The Service Game
Learn the New Rules Before You Compete
By Henry W. (Hank) Jones III
As corporate Web sites have evolved from billboards to transactional sites, both traditional and pure-play businesses have turned to outside experts to provide necessary services. Your company will need to work with these new infrastructure service providers. Fortunately, many of the rules of working with them have parallels to companies expanding their brick-and-mortar infrastructure in the physical world.
And now hosting companies offer more than fat bandwidth, robust power, and hardware farms. Both established and newer vendors are adding data storage, security consulting, procurement of hardware and software, and other related services.
Your business increasingly depends on a transactional Web site that's swift, safe, and stable—qualities that brick-and-mortar businesses depend on in their office buildings, warehouses, or factories. In addition, there are several other considerations you must make when choosing a Web-hosting service, such as: How will you procure site services? Can you estimate your actual rental costs? Will you be able to relocate to a better vendor later without unexpected expenses or obstacles?
When traditional businesses lease commercial space, construct a factory, or rent storage space, they rely on well-established building codes, zoning laws, familiar contract provisions, and expert advisors to guide their progress. Similarly, companies are increasingly outsourcing their Internet operations to third-party service firms. Colocation, managed hosting, and similar Web services are offered by a confusing array of new vendors. Webmasters, e-business managers, executives, and boards of directors must decide how to manage the transition from an internal, billboard-like Web strategy to a modern, transactional site, hosted by a special-interest Internet landlord. Good planning is critical. Below are practical tips to help you do your deal right and tight.
Corral a Qualified Crew
No smart CEO would let just one manager choose, design, budget, and oversee a company's new facility without ongoing involvement by other departments. She or he would deploy a multidisciplinary team to find the ideal Web host for the company. The point person for this group would be charged with obtaining advice from all department managers—regardless of their skill sets—on the requirements they have for the service company that will be chosen. This applies even if the team leader is the company's e-commerce executive, CIO, or Webmaster.
When you need office space, you hire a specialist broker. For your Web-hosting transaction, create a dream team of industry veterans. Your board of directors and your boss will thank you for obtaining specialists' advice.
Find an Internet technology consultant who has already struggled with the challenges of Web-site scalability, reliable pipes, and network security. In particular, this person must have experience with bandwidth procurement, network reliability maintenance, and other Web environment network management.
Your site's special traits may influence which employees you'll choose as site advisors. If your business model is content-centric, your chief content officer should help determine whether your Web host has adequate physical proximity to and alliances with the other vendors who are proponents of content-caching technologies. If your site has consumer transactions or other items that draw hackers, include your security manager and possibly your e-commerce insurer on your team.
Confirm that your e-commerce lawyer has Web hosting, data processing services outsourcing, software development, and e-commerce contracting experience. Link up with a CPA who knows which record-keeping, reliability, and risk management resources and processes should be deployed by your host so you're assured of its financial stability.
Study Up
For your online presence, you need to know exactly what "Internet real estate" your vendor will provide. Make sure the quantity and types of supplied bandwidth are adequate, and that its servers will suffice. Determine whether the authentication, security, content, email, and other functions are separated onto multiple machines (and whether they should be). Find out how and how often your vendor updates and documents its network security software, procedures, employee background checking, and other resources. And ask whose site management software will be used—your vendor's home brew, or global, best-of-class offerings by a financially stable independent software house?
Do your homework. Before adding or upgrading to a transactional site, study the infrastructure industry. From your desk—for free—you can read risk, finance, and strategy disclosures (such as the SEC filings that are available via www.sec.gov/cgi-bin/srch-edgar and www.freedgar.com), and marketing materials from hosts, such as: Rackspace, Exodus, Interland, Verio, Genuity, Digex, and others. Tour the vendors' physical sites and ask questions. Ask your IS department, CPA, and e-commerce consultant to conduct brown bag lunch seminars on the industry. The more you know, the better this infrequent procurement process will go.
Determine in advance with your team not only which services you'll buy, but also how, when, where, and with whom you'll negotiate. Before you sign or even study a vendor's contract, you should find and distribute study materials to members of your deal team. Optimal tools include articles from the industry press and even sales-oriented white papers from vendors. Sometimes with intense Web research, you can find real, final contracts between your chosen service provider and a prior customer with negotiated wording and other concessions included (although the pricing is often edited out). I used www.10Kwizard.com to find actual, signed agreements from the vendor with whom I negotiated a two-year, $1 million hosting deal. I pulled the text for free from government records. This embarrassed the vendor's representative, but disproved his claims that "we never change that paragraph," and led to better protection for my client's business in the final contract.
