When it comes to managed services, Cisco Systems has a problem: Only 10 percent of its resellers and solution providers are using its managed services program. As a result, Cisco says they are paying more for equipment to deliver services through the cloud than those participating in the program.

Cisco equipment—particularly switches, routers and firewalls—has long been used in the delivery of managed services. Since 2007, Cisco has supported managed services providers with a channel program that enables those companies meeting Cisco’s strict criteria to purchase product at a discount and lock in pricing for future purchases of the same equipment. In other words, they receive price protection as they add equipment and scale operations to meet increasing services demand.

“It provides more predictable pricing and understanding, and allows [service providers] to but the product for the long run at a more predictable rate,” says Edison Peres, Cisco’s senior vice president of worldwide channels, Go-To-Market Strategies.

Cisco says many of its partners are engaged in managed services, but purchasing their equipment through conventional resellers channels. That means they’re typically getting product at a one-time 42 percent discount that’s often eligible for a rebate through the Value Incentive Program (VIP). While the pricing is attractive, it’s inconsistent for managed services providers that must add more equipment as their business scales. Each time they buy a new switch or router, their cost will change with market prices.

Through the managed services program, qualified Cisco partners receive a 45 percent discount on products. However, purchases are not eligible for VIP rebates. Once they make the purchase, they receive price protection against increases as they add more of the same product to their infrastructure. “This is better and more profitable for the partner,” Peres says.

Managed services is the fastest growing segment of the IT marketplace; it will generate more than $42 billion in sales globally this year. According to market research firm Ovum, managed services is growing at 19 percent annually and the market will double in size by 2012 as small businesses to enterprise organizations adopt more managed services offerings.

“Customers are loving [managed services],” says Surinder Brar, Senior Director at Cisco’s Go To Market strategies. “The economic crisis has focused on more technology with less risk. They want to outsource; they want the partner to manage the solution. [Managed services] allows them to pay through operational expenses.”

While Cisco has long supported managed services, it hasn’t made it easy for solution providers to enter its managed services program. To qualify and receive certification, Cisco requires its managed service providers to have a certified network operations center (NOC). Building, staffing and maintaining a NOC often proves a high barrier to entry for many solution providers, particularly small organizations.

Under the modified managed services program, scheduled for launch August 31, Cisco will implement three tiers, including a new master’s level. Each of the new tiers will include new discounting structures for products that facilitate managed services.

The master’s program will still require managed service providers to obtain a certification, which requires having a fully functional and staffed NOC and the completion of an audit of capabilities and capacity.

For tier 2 and 3 managed service providers, they will be eligible to receive certification if they white label or outsource the NOC to a Cisco certified provider. “People should not have to invest in a NOC to participate in managed services, they should be able to white label it,” Brar says.

While the changes to the program were announced at the Cisco Partner Summit in Boston, details of the program weren’t readily available. Cisco says it will spend the next 90 days refining the program offerings and informing partners about the program changes.

When fully implemented, Cisco believes the changes and new tiers will lower the barriers to entry and allow more opportunity for smaller service providers to enter the market.

“I expect a lot of partners to embrace the program and participate in it moving forward,” Brar says.