In-Depth

5 Questions About the MSP Market

The essential questions partners have about the managed services market have some surprising answers. The upshot? It may still be a good time to become an MSP.

• By Scott Bekker
• November 01, 2009

The move toward managed services has been a megatrend in the channel over the last few years. Many partners have tried it, and many more have at least considered it. The approaches partners have taken range from baby steps -- like a shift in thinking or a Skunk Works-style business unit -- to a radical shift into managed services or starting a new company to capitalize on the opportunity. That said, the number of devices under management remains miniscule. For those partners on the outside looking in on the managed services provider (MSP) action, we offer this look at several essential questions about being an MSP today. Has the MSP market proven to be countercyclical? What MSP messages are working now? Is it too late to get started as an MSP? Is there conflict between cloud computing and MSPs? What happens to the MSP market when the recession ends?

1. Has the MSP market proven to be countercyclical?
One of the main selling points of the MSP business opportunity is that it's supposed to be countercyclical. In other words, one of those rare types that soar when every other business is crashing. In a period when everyone is looking to cut costs, that's a plus, right? The economy has been in freefall since late 2007. Has the MSP market been on the upswing over the same period? Several MSPs and a close read of some analyst research tell us yes.

DataPro Solutions Inc. is a good test case. The Spokane Valley, Wash.-based Gold Certified Partner launched its foray into managed services during the downturn. "We're seeing our business up in double digits over last [year], so I'd agree that it's countercyclical," says Tony Cook, DataPro's business development manager. "On the economy, what I'm seeing is people aren't comfortable. They're trying to find new ways to make their businesses work. Our perspective of workforce efficiency has really opened the door for us to be able to have more conversations around making the networks work and getting more reliability, so we're seeing a lot more interest [from customers] in doing things differently."

Ted Clouser, executive vice president with PC Assistance, a Little Rock, Ark.-based Gold Certified Partner, is also seeing an uptick that has doubled his number of managed-services customers over the last three years.

"I definitely think that now is the time to be out there grabbing the market. What we've found is pure competition here. Somebody's coming up for renewal, and it's time for them to look a little bit harder at what they're paying," Clouser explains. "People are tightening up their belt a little bit, making sure that they're getting value for what they're spending. As an MSP, if you're providing that value you don't necessarily have to worry about it. If you're in a situation where you've got something to offer that your competition doesn't, now is really the time to get [customers] to take a hard look at it, especially if you can walk in the door and show them that it's financially beneficial as well."

Clouser says he's also seen business come his way as a result of the economic forces that are driving workers out of the market. "On the more negative side, we typically can be brought in at a fraction of what it would cost for SMBs [small to midsize businesses] to have a full-time IT person. So, in some situations, it's built our business simply because people can save money in that way."

But just because a market is countercyclical doesn't mean business is falling into MSPs' laps. And that applies to even highly regarded MSPs with substantial experience in the market, like ACP Technologies, a Gold Certified Partner and a Microsoft Small Business Specialist in West Seneca, N.Y.

"We're kind of in a lull where we're stuck at the same amount of clients for about the last four months," says Ben Pearce, president of ACP Technologies. "Before that we had steadily acquired or put a new client on [at a rate of about] one per month, and that was with some extensive hand-holding with the client. The last few months we've lost a few MSP clients, and we've gained a couple. We've still stayed with 47 clients on board with us. It's kind of a flat line."

One of the main problems, Pearce explains, is companies that are too strapped to consider any kind of expenditure. That goes for both new customers and old. "The two that come to mind that we did lose in the last few months were just having such financial problems that no matter what happened, they weren't going to survive or stick with what they were doing," Pearce says.

Industry-wide, there have been some encouraging signs that the MSP market is true to its countercyclical billing. An August survey by Forrester Research Inc. of 2,300 IT executives and technology decision makers in North America and Europe found that current economic conditions are driving almost 20 percent of IT professionals to purchase more managed services. That study, which covers telecommunications services in addition to network services, found similar enthusiasm among customers in both the enterprise and SMB segments.