Your preparation for choosing a hosting company should include an investigation of the successes and failures of hosting services used by other companies with whom you have contact. If your team includes veterans of professional services firms like Andersen Consulting (now Accenture) and EDS, ask these colleagues which contract terms and customer communication processes worked well in pre-Internet, traditional outsourcing environments. Finally, your IS and finance departments must assess and quantify the purported benefits of buying via your chosen hosting firm. Know whether you can get better pricing, support, allocation of new technology, and vendor attention by buying hardware and software along with services?
Blueprint All the Players and Connections
In office and land deals, savvy professionals precisely chart linkages amongst all the resources. These contracts specify the layout and capacities of water, power, phone, and other "pipes" you rely on in daily work.
You should do the same when you plan to move to a host. Actually chart out who needs to cooperate with whom and how it should be done. Try to determine how your software vendors will need to intermittently interact with your hosting services vendor. Find out whether your CPAs can access your now off-site assets and operations. Lastly, speak with your insurance broker to confirm and perhaps supplement your coverage for the new storefront.
A one-page chart for your Web-hosting project educates senior management, justifies your budget, and (hopefully) explains those long work hours to your significant other. It can also help your deal team spot overlooked dependencies, omissions, and ambiguities in your plan. From this new perspective, plan new communications, budgeting, and contract changes for your current vendors, and check the flexibility of your incumbent supply relationships and contracts.
Financing your physical headquarters is a big deal. It requires not only a detailed, well-considered contract, but also many other resources to be quantified and confirmed, such as adequate parking, soil quality, and HVAC specs. Electronic services are different in substance, but no less complex. Your hosting services contract should cover these details:
Constant Motion. Web-site strategy, features, and technical components change rapidly, unlike old-world business facilities. You won't move that elevator, ever. But you will change your navigation and content from time to time. Can any employee instruct your site's host to change your security, power, or bandwidth provisioning? You'll want your vendor to respond promptly, but only according to instructions from the right people at your firm. Make sure the requirements, processes, deadlines, and tools for coordination between the vendor and your Web-staff are well documented, way before you need them.
Customer Care. In Web hosting, the hard spots are soft. Your success and satisfaction depend on the quality, currency, and precision of the vendor's services. In the contract, define issues about which you expect to receive proactive alerts from your vendor, including new equipment, pricing, Internet traffic problems, hacking, and alternative topologies.
Size and Stability. Decide how much is enough: How much bandwidth? How many interruptions and how little site downtime are acceptable? Is the vendor's service level agreement (SLA) reasonable? (See " SLAs: If 6 Turned Out to Be 9, I Don't Mind" for detailed recommendations and information.)
Air Care. Managing intangible property is a new requirement. Your hosting company will be the custodian of your (and your customers') intellectual property and confidential data. If your firm's knowledge capital is your baby, create strict rules for this well-paid Internet nanny. Special contract provisions are required covering data protection, security, copyright protection, data privacy (to comply with evolving U.S. and international rules, especially about consumers), patent risks, and other new e-challenges.
For example, if you sublicense software use from the vendor, demand indemnification—contractual protection—from the vendor against any resulting infringement claims from upstream software licensors or anyone else claiming unauthorized use.
Your investors, lawyers, and marketplace probably require you to identify and protect your competitive information. So require in your services contract that your vendor affirmatively maintain specific procedures, not only to protect your trade secrets and confidential information, but also to deliver periodic reports confirming compliance with the agreed processes.
Make a Safety Deposit: Pricing Savvy
Connecting future prices to published indexes is common practice. "Triple-net" leases are well-known to real estate brokers. In SEC filings, some Web-hosting companies have disclosed that adding services and raising prices for current customers is a key business strategy. Will your money fund your vendor's recapture of its costs from building out its data farms? Future efficiencies may enable your vendor to reduce prices, but the savings may instead be applied to paying for the vendor's rapid expansion.
Savvy managers must deploy both old and new world skills to control their hosting costs. Traditional skills like detailed comparative shopping, and the ability to synchronize procurement negotiations with several vendor candidates still makes sense even in Internet business.
