Tough Times Drive Managed Services

Right about now a lot of vendors that declined to create specific channel programs around managed service offerings should be kicking themselves.

 As the economy continues to lose steam it is becoming pretty clear that managed services have a lot of counter cyclical economic potential. What creates that potential is the simple fact that customers are looking for ways to first not apply what limited amount of access to credit they have to IT equipment and, second, to reduce their overall headcount by not having to hire IT people.

 One of the paradoxes about the IT business is that while we use IT to automate business processes to save money, the actual processes used to manage IT remain very labor intensive. This creates a situation where a solution provider that invests in IT automation tools to deliver managed services can provide IT services at a lower cost than most internal IT organizations can.

 As a result, we should see a continued rise in demand for managed services that will ultimately benefit the vendors that created programs that recognize managed service providers as a distinct type of partner with different needs than a traditional reseller.

 Those different needs stem, in part, from the way managed services providers get paid by customers. Typically, they are working for the customer over the life of a two to three year contract. The cost of any new equipment that is needed to provide the service is typically included in the life of the contract. That means that the solution provider all too often has to buy the equipment from a vendor that wants to get paid in 90 days while the solution provider does get paid for the equipment for equipment by the customer until two or three years have gone by.

 Some vendors try to push solution providers into expensive leasing programs if they want to become managed service providers. But the real vendors that are going to benefit most from managed services are the ones that have created terms and conditions specifically designed to support managed service providers.

 Cisco Systems, for example, spent two years researching what managed service providers really need from vendors in terms of support. After launching the program, Cisco now reports that it is seeing 35 percent growth rates in the number of solution providers joining the program, according to Al Safarikas, Cisco’s senior director of Service Provider Managed Services. This is happening because Cisco took the time to invest in programs for managed service providers while most of the rest of its competitors resisted creating business models that altered existing payment terms in any significant fashion. The other smart thing that Cisco has done is refrained from selling managed services directly. Granted this doesn’t alleviate the battle over managed services between traditional solution providers and telecommunications providers, but at least Cisco can claim some level of neutrality.

 As the economy bounces along the bottom for 2009, it’s pretty clear that the managed services segment of the channel will help Cisco cushion the blow. It’s in the interest of the managed service provider to make sure customers have the most current network equipment in place in order to reduce support costs that can cut into the managed service provider’s margin.

 In the meantime, vendors that sell hardware products can expect a pretty rough year because hardware is one of the first things that customers cut back on in tough times. By comparison, industry analysts such as Ovum are forecasting that managed services will see a compound annual growth of 18 percent through 2012.

 Hopefully, some vendors will take some time to re-examine their approaches to managed services in these hard economic times. When you get right down to business fundamentals, it’s clearly in their best interests do so. Unfortunately, all too often it takes an economic crisis to make that obvious.

 Mike Vizard is a member of the Ziff Davis Enterprise Market Experts team and regular contributor to Channel Insider. He can be reached at michael.vizard@ziffdavisenterprise.com.