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The tide is finally turning in the managed services market as the convergence of market acceptance and economic conditions is making it more palatable for end users to adopt remotely delivered infrastructure management and hosted applications. Troubling to some solution providers is that they will not be the ones delivering the actual services.

Managed services and SAAS (software as a service)—or, as we at Channel Insider like to refer to them, “solutions as a service”—have always been an expensive proposition. To deliver either a hosted hardware or software offering, solution providers had to make heavy investments in their own IT infrastructure. Additionally, changes in physical infrastructure required sweeping changes in business models, technical staffing and sales. The bottom line is services required a high-risk exposure.

But the total market for solutions as a service is expected to top more than $60 billion by 2012. Changing the equation are technology vendors and nontraditional media companies entering the market with multiple go-to-market models that are decreasing the cost of delivery and adoption. Everyone from AppRiver and Dell, Google and Microsoft, Hewlett-Packard and Verizon are offering various forms and flavors of cloud-based and remotely delivered management services.

While many of these companies are offering private-labeled versions of their services for solution providers to resell, the channel model that’s beginning to take root is the agent system.

Agent-based sales of services is akin to the system used by auto, property and life insurance companies for decades. The local agent—operating as a representative of the vendor—advises local customers on the types of services available, helps build and selects the package, processes the paperwork, and hands off to the carrier for services delivery and management. For their effort, agents receive a commission.

In the solution services agent model, small solution providers are able to offer remote infrastructure managed services and cloud-based, hosted applications to their customers almost overnight without the expense of building massive infrastructure to support the offerings. The model works because the investment risk is being taken by large vendors that have the financial depth and expertise to bridge the revenue-profitability gap that has stalled so many of the smaller managed services pioneers.

Microsoft calls its strategy “Software+Services” because it believes that no organization is going to radically shift its IT investments from on-premises to hosted solutions. Instead, Microsoft believes IT managers—particularly for small and midsized businesses—will opt to use hosted services as a means for augmenting existing infrastructures, and that means on-premises product sales will continue and provide solution providers with value-add migration and integration opportunities.

Dell sees the same with its recently expanded managed services offerings. While it’s offering managed services direct, as a private label through solution providers or through reseller agents, Dell believes solution provider play a critical role in pre- and post-sale value-add opportunities that will continue to maintain their relevance in the marketplace. However, the choice of who delivers the service resides with the customer, Dell says.

“Dell is consistent in that we’re always about being customer-centric,” says Peter Klanian, senior manager of SMB channels in Dell’s software-as-a-service division. We can’t state that we’re about giving the customer choice if we’re channel only.”

But the notion of reducing the solution provider role in the delivery of solution services to one of a paperwork pusher is troubling to many in the channel. The traditional role of the channel is value-added services for hardware and software sales and implementation. If the vendor controls the delivery and interaction with the customer, where can the solution provider add value?

“The solution provider is definitely the feet on the street, the person who establishes a relationship and the on-site service, but more and more the channel will be cut out of services,” says Mark Scott, CEO of The Utility Company, a provider of subscription-based managed services that solution providers can resell or private label as their own service.

Services being delivered more cheaply and, subsequently, direct by vendors are a natural evolution of the technology and marketplace, says Ross Brown, vice president of solution providers at Microsoft Worldwide Partner Group. As service implementation become less complex, their cost and value-add opportunity will also decrease. It’s the same process as commoditization in hardware and software products. Exchange e-mail service may not have much opportunity for resellers because it’s less complex, but unified communications likely will. “The more complex the offering, the more you’ll need boots on the ground,” Brown says.

Trend Micro recently reaffirmed its commitment to working with solution providers on its services offerings and driving services business through channel partners in the delivery of services because it does need the local representation. “The channel is critical and essential for software and subscription services,” says Frank Mong, vice president of SMB marketing at Trend Micro. “Security, whether at the endpoint or gateway, is complicated enough that we can never take a partner out of the engagement.”

While some may criticize vendors for providing services direct to customers, the reality is none of the major vendors offering managed or software services is preventing solution providers from fielding either their own homegrown or private-labeled versions of their solutions. Dell, Ingram Micro’s Seismic Program and Zenith InfoTech have programs in which resellers can private label their infrastructure to offer managed services. Or, solution providers can build their own services by cobbling together various technologies in a services model, such as Intermedia’s implementation of hosted Microsoft applications. Rewards follow risk; the more risk you take, the higher the reward.

While the future role of solution providers in the services world remains unclear, and the agent model has the potential for marginalizing the solution provider in the value chain, the one certainty is that none of the major vendors has the ability to touch Main Street businesses in a meaningful way. And that’s where the solution provider will always prevail.

“Who owns the customer is who owns the relationship as the trusted business adviser,” says Tommy Wald, CEO of managed service provider Riata Technology in Austin, Texas. “Value is always going to be in high touch and having knowledge the customer needs.”

Lawrence M. Walsh is vice president and group publisher of Channel Insider. Read his research on the evolving managed services marketplace and “Seven Laws of Managed  Services.”

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