You must decide whether to manage costs by unbundling your vendor's services. Determine whether you can opt out of your vendor's off-site data storage, software maintenance, and other discretionary services, and handle these yourself. Look at separate pricing scenarios so your team can make its "make or buy" decisions based on full data. Ask whether you will get favored customer pricing, when this can be activated, and how such a provision would be calculated.
Also keep in mind that vendors impose fees for costs incurred by unnecessary customer errors and unapproved technical processes. If you make tech-support calls to the site services vendor, assuming bandwidth problems, you may incur charge-backs if the culprit turns out to be software errors on your side.
Stay Informed
When you buy a house, the lender requires checking for both the land title (ownership) and termites before the transaction is completed. In corporate mergers, due diligence (to assess assets and liabilities) occurs between drafting the contract and closing the deal. Wouldn't you require a last look or walk-through of your new office build-out before signing that commercial lease?
For your Web business initiative, check out the new software application installation process at your Web host's server farm, with specified assistance by vendor personnel before you go live. Require your IS gurus to establish a detailed written plan for assessing and documenting the new facility. Create something similar to the punch-list used by architects and contractors in construction projects. You'll want to know Internet addresses for connecting to your and the vendor's servers, the quantity (adequacy) and quality (conditioning) of uninterrupted power resources, hardware load balancing, recovery procedures, and other details.
Your office landlord won't reimburse you for fires started by your employees who are secret bathroom smokers. Rather, you'll get the bill. Your insurer will also deny your claim for reckless parking-lot driving. Similarly, your Web-site landlord will specify obligations for you that impact your Web site operations—including your content management, human resources policies, business insurance, and respective costs.
Make sure your temporary staff, new hires, and on-site consultant aren't using your email system to conduct side businesses. Is that off-quota sales rep online defaming another vendor? Is that LAN manager downloading obscenely large files? Consider these obligations:
AUP OK? Both consumer and commercial Internet service providers precondition their services on acceptable use policies (AUPs). Internet access vendors are taking stronger steps to protect both their reputations and their access to other links in the Internet chain. If your staff breaks the rules, be prepared to be cut off by your vendor, and expect no credit on your bill.
Quality Controls. Where did the customer who visited your Web site get that virus? Was a worm, Trojan horse, or spyware (that monitors a user's behavior and/or software selections) downloaded from your outsourced site? What policies, records, and training can you offer to prove it wasn't you? You should not only have site management policies that prevent such problems—the service agreement with your Internet infrastructure vendor should affirmatively document its quality assurance and record-keeping processes, and the resulting logs should be available to you.
Your Internet strategy must include updated human resources, finance, insurance, and other procedures. If your managers and vendors aren't net-savvy, send 'em to seminars. Or launch your own new economy boot camp: Hire outside specialists to jump-start and supplement your employees' skills.
Schedule a Fire Drill
All conscientious employers and tenants must plan for disasters. A necessary task of savvy management is to enable business continuity, despite fires, union strikes, and other reasons for unexpected unavailability of your usual business resources. How can you manage your Web-hosting deal to cope with the inevitable rainy day?
Clever businesses will extend their old-world contingency planning beyond publicity nightmares and union walkouts to cover Internet availability. Your CIO, information technology consultant, and e-commerce lawyer can help your company identify and procure the backup resources to stay in business in such an event. And new forms of e-commerce insurance can mitigate the losses from crises.
Study articles in industry periodicals that critique SLAs. Find your network operations manager and learn the secrets of the Internet's belly. Imagine you had some new funding, and decide whether you'd invest in your Web business, given what you know about the infrastructure processes, vendors, and components. Try to map transactions on your firm's site, and note any changes in suppliers, points of failure, or added technologies since you first chose your hosting vendor. Then consider what open questions, contract improvements, or exposure should be tackled. Finally, reread your company's last two big information technology contracts: If you spot holes, can't interpret the dense code, or wonder if certain terms and ideas are inadequately defined, imagine that it's your Web hosting deal, six months down the road.
The good news is that the Internet offers businesses a new world of prospective long-term customers, suppliers, and allies. But the near-term Internet challenge for managers, executives, and boards of directors is to update, accelerate, and act on their pre-Internet smarts and procedures to manage the new risks of their new business space on the Web.
Henry W. (Hank) Jones, III is an e-commerce consultant, lawyer, executive, trainer, and writer with 23 years' information technology experience. He operates both consulting and legal practices, based in Austin, Texas. He can be pinged at [email protected].