"While the down environment is making most technology areas suffer, managed services is getting a boost as firms look for more flexible payment models that limit capital expenditure but also can keep them current with technology changes that help their firm," Ellen Daley, research director at Forrester, said to summarize the significance of the firm's survey. "This further accelerates an industry move to a more flexible services model for fulfillment of telecom, network and IT technology changes."

Techaisle, a San Jose, Calif.-based market-research firm, recently released research indicating that 2009 spending on managed services by SMBs will grow 9.2 percent over the 2008 revenues. According to Techaisle, managed-services spending for 2009 is expected to reach $14.3 billion worldwide among SMBs, which are here defined as companies with fewer than 1,000 employees.

2. What MSP messages are working now?
Messaging among successful MSPs -- and language that customers are looking for -- is changing, as well.

In the large Forrester study, the firm found different motivations for buying managed services among the 2,300 IT respondents. Comparing results to previous years, Forrester noted that cost savings was no longer the top reason for going with managed services. The motivation, for both enterprises and SMBs, was related but more subtle; they wanted to use managed services for low-level infrastructure jobs such as keeping the network running so they could, instead, focus on their core business competencies. In other words, when your business landscape is shifting around you daily, do you want your employees focusing on how to provide unique value to your customers or do you want them doing administration and maintenance work on the Exchange Server?

ACP's Pearce is seeing exactly that trend among his existing customer base, who are actually willing to pay more at the moment to have more networking grunt work taken off their plates.

"We've gone in and raised our rates, or we have a fee system in place where every client we have in the next six months has been categorized into different levels or different programs. We're raising rates but we're also showing them the value of why we're raising those rates. We haven't had one company come back to us and say, 'No we can't do that,' or, 'No, it's not worth it.' They truly do see the value in us raising the rates," Pearce says.

Less specific to macroeconomics is using the right language, PC Assistance's Clouser has found. "I'd spent a lot of time talking about 'monitoring,' and that was a big no-no. People place very little value on the word 'monitoring.' Changing that to 'managed' -- and saying that monitoring was simply a portion of it -- made a difference," he explains. "The perfect time to bring it up was when someone had some sort of outage. And I'd start by saying, 'You know, if we had monitoring in place, we could have caught that and it would have helped.' People just weren't biting on that. Part of that, I think, was maybe that it was three years ago. But even today, if any of our people use the word monitoring, I'll immediately correct [that]."

Starting from the right place matters too, Clouser adds: "When I meet with a prospective client, I want to know what most frustrates them about their technology, and then focus with them on how we, as an outsourced MSP, can take that frustration away. In partnership with them, we're trying to extend -- or become -- their IT staff."

DataPro's Cook is having success by steering conversations toward the cost of downtime. "We found that people are much more interested in talking about our managed services when we can talk about the cost of their network not working. It's one thing to talk about the cost of care and maintaining a network. That's a big part. But it's also the loss of productivity when that network isn't available that we're finding people are really interested in," Cook says.

3. Is it too late to get started as an MSP?
There's some faint talk in the industry that the MSP market opportunity was just a moment, and that moment is ending. That's not the sense we got from the MSPs we talked to.

To be sure, many more traditional break-fix companies have been opening up managed-services shops inside their businesses. Clouser notes: "We've probably seen more direct competition this last year than we ever have before. I'd attribute that to these recessionary times." But that's not to say the market is even close to overcrowded, he adds: "We need to all remember that the number of devices that are managed is something like 3 percent. The number is very, very small. So there's a ton of space to go out and grab -- there has been and there continues to be. And we certainly can all jump on board and get on it."

Cook agrees. "A large, large amount of our customers are small businesses, and the opportunity is really wide open. Even in our town, we have three really strong MSPs, and I run into them maybe once or twice a month, so it's definitely open," he says.

The other thing about managed services is that it's difficult to do properly. Buying a toolkit and marketing the service doesn't make an existing value-added reseller (VAR) a good MSP.

"There's a lot of opportunity out there, and I think that people are giving it a shot. But I think it's important to spend a whole lot of time studying it, and making sure that you do it to the best of your abilities," Clouser advises new entrants. He's not just being altruistic on that point. "The biggest thing I think that can be detrimental to the managed service industry is doing it wrong," he adds. While a botched engagement is an opportunity for experienced MSPs to step in, it also leaves these customers wondering if their experience speaks badly of the MSP business model or the specific MSP that was managing the account. And that's a significantly harder sale to make for those experienced companies like PC Assistance.

