5 min read

Managed services grow up

They received a bad rap in the early years from channel partners, but are finally starting to mature.

Vendors providing remote managed services platforms are putting more emphasis on partner support, with even Ingram Micro offering hosted managed services for its VARs.
“Managed services have been an idea for a long time with fits and starts out in the channel, but it’s for real now,” said Justin Crotty, vice-president of services with Ingram Micro Inc. “It’s transforming the VAR business model out there and we have to respond to our customers’ needs as well as stay relevant to our customer base, many of whom are pursuing or looking to pursue the development of managed offerings.”

There was a lot of early hype around managed services, but VARs who hoped recurring revenue offerings would be their only income didn’t survive, said Crotty. Today, VARs’ service offerings are maturing from reactive, project-based capabilities to proactive, predictable and manageable capabilities in service-level agreements, contracts and long-term agreements. And they’re merging managed services into their traditional offerings where it makes sense.

Just as in the past, when VARs turned to distributors to house product instead of building warehouses, the same thing will happen in the service landscape, said Crotty. “If you look at all the VARs out there who are investing in managed services – meaning they’re buying the applications and building the servers to run the applications – there’s a significant amount of duplicative investment going on out there VAR to VAR,” he said. “Essentially they’re all duplicating each other’s infrastructure.”

Today that’s okay because margins are good and it’s a relatively fragmented, unsophisticated market. But that will change as we see more standardization and larger players get into the game. Those duplicative investments will become unsustainable, he said, and VARs will have to look for alternate methods to deliver managed services.

“We think distribution is well- positioned to assume an economic value proposition in the channel,” said Crotty. The idea is to build the infrastructure, support resources and delivery mechanisms so VARs can deliver those same services to their end-customers in a private-label fashion, while still owning the customer.

Distribution is nothing if not a duplicate game, he said, and while he believes Ingram Micro has done a good job of putting a stake in the ground, he expects that other will distributors enter. Synnex Canada is already one of them, but Tech Data Canada is not.

New opportunity
Ingram has determined that this managed services evolution is a new business model opportunity for the channel, said Dan Wensley, vice-president of partner development with Ottawa-based LPI Level Platforms Inc., whose managed services software is used by Ingram. “As a distributor they’re in a unique position. Not only do they have the solution provider community, they also have a relationship with the vendor community.”
Ingram Micro’s hosted offering appeals to channel partners who don’t want to invest in the infrastructure, but others prefer to bring the capability in-house using tools from suppliers. (For profiles of five of them, see the accompanying sidebars.)

Another boost for managed services is the recent announcement of the MSP Partner alliance, which includes Microsoft, Cisco, Intel and Ingram Micro, as well as Level Platforms. The alliance wants to provide collaborative online education dedicated to managed services, including implementation strategies and industry best practices. Solution providers that are part of the alliance have access to the MSP Partners Member logo to show customers they are committed to managed services.

This, says Wensley, is a sign that the products have matured, the business model has matured and the vendor community adoption that was talked about over the past couple of years is now a reality.

“We certainly see it as one of the ways that the channel will continue to add value and remain an important part of the buying chain for technology,” said Peter Klanian, vice-president of global sales with SilverBack Technologies Inc., an MSP vendor.

VARs are always concerned, and rightfully so, about vendors taking partnerships direct with their end-customers. Managed services put VARs in a position where they never have to worry about that because they become entrenched in their customers’ operations. “If they do it right, their customers cannot live without them,” he said, “so it’s a very empowering change for VARs and it’s very critical to their future success.”

Those who aren’t engaged in managed services are going to be pulled in that direction whether they like it or not, he added.

VARs are charging about $100 a month to manage a server and anywhere from $30 to $40 to manage a workstation. A VAR with 25 or 30 clients, each having up to 30 workstations and a couple of servers, can pull in pretty good steady revenue, said Darin Stahl, research lead with Info-Tech Research Group. Vendor support has improved, from marketing collateral to initial configuration and set-up, because, after all, this is also a recurring revenue stream for the vendors.

Protective
But VARs are highly protective of their customer lists, and there’s deep suspicion about handing this information into a vendor’s system. “Any one of these VARs has been burned by vendors through the channel before,” he said. “It’s a tough market. They come at it with a deep worry.” Vendors will have to demonstrate to VARs that customer privacy and ownership will be maintained.
One alternative is for a larger established VAR to become a “super-VAR” by taking the lead, establishing managed services as a solution, invoking the white labelling and working with smaller VARs to build bridges and partnerships. “That could take a long time,” said Stahl, “but with the right positioning and right people, I’ve seen this work very well.”

At the end of the day, a VAR’s biggest challenge is not related to technologies and tools, but to internal business operations and methodologies that evolve, said Crotty. The most successful VARs that have made the transition to some level of managed offerings have paid attention to those internal business process changes, and were committed to them.

Amy Luby, principal with Mobitech, an Omaha, Neb., solution provider that supports servers and workstations in an MSP model, agrees that the biggest challenge for small MSPs is evolving internal processes. “The model is completely different from what solution providers used to do a year ago, and that’s the biggest challenge,” she said. “Probably the next biggest challenge is sales: How do you get out there and drive the business?”

You can’t approach customers by saying you’re a managed service provider, she said, because it doesn’t mean anything to them. Instead, you’re selling concepts such as risk management or increased productivity.

So while it’s important to get on the managed services bandwagon, you have to be methodical about what you’re doing with your business model.

Another challenge is that managed services themselves are becoming rapidly commoditized, she said, so Mobitech is looking for ways to combat that, such as selling hardware as a service and becoming more of a utility provider as opposed to an MSP.

There is a notable shift in sentiment among enterprises toward multi-sourcing or flex-sourcing as opposed to the outsourcing model that was prevalent in the past, said Sebastien Ruest, vice-president of services research with IDC Canada. And there’s been a trend in Canada for smaller deals, rather than mega-deals. “So discrete outsourcing is declining but it’s not disappearing,” he said. “It’s shifting to these shared services or managed services models where organizations will externalize or outsource components rather than the entire gamut of services.” Contracts are being re-drafted with performance-related bonuses or penalties in mind.

If these services are adopted by larger organizations, VARs will likely need support from distributors or vendors in more of a collaborative type of environment in order to be successful. Ingram Micro’s entry into the market points to the fact that even non-traditional players can start providing managed services because there’s no real barrier to entry if the infrastructure is in place. Telcos, for example, could do it for telecom services.

“The market is ready and there’s a demand from customers,” said Ruest. For VARs, there’s a danger that if they don’t move away from their old business model to a smart sourcing model, they could become extinct.

“We believe that all VARs should be taking a look at this,” said Crotty.Down the road, he added, channel partners will likely have one or more recurring revenue offerings.

“It doesn’t mean they’re going to be an MSP,” Crotty said, “but they should be dabbling in it and they should start to fold those offerings in where it makes sense.”

To read more on the five managed service providers click on the links below:
N-able Technologies| SilverBack Technologies | Level Platforms | AdventNet | GroundWork Open Source