US Hot Site Market Analysis & Forecast
By Tari Schreider
The U.S. computer backup industry began in the mid-1970s with the introduction of several small regional backup computer facilities located in the Midwest. The defining moment was the establishment of SunGard Recovery Services in Philadelphia, Penn., in 1979. Over the next 10 years, the industry grew to over 100 providers of backup computer centers located throughout the U.S. By 1989, $240 million in annual subscription fees were generated from a rapidly growing number of clients. Vendors marketed their services as "hot sites" which were designed to provide stand-by computer resources, in the event that one or more subscribers required an alternative computer center to process critical applications.
This requirement was usually prompted by an actual or perceived event that could render the subscribers computer systems inoperable. The activation of the hot site services was initiated through the formal declaration of a disaster. The definition of "disaster" varied by client, and, subsequently, hot site providers allowed broad interpretation. For example, clients have activated their hot site subscriptions to provide backup during a planned relocation of their data center.
The following chart presents the types of events which have forced companies to declare a disaster:
Today, the industry is comprised of 31 companies which represent the majority of the hot site providers who generate subscription fees of $620+ million annually. The industry has seen substantial consolidation since 1989. In fact, this trend continues with the acquisition of XL/Datacomps 1400 hot site subscribers by SunGard in 1994. This consolidation has created a situation where the market is now dominated by 3 companies: Comdisco, IBM, and SunGard. These companies now control over 80 percent of the market in both revenue and subscriber base.
The hot site industry has successfully recovered 582 companies since 1982 with an average of 40 per year. Nearly 44 percent of these recoveries have resulted from regional events where multiple subscribers have been effected simultaneously. In not one case has a client been denied access to a recovery facility because of excessive demand. The event most likely to send a company to a hot site is loss of power, followed by hardware errors and fires.
One of the most interesting facts that has become evident from CPRs research is that nearly 50 percent of the companies requiring the use of a hot site spend less than 72 hours there. This points to a fundamental problem in the industry of premature declaration of disaster. Companies tend to declare a disaster quickly during a potential event, fearing they will not be admitted to the hot site because of "first-come, first-serve" philosophy.
The chart below depicts time spent recovering at hot sites:
Financially-oriented firms tend to utilize hot sites more frequently due to the critical nature of their operations. In fact, over 65 percent of all hot site recoveries involved these types of firms. The majority of recoveries have occurred at Comdisco, IBM, and SunGard. These three vendors alone have supported over 67 percent of all disaster recoveries.
The hot site industry has proven to be an effective strategy for recovering computer centers. Since 1982, 582 successful recoveries were completed at over 25 hot site locations. This success rate, decreasing cost of subscriptions, and reliance on technology by American companies ensure a stable future for this industry.
The following chart represents multiple hot site recoveries during regional disasters:
The hot site industry has been growing at approximately 17 percent per annum in revenue and approximately 30 percent per annum in subscriptions. However, CPR estimates that this rate of growth will slow to approximately 15 percent per annum in revenue and 20 percent per annum in subscriptions. These growth rates assume a continuation in aggressive marketing to broaden the subscriber base and introductions of higher revenue generating services in the areas of PC/LAN, electronic data vaulting, and voice recovery. CPR believes these growth influencing factors will continue through the last half of the 1990s.
The industry is still primarily focused on financially-oriented subscribers as they represent the largest data centers within the U.S. In fact, nearly half of the providers focus exclusively on financial firms. Since Unisys historically has had significant penetration in the financial area, this accounts for the disparately large number of Unisys-oriented hot sites. CPR estimates that 45 percent of all hot site revenues ($279 million) has come from financially-oriented firms.
Hot site vendors are beginning to provide end-user and PC/LAN based recovery services. These services are an essential survival strategy for any vendor determined to continue in this industry.
The most significant trend in the industry is the focus on business continuity as a whole. Hot site vendors are placing an emphasis on recovering not only the "glass house", but the other critical aspects of their clients business. In fact, this emphasis is required in order to maintain account control and prevent a subscriber from having more than one hot site provider service its needs.