While none of the MSPs we spoke with felt the market was overcrowded, all have noticed a sea change in customer awareness about the potential benefits of enlisting the services of an MSP. The biggest factor was Dell Inc.'s 2007 acquisition of Silverback Technologies Inc. and its subsequent advertising of the service.

"When we first started with managed services in 2005, people really didn't know what it was," Clouser says. "When you [were] going out and talking about something, you [were] trying to pitch something that really was foreign. Quite honestly, one of the best things that happened in the MSP market [was] Dell putting some money into advertising it. So people learned about it -- and probably didn't want to use Dell because they didn't have that personal touch. They come to firms like ours, and they're looking for something that they're now educated about and [see as] a local presence. It was a tremendous help for us, in my opinion."

In New York, Pearce saw the same effect from Dell's moves into the market. "I think people are more educated now about MSPs," he says. "As they learn what we can do for them, we save them money [and] make their experience with their technology better. We also educate them going down the road, trying to sell them a service."

4. Is there conflict between cloud computing and MSPs?
As cloud computing matures, there's a sense that it comes increasingly into conflict with managed services. One of the closest observers -- and biggest proponents -- of the MSP industry, Charles Weaver, doesn't see the managed-services industry and cloud computing as mutually exclusive. That aside, Weaver, the president of the Chico, Calif.-based MSPAlliance, contends that every MSP had better have a cloud strategy.

"If you don't know what your company's cloud strategy is, my suggestion is: Get one. Not only is cloud computing a viable service-delivery mechanism, it's also something that your clients will be asking you for, if they aren't already," Weaver wrote in a recent blog posting. "Firms that don't have [a cloud strategy] will be at significant risk."

Weaver says many MSPs are putting together their first cloud-based services, many of which are focused on backup and storage or security. Weaver doesn't expect the cloud-computing efforts of big vendors like Microsoft, Google Inc., Amazon.com Inc. and IBM Corp. to negatively impact MSPs.

But there's some indication that the biggest guys won't be able to access MSPs' potential customers with their cloud solutions without the help of those very same MSPs. The Techaisle report found that "[more than] 36 percent of managed-services spending by SMBs in 2009 will be made by 10-49 employee size categories, making it the most lucrative target segment but also the most difficult to reach."

5. What happens to the MSP market when the recession ends?
If the conventional wisdom indicates that MSPs are performing better in the recession than IT as a whole, that suggests that the opposite could be true when the recession ends. A lot of signs indicate, however, that the MSP model could continue to do very well.

For one thing, an economic recovery is far from assured, and, even if the economy bounces back, few expect employment to surge. A Duke University/CFO magazine survey of 650 companies released in late September contained some especially sobering figures. The CFOs said their workforces were 6 percent below 2007 levels. Asked how long they expected it to take for employment to return to those levels, they estimated they'd drop more employees in 2010 and rehire half of the employees they'd let go by 2012. On average, the CFOs estimated that a quarter of the jobs would never be restored. So there's a good chance that, even with a recovery, the market MSPs wade into over the next few years will be very similar to the market of the last few years.

Analysts at Techaisle project 9.6 percent growth in MSP spending by SMBs in 2010 to $15.7 billion worldwide. According to Techaisle analyst Anurag Agrawal, "SMBs are now looking beyond infrastructure investments as their respective countries slowly emerge from the global downturn. With continuing education by vendors and channels, SMBs have begun embracing managed services with cautious optimism."

Meanwhile, Microsoft CEO Steve Ballmer has been talking about the global economy being in a "reset." Two things that many companies will probably have learned from the recession -- even if it ends in strong growth -- is that they can get by with less and that getting out of the business of managing their own IT infrastructure can be a very good move. That's actually a message that was gaining traction before the recession hit -- and the MSP market rode that wave before 2008.

At the risk of sounding like a partisan politician -- take your pick between those who offer lower taxes or a new government program as a solution to every problem -- the MSP business model seems to have a decent future no matter whether the economy goes up, down or sideways.