As lucrative as managed services are to solution providers, they're attracting vendors too, creating a higher level of competition for this high margin business.
The booming rush of air I often hear at conferences is the sound of solution providers racing at brink speed to managed services. As an industry, we've done a fantastic job of selling VARs on the concept of remote monitoring and management of everything from the data center to the desktop.
My question is who will they run into once they get to the promised land of lower operating costs and high margin recurring revenue streams?
The argument for managed service migration was simple: hardware margins are gone and software margins are evaporating quickly. Services—either the traditional break/fix, hosted infrastructure services, or remote monitoring and management—would provide fatter margins and greater scalability than straight product sales ever could.
The problem for early adopters was infrastructure and capacity. Under the old managed services paradigm, a provider was obligated to have almost double the contracted production capacity to handle outages, utilization spikes and business growth. The startup costs were simply too high for many solution providers turned service providers.
The market has definitely changed. Software companies specializing in RMM tools—N-Able, Level Platforms, SilverBack Technologies—have sold the channel on the build-as-you-go model, or building enough capacity as needed today and then adding more when needed.
Here's the problem that the late adopters will discover: Managed services is attractive to the big vendors, too. Those margins and recurring revenue streams are just as valuable to growth-oriented IT corporations as they are to Main Street VARs.
Case in point, last summer I saw something at the Microsoft partner conference in Denver that should terrify any solution provider—a full-page ad in The Denver Post for IBM managed desktop services for small businesses. For $50 per seat per month (50 seat minimum), Big Blue would ensure that end-user clients were configured, updated, patched and running smoothly. Let's do the math: the cost for a desktop admin runs anywhere from $50,000 to $75,000 a year. The cost of the IBM service: $30,000—and scales as more users are brought on board.
Click here to read more about managed services in a mixed-up world.
Let's talk about storage and remote backup—a mundane task if not expensive proposition, considering regulatory storage requirements are increasing and rate of data generation is increasing as much as 60 percent annually in some organizations. Many solution providers and startup companies are looking to create centralized storage banks and sell capacity on an as-needed basis.
Watch out, if you're one of these solution providers—you're not alone. Amazon—yes, the online bookseller—is in your target market. Just last month, Amazon launched its utility computing and storage services in Europe, replicating a stealthy model that has quietly gained traction in the United States. As of October, Amazon is storing more than 10 billion objects for more than a quarter million unique users ranging in size from small mom and pop shops to Fortune 100 enterprises.
Amazon got into the business because it had unused capacity in its vast e-commerce infrastructure and had tremendous tangential experience in developing, delivering and managing online services. At a rate of 15 cents per GB per month for storage and 10 cents per GB uploaded and 13 cents per GB downloaded, the cost of Amazon managed storage is as competitive to the small and midsize business market as any solution provider can deliver.
Dell says its purchase of Silverback Technologies (RMM tools) and Everdream (remote desktop management) is to bolster its enterprise software offerings. However, it's difficult to believe that a company as aggressive as Dell will sit on these resources and not convert them into a direct sales offering.
Of course, infrastructure players such as The Utility Company, Zenith InfoTech and Ingram Micro's Seismic give small solution providers access to vast, scalable and affordable managed services resources without the steep development and investment costs. Companies like these will provide smaller solution providers with a level playing field to compete against the large services offerings of traditional product IT vendors.
And, to be fair, many vendors are looking to fulfill services through the channel. Cisco Systems, Microsoft and SonicWall are big supporters of enabling their solution providers in managed services, while other companies such as Trend Micro and Citrix Online are using their partners as agents for their managed services offerings.
Nevertheless, as IT vendors look for new opportunities for growth, they'll look to the same place they've been pointing their channel partners: managed services. What it means is that the field of competition will get very crowded and usher in a whole new era of channel conflict. Ultimately it will require solution providers to compete where they've always won—in the value add they deliver to their local customers.
Lawrence M. Walsh is editor of Baseline magazine and regular columnist to Channel Insider. Share your thoughts on managed services in the channel at lawrence.walsh@ziffdavisenterprise.com.
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