MSPs Are Facing the Best and Worst of Times

By Michael Vizard
MSP roles

When it comes to becoming a managed service provider, it's never been easy. What is changing, however, is that turning a profit as an MSP is becoming more of a challenge than ever.

Not too long ago becoming an MSP meant building out a full-scale data center. But as cloud computing has evolved, it's becoming simpler to make use of a wide array of software-as-a-service applications to manage IT. As a result, the IT channel is witnessing the emergence of a new generation of so-called "born of the cloud" solution providers that provide and manage a broad array of IT services.

In fact, thanks to the emergence of fairly well-documented application programming interfaces (APIs), it's a lot simpler to stitch those services together without having to invest in a data center. Just as significantly, it's also much easier to swap one service for another without disrupting the end customer experience.

"There's a saying now that friends don't let friends build data centers," said IDC analyst Darren Bibby. "There's no requirement for an MSP to build a data center anymore."

Vendors Getting in on the MSP Act?

The challenge that many potential MSPs now face, however, is that many vendors are now delivering their own offerings as a managed service in the cloud. For example, both Oracle and SAP are investing millions of dollars in sales and marketing to get customers to migrate to database and application services that they manage. For that reason, an MSP needs to add value by managing a fairly broad portfolio of services that include some unique capabilities.

Case in point is Cedrus, a solution provider that creates custom business processes for customers using cloud infrastructure from IBM.

The paradox that customers now face is that, thanks to the prevalence of open-source software and APIs, there are more cloud services than ever to access, but once a customer reaches a certain critical mass, the integration challenge becomes significant, said Hanna Aljaliss, director of business process management and integration for Cedrus.

"In a lot of ways, some things are simpler," Aljaliss said. "But it gets complex quickly if you don't know what you're doing."

At the same time, some MSPs are taking advantage of the cloud to push into areas that previously would have been complex to address. Digital Water, for example, has created a managed service that targets the assets of organizations that manage water supplies. Using an application that IBM helped build, this is hosted on the IBM Bluemix platform-as-a-service environment.

Digital Water CEO Ted Jenkins said that without the cloud the company would never have been launched. "We were born of the cloud," Jenkins said. "Not going to the cloud was never an option."

Finding Ways to Bolster MSP Margins

While most MSPs are focused on delivering traditional IT services, pressure on margins along with increased competition is going to force many of them to innovate. At the same time, however, there is a significant expansion of the MSP category emerging as new players enter the market to take advantage of the cloud to target specific use cases within a vertical industry.

While that creates opportunities, MSPs also have to take into account the fact that many customers are becoming more knowledgeable about what's required to create a solution in the cloud. For example, customers are getting savvier about which projects require the actual development of code versus orchestrating APIs, said Sandy Carter, general manager of the developer ecosystem and startups for IBM.

"There's now a definite difference between the need for coders and someone who can compose an application," Carter said. "In fact, we're seeing new titles, such as integration engineer, to do API mash-ups."

In fact, application designers rather than coders are now commanding the most money, said Brendan Wright, head of global partner channels for Topcoder, a crowd-sourcing service of application development projects.

"Designers are commanding a premium because the cloud is all about the human-to-machine interface," Wright said.

While there's definitely more opportunity than ever for managed service providers to add value, it's less clear at the moment as to whether this expansion of the MSP category will be permanent.

Prognosis for MSPs

Eventually, many new MSPs will likely be acquired, said Cassandra Mooshian, an analyst with Technology Business Research. "Right now, we're seeing a lot more expansion," she said. "But there's always going to be an inevitable amount of expansion and contraction."

A major factor in that eventual contraction is the simple fact that the actual cost of delivering IT services is dropping. That means it's only a matter of time before increased competition forces many MSPs to expand the scope and reach of their services. Otherwise, they risk getting caught up in a price war that will undoubtedly consign many of them to the proverbial scrap heap of MSP history.

Michael Vizard has been covering IT issues in the enterprise for more than 25 years as an editor and columnist for publications such as InfoWorld, eWEEK, Baseline, CRN, ComputerWorld and Digital Review.


This article was originally published on 2016-02-25