According to Mainspring, Many Managed Hosting Companies Destined to Fail Without Aggressive Re-Alignment of Business Models.

Business/Technology Editors

CAMBRIDGE, Mass.--(BUSINESS WIRE)--May 7, 2001

Mainspring Working with Managed Hosting Clients to Set Growth and

Funding Targets, Improve Business Metrics and Segment Customer Needs

"A year ago investors were enamored with managed hosting, providing billions to fund a `land grab' by hosting firms, who spent 3 to 10 times their revenues to build out infrastructure and acquire customers," said George Pohle, vice president and general manager of Mainspring's (Nasdaq: MSPR) Technology, Communications and Media (TCM) practice. "Now many managed hosting firms cannot raise additional funding, since few have demonstrated a sustainable business model and even fewer have reached cash flow break-even. Most will not survive unless they take aggressive action now to realign their business model to succeed with less cash. We are helping managed hosting clients understand, in detail, the real profitability of their various services and customers. That understanding enables them to define realistic financial targets, and select the strategic and operational changes required to get on track to profitability."

Managed Hosting Companies: Initially Cash Guzzlers, Eventually Cash Generators

Mainspring believes that while there will be a shakeout in the short-term, the industry will be extremely attractive in the long-term, generating substantial cash flow. "There is massive potential. Adoption among enterprises has only just begun," said Russ Knister, director of Mainspring's TCM practice. "Hosting applications vs. web sites is just beginning. Also, the value proposition, which includes cost savings, access to expertise, increased reliability, and staying current with technology is still valid. Long-term, the economics can be extremely attractive, especially with loaded data centers and only limited price deterioration."

Benefits of Mainspring's Economic Modeling Technique

"In the rush to build infrastructure and acquire customers, the management teams of many hosting companies did not have the resources to focus on streamlining operations or creating detailed economic decision models," added Knister. "Mainspring's approach provides web hosting companies with visibility of customer and product profitability, the operational levers that have the most impact, and tradeoffs between growth and funding targets."

Together Mainspring and its managed hosting clients focus on achieving some of the following imperatives:

--Define target levels of revenue growth and determine funding needed Hosting firms must ensure that their growth plans are aligned with realistic funding goals. This requires a detailed analysis of operating economics that provides an understanding of the true revenues and costs associated with selling, provisioning and servicing new clients and services.

--Defer cash outlays and transform fixed into variable costs Hosting firms have a variety of options, such as leasing or selling equipment to customers, lowering vendor costs with pay-per-use plans, and leasing shared infrastructure equipment.

--Segment customers and clarify needs Serving different customer segments requires different operating models and different investments. With scarce funding, firms can only afford a few and should target segments with the best returns.

--Prioritize product and service offerings Many new services require significant investment. Hosters should understand the break-even volume and assess if expected demand is sufficient for a positive return for each new service deployed.

--Develop cost effective customer acquisition and channel strategies Given the need to load data centers, distribution is crucial. Most firms will need channel partners, given the high cost and reach of direct marketing and sales efforts. Since channel partners can drive large hidden costs, managed hosting firms must be selective by understanding channel break-even economics.

--Identify operational improvements During the initial industry `land grab' there was little opportunity to address improvements. Now, hosting firms must trim low-margin products, features, and specifications.

--Explore strategic options if anticipated funding looks inadequate Firms should seek equity investments by partners and large customers if the other actions are not adequate to stretch funding enough to achieve positive cash flow.

About Mainspring

Mainspring (Nasdaq: MSPR) is a leading strategy consulting firm that partners with Global 2000 companies to develop and commercialize profitable online and offline businesses. Mainspring helps clients exploit new markets, new business models and new technologies. With expertise in four vertical areas, Mainspring's focus encompasses Financial Services; Retail and Consumer Goods; Technology, Communications, and Media; and Industrial and Life Sciences. Mainspring is headquartered in Cambridge with additional offices in New York and Chicago. For more information about Mainspring, please visit www.mainspring.com. On April 19, IBM announced it's intent to acquire Mainspring in a cash merger. The closing for this transaction is anticipated to occur by mid-June 2001, subject to governmental reviews and shareholder approvals.