the opportunity to spread internal IT support costs across many PCs, will outweigh the convenience and economy of CenterBeam's flat-rate plan. "When we grow to 300 people, we'll have to do the cost-benefit [calculation] again" to see if the current deal still makes sense.

Kulasekaran thinks that when the time comes, he can cut a deal with CenterBeam and continue the relationship. In fact, he says, he's already negotiated a better deal than the standard flat rate for smaller customers. And Mike Grimm received a major concession--during the shift from in-house IT to Everdream over the next 18 months, Everdream is supporting his older equipment.

Special deals like these raise troubling questions for would-be OIP customers. If an OIP makes concessions to snag big accounts, can it grow smoothly? Will a sudden jump in PCs from a new big account degrade service? There's no clear answer, though CenterBeam cites its relationship with EDS, which is happy to take on large accounts that CenterBeam can't handle. One thing is certain: If an OIP's service were to falter, the value proposition would quickly evaporate.

Outsourcing The Future

David Tapper, a senior analyst with International Data Corporation, firmly believes in what he calls the "utility model" of computing, in which OIPs play a key role. He sees companies like CenterBeam and Everdream as foot soldiers in a long march toward ASP-based computing, where and thousands of application developers will use OIPs as a pipeline for applications you subscribe to rather than purchase. Already, he notes, both companies have dozens of ASP partners offering such services as e-commerce storefronts and human resources management. But they will embrace new technologies--such as handhelds--only as they become standardized.

Think of OIPs as ultraconservative, outsourced IT departments. If you'd like to stop worrying about the basics and concentrate on technology strategic to your business, an OIP is a compelling option, provided you believe the promises that quality of service will remain high--and provided you're willing to upgrade your current infrastructure in one fell swoop.

Doing the Math Outsourced IT

Here are typical costs of setting up a Microsoft-based, 20-person office compared with those charged by a typical outsourced infrastructure provider (OIP). Because OIPs include ongoing software upgrades--and hardware upgrades every three years--in their monthly fees, we've calculated the monthly hardware and software costs of doing it yourself across three years. If you choose not to hire a full-time IT person, you'll dissipate your salary savings on various VAR setup charges, extended support plans, employee training programs, and (very likely) the incalculable costs of downtime. On paper, the core of the OIP value proposition is clearly premium service and support. Your mileage, of course, may vary.

Tech Support From the Source

The Pros and Cons of PC Makers' Service PlansIf you like your PC vendor, you might like the idea of handing over all your support headaches to that company. After all, who knows hardware better than its manufacturer? But when it comes to doing business with old-guard computer makers, expect trade-offs.

On the plus side, major PC manufacturers have far broader hardware offerings than the take-it-or-leave-it desktop and laptop configurations provided by outsourced infrastructure providers such as CenterBeam and Everdream. And the PC companies may offer more complete IT services for some customers. Streamlined, easy-to-understand pricing and simple all-in-one support plans, however, are much harder to find.

Dell and IBM, for example, don't themselves offer packages that let you get a PC and service for one monthly service charge. Instead, they work with third-party leasing firms to devise payment plans for PCs and IT services. And leasing companies like Dell Financial Services (partially owned by Dell Computer) don't claim to offer the breadth of help desk services CenterBeam and Everdream provide.

Micron's Menu comes closer to the CenterBeam/Everdream approach. Its Subscription Computing program offers a veritable Chinese restaurant menu of system configurations and levels of IT services to choose from. Unlike CenterBeam and Everdream, which support only the systems they install, will service any computer. But the company draws the line when it comes to performing complex tasks such as remote network management, data backup, and software distribution.

Gateway, meanwhile, is using its 300 Gateway Country retail outlets as regional support outposts for its business customers. Services include networking, Web and e-mail hosting, firewall protection, Internet connectivity, and application support. And as with Micron, pricing is based on an à la carte suite of options, not a one-package solution.

Will more PC manufacturers offer all-in-one IT outsourcing plans in the manner of startups like CenterBeam and Everdream? "Larger vendors are keeping a close eye on what these companies are doing," says John Madden, an analyst with Summit Strategies, pointing out that Hewlett-Packard and Dell have established relationships with Everdream and CenterBeam, respectively. Madden thinks the heavyweight hardware vendors will jump to capitalize on any success they see--and that it wouldn't take much for a vendor to rejigger its sales pitch to replicate the IT-in-a-box approach to selling PCs and services. For now, however, you might find that it takes several days to get a monthly per-desktop price quote from one of the big guys that matches one of the package deals that CenterBeam or Everdream can put together in an hour.

--Tom Spring

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