Out of Service

How to survive when your web provider dies

Danny Briere lived like a king on Maine's Great Diamond Island. Two miles off the coast, the telecommunications entrepreneur could get whatever he wanted delivered to his home office: groceries, daily FedEx packages, you name it. He even got high-speed Internet access--until his service provider, financially ailing HarvardNet, of Medford, Mass., pulled the plug on him.

The irony is undeniable: Briere is the founder of TeleChoice Inc., a telecommunications consulting outfit that tracks Internet trends. What's more, Briere was once used as a customer reference by HarvardNet, which rented space in his neighbor's basement to store expensive telephone equipment because the Internet service provider had no facilities on the island. Things worked well until December, when HarvardNet dropped its high-speed Internet service, cut 280 workers from its payroll, and announced it would focus on Web hosting instead. What does HarvardNet have to say about the effect on customers like Briere? Not much, apparently--no one re-turned our calls.


The lesson here: No business ever stands on completely solid ground in the squishy world of Web-based services. In practice, it means you have to treat all outsourced service providers the same--with caution--whether they call themselves an ISP (Internet service provider), ASP (application service provider), or BSP (business service provider).

Some lessons are learned the hard way. Edward Vincent, chief executive officer of New York-based Web retailer Citystuff.com Inc., says he spent $500,000--half his $1 million in seed funding--to shift his computer operations to an outsourced model last summer. Unfortunately, Citystuff chose Pandesic LLC in Sunnyvale, Calif., as its ASP. Two weeks later, Pandesic announced its withdrawal. "It crippled us," says Vincent. Citystuff now hosts its own Web site. If Vincent ever outsources again, he says, he'll first demand more details on a company's financial status.


Even then, nothing is guaranteed. Planetgarden.com Inc., a Web-based florist headquartered in Norcross, Ga., did its due diligence before outsourcing its back-office accounting to ReSourcePhoenix.com Inc., a publicly traded ASP based in San Rafael, Calif.

In late november, ReSourcePhoenix announced it was laying off 80 of its 173 employees, selling its assets, and winding down its operations. But PlanetGarden Chief Financial Officer Michael I. Marto had done at the outset what Vincent didn't: He rewrote the contract to provide some protection. That included altering ReSourcePhoenix's data-backup procedures so that PlanetGarden's crucial data--including sales transactions--were kept in two places: at the ASP and at PlanetGarden's headquarters. The florist also required the ASP to purchase an "errors and omissions" insurance policy, a form of Internet malpractice insurance. "Do you know how much liability there can be if they do something with credit-card transactions or anything else that blows up everything?" asks Marto. "We insisted that they have coverage." PlanetGarden itself has a $15 million Internet insurance policy for which it pays more than $20,000 a year.

PlanetGarden's demands went further. It tied its monthly fees to completion of financial reports it needed from the ASP. "Never agree to pay a lot of money up front," Marto warns. It also insisted that, should ReSourcePhoenix ever go out of business, it would pay the cost of converting the retailer's sales data to whatever format PlanetGarden's new ASP used. ReSourcePhoenix agreed and eventually paid an undisclosed sum to convert the florist's data from Oracle Corp.'s financial software format to the Great Plains Software Inc. program used by the florist's current ASP, Atlanta-based NetFinancials Inc. The process took six weeks.


Securing your data soon may not be your only challenge. Securing your basic business services may be, too. Why? Market pressures are forcing online service providers to offer offline services, such as management consulting. While the trend benefits the likes of LOR Management Services LLC in Los Angeles--which hosts financial software plus has certified public accountants on staff--greater outsourcing can mean greater risk for the client, acknowledges Brian Regan, chief executive of LOR Management.

Still, ASPs that mix face-to-face consulting with online service have a greater life expectancy. "The technology components of outsourcing, such as data backup, are now a commodity. The ASPs that will stay around are those that take their business expertise and wrap it around hosting," says Dave Boulanger, a research director at AMR Research Inc. in Boston.

Sound like you'll be getting more bang for your buck? Maybe, if you choose the right ASP. But that's no easy feat: AMR predicts only 40% of today's 1,200 service providers will still be in business by the end of the year.

The bottom line in choosing a service provider: Manage your risks. Citystuff didn't and paid the price. PlanetGarden did and has come through relatively unscathed. What about TeleChoice's Briere? Because his 55 consultants are scattered around the world, using a variety of ISPs, he risked very little when HarvardNet ceased its ISP operations. He just had to swallow his pride and come to the mainland.

By Kevin Ferguson

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