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As the costs of managing IT in-house continues to rise, Microsoft-application outsourcer Azaleos is looking to cash in on making it less expensive and easier, particularly as customers look at migrating to Microsoft Exchange 2007.

The company tells customers its appliance-based outsourced migration and then ongoing managed service of the application can each save IT organizations 20 percent in costs over doing it themselves.

As many start-up vendors do, Azaleos initially sold the appliance and associated services directly to customers – with 70 percent of its sales direct and 30 percent through partners at the beginning of 2007. Azaleos’s customers typically range from 100 to 10,000 mailboxes. But as the company has grown it has recognized that to scale sales it must create a channel strategy and organization.

Azaleos took the first step a few months ago, announcing on April 30 a deal to sell its appliance and services through VARs through a distribution agreement with Avnet Technology Solutions, Americas.

“We are targeting Avnet resellers who also work with IBM, HP, EMC’s storage solutions and Network Appliance,” said Azaleos CTO Keith McCall. “There are 300 to 400 of these resellers across North America and they typically have sales between $30 million and $50 million.”

Avnet said in a statement in April that together with Azaleos it would offer Avnet’s IBM VAR partners a complete solution for upgrading or migrating customers to Microsoft’s most recent enterprise email application, Exchange 2007.

Partnering with Avnet gives Azaleos a reach across North America and a presence in Europe, McCall said.

The three-year-old Redmond, Wa.-based Azaleos offers customers an appliance-based application management service that allows them to keep their e-mail on premises – wherever that may be – rather than outsourcing the data to a hosting company. Microsoft offers the services on an outsourced and hosted basis to large enterprises, announcing a few new customers earlier this month.

But some companies prefer Azaleos’s appliance-based approach due to regulatory requirements that data be kept at the company, McCall said.

“In Canada you can’t have your email systems hosted on an email server that is not in Canada. Same thing for Germany,” he said. “The only companies that can use hosting are those not affected by government regulations that control where they can keep their email server.”

McCall, a former Microsoft executive who worked with the team there that is now providing outsourced e-mail and other application services, said his company took the opposite approach from Microsoft.

“We addressed the question: how could you keep the data in your own data center but get someone else to do the management of it all?” he said. “Our appliance is designed to replace the Exchange Server on the customer site. This lets companies keep their content in-house at the same time it gives them the ability and flexibility to rely on a team of experts for monitoring and management.”

The appliance itself is priced at $15,000 with various services layered on top of that, McCall said. The ViewXchange monitoring and reporting service costs $5 per user per month. ManageXchange is $7 per user per month. Archiving applications on the server are $4 per user per month and business continuity and disaster recovery is $4 per user per month.

Resellers get a cut of up to 25 percent of the appliance sale plus a cut of the managed services fees.

Azaleos expects to have 40,000 Exchange seats under management at the end of the current quarter. By the end of 2007 the company is looking to increase that number to 100,000.

Analysts estimate that the total enterprise email market consists of 250 million mailboxes worldwide, with 140 million of those Microsoft Exchange mailboxes.

“So by tapping into Avnet and outsourcing vendors, our goal is to scale to have 10 percent of the total mailboxes,” McCall said. “Due to the cost and complexity of running and migrating to Microsoft Exchange 2007, we are seeing a significant number of companies considering outsourcing as a solution to save on costs.”