IDC: Outsourcing sector needs rescue fund for cloudy customers

2e2 collapse to hit channel, customers, investors

The outsourcing industry should develop a voluntary crisis fund to give protection to customers should their services provider hit the wall.

This was proposed by IDC in light of 2e2's recent high profile collapse that left some customers scrambling for alternative suppliers, and highlighted the pitfalls of outsourcing.

One solution is to create a "voluntary shared rescue fund" along the lines of the Association of British Travel Agents bond, said IDC associate veep Douglas Hayward.

"The bond is posted by travel operators and the money is used to ensure that customers who book holidays get home safely when their operator goes bust," he told The Channel.

Faced with a shirking pool of cash to fund 2e2 while in administration, FTI Consulting was forced to ask some customers to pay extra funds to keep the data centre open.

Hayward said hosting and cloudy firms could hold a pot of cash in escrow to be used so that hosted data can be transitioned to new providers should the need arise.

"This could be marketed either as an industry-wide service, or as an optional value-added service to be bought by clients when signing a hosting/outsourcing contract," he said.

Another option is for hosting firms to guarantee regular data backups are made to third party DR providers who are obliged to hand over the data to the customer in the event the hosting entity goes pop.

"That option, however, would be costly and arguably wasteful, not to mention bad for the environment, by generating huge volumes of duplicated data in independent data centres."

A collapse like that of 2e2 is rarer than hen's teeth, but so dramatic was its fall that the ripples will be felt by customers, purveyors of the cloud and those that invest in tech firms.

Phil Doye, chief exec at Kelway, told us last week that 2e2's demise will act a a reminder of the dangers of putting critical data in the cloud.

"Cloud providers will be under close financial scrutiny and will have to demonstrate a clearer disaster recovery strategy in the event of a business failure," he said.

2e2 had long term debts of £270m including more than £150m owed to banking investors and more than £85m tied up with VC backers Duke Street Capital and Hutton Collins.

Mike Norris, chief executive at Computacenter, said the collapse may well "discourage investors" and claimed this was "not good" for the reputation of the channel.

But Alastair Edwards, principal analyst at Canalys, said investors should be mindful that "there were particular issues related to 2e2, this is not a sign the channel model is in peril".

"It speaks to the dangers of trying to accelerate too fast to a service-based business model, you can't do it overnight and doing it by acquisition is a challenge," he said.

Hayward at IDC, said the financial wellbeing of a hosting business must be top of mind for procurement bods.

"Look for warning signs such as high debt, continued annual P&L losses, poor cash-flow and poor credit ratings," he said.

Sadly all these signs were evident at 2e2, but customers weren't looking.

Dasiy's VC backer Oakley announced that it had acquired the business and assets of the 2e2 Data Centre business today. ®