United States: Storage Services Still Growth Business Despite Overhype of Total Outsourcing

With the storage hardware business in the doldrums these days, some may see storage software, a category most all agree has a bright future, as the only cause for hope. But, meantime, a close cousin -- the storage services business - is holding its own quite well in the current economy.

The sector is pegged to grow 8% a year - to a cool $41 billion by 2005, according to Gartner Dataquest, up from $26 billion this year. And that's without the strength of the once-vaunted promise of a new breed of "storage service providers" (SSPs). The assumption that enterprises were ready to totally outsource their storage proved wrong, or early at best -- providing a sharp slap in the face for these upstarts, many of whom have changed focus or shut down altogether.

"Remote provisioning hasn't worked so far," said Adam Couture, senior analyst for IT services at Gartner. He recently conducted a survey of 19 firms that provide storage services, ranging in size from IBM down to firms of less than $100 million in revenues. The report is entitled "Storage Services and SSPs: The Insider's View" (available at http://www.gartner.com/).

"Backup and recovery services is what's real," Couture said, noting this category is now a third to a half of the storage-related service revenues of most of the firms he surveyed. He also said that certain firms, including IBM and Compaq, have "a very strong business putting a dedicated box on your site, which you can grow into." Most companies simply aren't yet comfortable having their primary data stored outside their walls, he said.

Couture noted that, in a separate survey Gartner does annually of users, 70% of those who said they'd buy any outsourced services would buy data backup and recovery.

"The biggest component of storage services is still hardware-related support services," he said, a category that's growing 5% annually. "And the downturn in spending is actually boosting that even further." The reason, Gartner's Couture said, is that customers are holding onto storage equipment longer. And, once it's out of the three-year warranty period, they have to pay for support that had previously been free - a phenomenon that keeps that category in the lead these days. "The fastest-growing category of storage services is storage software support, growing at an annual rate of 20%," Couture noted. "But it's still such a small category."

How do providers see the current situation? "Storage and backup are baked in to virtually every deal we do in total managed-server offerings," said Tom Kieffer, CEO of Agiliti Inc., an emerging, privately held, 100-employee managed services provider based in Minneapolis. "But demand for simple dedicated storage - the pure SSP-type service - is low." He noted that demand for IT outsourcing in general "is good and getting better, as firms look to reduce operating costs."

Another vendor view is from storage architect and integrator Datalink (Nasdaq: DTLK), based in Chanhassen, Minnesota. "Customers are more cautious today," said Scott Robinson, Datalink's CTO. "But they're increasingly looking for more detailed assessments of their storage needs, and are willing to pay for that - to get an independent view." Datalink has been designing and implementing SANs since 1999, he added, "which is a very long time in this business."

"Before, customers' checkbooks were more open," said Robinson, "Now, they want to know how storage will drive their core business." Datalink provides storage services in three other areas besides assessment: design, implementation, and support. Robinson said the later category, tech support, is holding its own for his firm these days, mainly on the strength of recurring business from existing customers. He said Datalink is primarily focused on the mid- to large-scale, enterprise-class data center market.

And what of margins in storage services these days? "They're good and holding steady, and in step with the other managed IT-services offerings we sell," said Agiliti's Kieffer.

Asked if he thought the SSP concept still had viability for the future, Kieffer said, "Yes, but concerns about security and computing architectures with storage decoupled from servers and applications is an issue. The new 'Web services' paradigm - .NET, J2E - will help."

What are these vendors seeing as far as overall customer demand? "It's getting stronger as the managed-hosting model is gaining acceptance," said Kieffer, "and as the market matures and financial viability concerns [regarding the vendors] subsides."

Says Datalink CTO Robinson: "The economy is still the big question. But we are seeing activity picking up. It's a slow, gradual climb."