Hot site providers entice subscribers with many different types of service offerings. Following is a description of each type of major service provided by U.S. hot site vendors:
·Cold Site - An empty, environmentally-conditioned computer room available on a subscription basis. These subscriptions range from 12 to 60 months and costs generally range from $500 to $2,000 per month. Hot site providers generally include this in the basic cost of a hot site. Once the subscriber has exceeded its occupancy time at the hot site (generally 6-8 weeks), it is moved to the cold site.
·Electronic Vaulting - A service which has yet to take off in the U.S. is the electronic vaulting of data from the subscriber site to the hot site. The primary reason is cost. Although many clients would like to take advantage of this type of service, the high cost has kept all but a few from implementing it. This service requires that DASD be dedicated to the subscriber which prevents it from being shared with other subscribers. PC/LAN electronic data vaulting is emerging as a popular service; however, it will take a few more years to become cost-effective and subsequently widely accepted.
·Hot Site - A hot site is an operationally-ready data center which offers specific hardware platforms for immediate availability upon notification of a disaster event. Subscriptions are based on the number of MIPs, DASD, and peripherals required to recover a "like" computer configuration. Subscriptions average 52 months in length and costs range from $250 to $120,000 a month. Hot sites can be used for up to eight weeks in disaster mode.
·Mobile/Porta-Site - For smaller hardware configurations or emergency office environments, there are mobile computer/office environments available. The difference between these two options is that mobile sites are stand-alone units on mobile trailers, whereas the porta-site is transported to your facility and constructed upon delivery. The costs for these options are essentially the same as cold sites. Mobile hot sites have been increasing in popularity because they bring the work area to the end-user.
·OEM Insurance - Companies such as DEC and Wang are now offering a form of insurance where they will replace the damaged computer equipment on a priority basis in the event of a disaster. They will guarantee another system of equal or greater processing capacity within a specified period of time. Their costs are based on a percentage of the monthly maintenance bill and are usually in the range of six to eight percent.
·PC-Based Planning Tools - Virtually all hot site vendors offer some form of PC-based disaster recovery plan development tool. In many cases (like consulting services) these packages are provided as an enticement to acquire their hot site services.
·Quick Ship - This option is essentially what its name implies, the shipment of computer equipment quickly. Most third-party leasing vendors provide this as a recovery option to their customers. Customers are charged a priority equipment search fee and the normal leasing charges plus a premium once shipment is requested.
The market for hot site recovery services will continue to grow for the foreseeable future. If the current rate of growth which projects that this industry will generate in excess of $1 billion annually continues, the number of subscribers could double by the year 2000. The market will experience a few more minor acquisitions, however, there are few prime acquisition targets left. By the year 2000, CPR estimates the total number of major hot site providers will dwindle to approximately 20.
Network recovery is the next significant horizon in the disaster recovery industry. Recent decisions by Judge Green relative to the Local Carriers and the Long Line Carriers make their entering the disaster recovery business inevitable. To date, U.S. communications carriers have made only exploratory movements into disaster recovery. CPR does not foresee these companies opening hot sites, but rather focusing on moving and storing data to and from recovery facilities.
Our company sees more specialized recovery services emerging over the next several years. The industry will move away from generic recovery platforms to industry specific recovery solutions. The wide distribution of client/server architectures will require hot site providers to open more end-user facilities closer to where their subscribers are located. CPR envisions the hot sites moving toward extremely large regional recovery centers connected to many end-user oriented business resumption centers connected by redundant networks. Backing up and storing of client/server data will become a preoccupation with the hot sites over the next several years as they hold the key to recovering sophisticated LAN, MAN, and WAN environments. The vendor that first provides an economical solution for data recovery will control this important emerging market.
The market will continue to be influenced by the number of annual disasters as well as legal statutes. More specifically, following each major disaster incident and issuance of a revised legal statute, there is an increase in new subscriptions for hot site contracts. Disaster recovery is still viewed as a discretionary expense and one which requires a catalyst to move management to take action on implementing a recovery plan.
In summary, the hot site industry will continue to grow steadily; however, enforcement of existing legal statutes relating to contingency planning and several major disaster events could increase the growth of this industry by an additional five percent per annum.
Tari Schreider is a Director of Research with Contingency Planning Research.