The State of the Managed Service ProviderBy Michael Vizard | Print
MSPs need to rethink business models if they are to compete effectively in the age of the cloud
For more than a decade now solution providers have been told they should embrace managed services as a way to ensure ongoing profitability in an age where profit margins associated with reselling products are razor thin.
Now comes an age of cloud computing where many systems are being consolidated in the cloud. Many of those cloud computing deployments ae running on a customer's premise so they still need to be remotely managed, which is a good thing for managed service providers (MSPs). But as time marches on, many cloud computing deployments will be centralized in data centers managed by cloud service providers that have business models that are more akin to managed hosting companies than MSPs.
To make matters even more challenging, very few MSPs generate revenues of more than $10 million annually. In an era of cloud computing that will require additional investments in IT, it’s going to be hard for many MSPs to compete as a cloud service provider.
That leaves many MSPs with a couple of stark choices. They can either opt to resell cloud services developed by somebody else at a relatively low margin, or they can look to band together with other MSPs to create enough critical mass to compete.
Sam Attias, managing partner for Technology Capital Investors (TCI), is betting on the latter approach. TCI is investing in MSPs as part of an effort to help these companies reach a level of scale that lowers costs by sharing IT infrastructure, while at the same time focusing the marketing efforts of each MSP on a specific vertical market.
Attias says the reality of the MSP market today is that most of the companies in it have revenues of about $1 million and are marginally profitable. For any number of reasons, the MSP market as a whole never really attained the level of momentum expected. That doesn’t mean that demand for managed services still won't eventually take off; it’s just only now is there a confluence of economic and technology events coming together in a way that favors MSPs, says Attias.
But MSPs are also facing competition from companies such as Google and Microsoft that want to leverage cloud computing to take more business direct. MSPs still have the advantage when it comes to competing with faceless entities in the cloud because they still own the relationship with the customer. What MSPs most need now is way to restructure their operations that allows them to profitably leverage those relationships to compete more effectively, says Attias.
None of this is lost on MSPs, many of which are already banding together to share resources to one degree or another. But Attias is making a case for a more structured approach to forming MSP alliances that encompasses everything from backend IT investments to the actual go-to-market strategies being used by each MSP.
Reaction to that strategy will naturally run the gamut across the channel. Many MSPs value their independence and look at anything involving venture capitalists with deep suspicion. But as Ben Franklin said when confronting a similarly difficult set of circumstances, the one thing that is for certain is that that if MSPs don’t find some way to hang together they will most certainly hang separately.