What's ahead for storage service providers?

Posted on May 01, 2002

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The model hasn't lived up to its original promise, but SSPs can still save IT organizations money because of economies of scale, while providing better data protection.

by Patrick D. Curran and Bryce D. Youngren

The storage service provider (SSP) industry has lived through a lifetime in just two years. It emerged with much fanfare and excitement as SSPs evangelized the concept of selling storage as a utility. Companies would no longer buy and manage their own storage hardware, the argument went; instead, they would contract to only pay for what they used, just as they would with communications services or electricity.

Racing to capture the lead role in this new world, many leading SSPs invested millions creating storage infrastructures. In the middle were Internet data centers, which housed the IT infrastructure for thousands of companies, and which would resell these storage services. Industry analysts predicted the industry would quickly grow to several billion dollars in a few short years.

Fast-forward two years to today, and the results are not as rosy as many had hoped they would be. First, many of the early adopters of SSPs' services were dot-coms, and when this customer base began to disappear, so did large portions of the SSPs' revenue. The SSPs already had purchased significant amounts of hardware to service these customers and had to continue making payments on these assets while their revenue dwindled. In addition, many IT organizations were hesitant to outsource primary disk operations, and it was difficult for SSPs to resell the disk capacity they had purchased.

The final straw for many SSPs came when several of the Internet data centers, on which SSPs depended to resell their services, declared bankruptcy or shut down. In the past six months, virtually all SSPs have announced sizable layoffs, and several have ceased operations.

Unfortunately, this picture of distress is the only one that many industry-watchers see. While the industry has not lived up to the daunting expectations originally placed on it, demand for outsourced storage services continues to grow.

Redrawn Business Models
In the wake of the dot-com implosion, many SSPs quickly shifted gears, the strongest players retooling their service offerings for the corporate market, assuming the role of managing existing storage environments for large enterprises. This shift eliminated the SSPs' need to invest in infrastructure buildouts.

Companies can potentially reduce costs and improve IT efficiencies by engaging an SSP to manage their entire storage infrastructure. Most SSPs use a centralized management and monitoring system that services many companies, and because of the economies of scale, SSPs can possibly provide these services at a lower cost than a company could create on its own. SSPs' services also help increase the capacity utilization of their clients' storage infrastructures (many storage infrastructures are only 50% utilized), allowing these clients to postpone additional storage-related capital expenditures.

One promising area of opportunity for SSPs is backup. Some enterprises only complete 50% to 60% of the backup jobs they attempt; SSPs can allow customers to raise this number to as high as 95%. By eliminating the complexity associated with effective backup administration, SSPs allow enterprises to free up their IT personnel from time-consuming backup administration and have them focus on other IT priorities. Improving backup success rates makes enterprises better positioned to respond to unforeseen disasters—a top priority for IT managers.

Key Differentiators
Two key differentiators are beginning to define the SSP market and distinguish competitors: the software they have developed to offer their services, and the service levels they guarantee and deliver. The best software systems aggregate data from all leading storage vendors and environments. First, SSPs should monitor the health, capacity, and performance of an enterprise's storage infrastructure from a network operations center (NOC) that is staffed 24x7. When issues arise, SSPs' systems should enable them to address the maximum number of issues at the NOC, leaving only the most difficult to be handled by their client's on-site staff.

In addition, software systems should provide customers with a single consolidated view of their storage environment and allow customers to verify that service level agreements (SLAs) are being met. To add value, SSPs should make these systems as comprehensive and as easy to use as possible, providing different views for higher-level managers as well as the details on specific devices.

Future Opportunities
SSPs are beginning to provide remote backup and data-recovery services for smaller firms and divisions of large corporations. Like larger enterprises, most small and mid-sized companies struggle to maintain effective backup strategies; many cannot recover data quickly and reliably in the event of a system failure or disaster. Many firms make the mistake of keeping tapes in their offices, which means these backups are vulnerable to fire and flood, as well as employee tampering. Firms that do keep tapes off-site pay more than $1,000 per month to tape-vaulting firms. While this is a prudent practice, it often takes up to 24 hours for tapes to be returned and the restoration process to begin.

SSPs can potentially provide better data protection and faster data recovery at lower prices than companies pay for a tape-vaulting firm. The service is relatively simple: SSPs make a remote copy of the information on a firm's servers via a high-speed network connection. This copy resides at an off-site data center, with a high level of security and redundant power and bandwidth. Backups can be scheduled several times daily, based on companies' needs and operations. If restoration is necessary—usually when files are lost or corrupted—they can be quickly retrieved via an online interface. Most importantly, companies are assured that the backups are occurring, completely and on schedule. Because of falling bandwidth prices and the resulting growth in penetration of business broadband access, some SSPs are beginning to target small and mid-sized businesses by offering remote backup services those companies could not afford to create on their own.

In addition, targeting vertical markets—particularly those with specific regulatory requirements—presents significant opportunities for SSPs. The healthcare and financial service sectors, for instance, must comply with the specific data storage and security requirements of the HIPAA legislation and the Gramm-Leach-Bliley Act, respectively. SSPs are developing solutions that ensure cost-effective and timely access to both new and aging data with digital archiving systems that manage extremely large inventories of data.

In the future, customers may want to turn to one provider to manage other areas of the IT value chain, such as security, firewalls, servers, networks, and even applications. To provide these functions, SSPs will either need to build the capabilities into their systems or merge with other service providers that have developed such capabilities.

Amid this market's continued uncertainty, it is clear that the SSP industry will shift in dramatic ways during the next 12 months. Many weaker SSPs will fall out of the market or be merged into stronger players. Industry leaders will emerge and market demand should accelerate. Established IT service providers such as IBM and EDS and even telecommunications service providers will start to introduce new services (e.g., remote server backup and enterprise storage management and monitoring) and acquire existing players to quickly expand their base. Successful SSPs will continue to broaden their capabilities and find new ways to bring value to their customers.

Patrick Curran is a partner at Great Hill Partners and chairman of the board of ManagedStorage International, and Bryce Youngren is a senior associate at Great Hill Partners and serves on the board of ManagedStorage International (www.managedstorage.com).


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