In-Depth

A Microsoft Partner's Guide to Managed Services, Part 1: Success in a 'Nested Doll' Environment

There are so many trends providing headwinds, tailwinds and crosswinds to MSPs right now that it's hard to sort them out. Industry experts provide a few baseline concepts from their higher perches to help MSPs find a snug fit in the emerging industrywide puzzle that resembles a Russian nested doll toy.

• By Scott Bekker
• August 01, 2012

When Scott Gode thinks about the managed services provider (MSP) market, he likes to use the image of nested dolls. The wooden painted crafts, in which a small doll fits inside a larger one that fits into an even larger one in an ever-larger progression, are a good metaphor for Gode's business.

As vice president of product management and marketing for Azaleos, a Microsoft National Systems Integrator and an MSP specializing in services around Microsoft Exchange, Gode believes the nested doll model fits one way his company works. Azaleos nests security services from Symantec Corp. inside its own Exchange archiving service, while the entire Azaleos package gets used another level higher by companies such as IBM Corp., Verizon and CDW Corp.

The metaphor of nested dolls actually clarifies many of the pressing questions facing both the companies that are already established in the MSP market and those Microsoft partners who haven't embraced the MSP model but are giving it serious consideration.

How much technology does an MSP need to develop on its own versus how much should it reuse other vendors' established technologies? How heavily to invest in a datacenter versus outsourcing those functions to vendors or hosters? How transparent to be with customers about the technology inside the doll -- in other words, go white-label and brand the technology as yours, or let the customers know what technologies they're getting from whom? And, finally, how many technology options to include -- one best-of-breed stack for all customers, or interchangeable stacks that are customizable to the needs of each client?

Gode's answer is to abstract the experience for the customer in the cases where Azaleos is bundling another vendor's security. "We'll resell the Symantec solution, so that from a billing perspective and at least an initial first-line call perspective, the customer can say, 'OK, e-mail -- that's Azaleos.' If we were trying to offer that service ourselves, it would be a higher-priced item and at the same time not as technologically advanced."

Getting deeper into his considerations as an enterprise-focused MSP, Gode says, "There's a juggling act there on the part of the partner as well as the customer. The partner is saying, 'I want as much business from the customer as I can get. I want to offer a whole menu of stuff that I can do. At the same time, I have certain operations costs.' While they vary, the customer is saying, 'Ideally, I'd like one throat to choke. Whether it's archiving or the phone system, I can just go to this MSP.' If I [as an MSP] can split out some portion of those costs to an old-school hoster who's just turning the crank around stuff, maybe it's worth a look."

The same thought processes are going on with small and midsize businesses (SMBs) and their MSPs.

"You've got two crossing-the-chasms here," says Gavin Garbutt, CEO of N-able Technologies Inc. "One is the MSPs that are at the majority phase -- pretty much every VAR says they're an MSP now, even if they're not. But now the SMBs are adopting managed services."

Garbutt contends that the channel is getting to the point where many partners don't want to sell products anymore. "They want to sell everything as a service. If they have the management wrapper around it [such as a remote monitoring and management system], they just go in and give them the report. They show value, they show solutions and they upsell and cross-sell them really easily," he says.

The opportunity following those reports is to get more strategic with customers and start doing lifecycle management and planning. "They're able to sell the customer services 18 months ahead of time because they understand what the pain points are. They can discuss hosted Exchange, hosted SharePoint, the advantages of virtualizing the desktop. They're educating the customers and they're lining up projects six, 12, 18 months ahead of time. That's an absolutely profound shift that's happening in the MSP industry," Garbutt says. "Where we're going in the next generation is going to be all about reporting and dashboarding and representing your [Service Level Agreements] to customers and having them see the quality of service they're getting from their cloud-based applications."

Choosing Multiple Vendors
Stuart Crawford, a longtime MSP evangelist who consults with MSPs through his firm Ulistic Inc., agrees that many top MSPs are getting more strategic with their customers, no matter the customer size. In many cases, he says, the best approach is selling the value of your advice and your ability to manage many different services, rather than white-labeling other companies' services.

"I believe the real opportunity is in creating the plans -- writing up the strategy around [topics such as] business continuity and consulting with clients around what the risk is," Crawford says. The MSP would coordinate having the right vendor come in to demonstrate the service. The message to the client from the MSP, Crawford says, is, "'We'll work with whatever is the best one for you.' What may work for one customer may not work for a second, and so on. Then the MSP does the prep, planning, execution and continuous testing of the strategy."

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Jamie Brenzel, CEO of KineticD, a storage and recovery solution provider that works with many MSPs, says he's seeing a lot of successful partners disassociate themselves from representing a single vendor for their service. "They're feeling comfortable with being more agnostic about the solutions that they're providing with their customer base, and less concerned about branding. They're focusing more on identifying the best of breed and highlighting that as opposed to [hiding it]," Brenzel says.

How high could that trend of MSPs representing multiple vendors go? In a recent speech, Bob Godgart, founder of the vendor-partner connection platform ChannelEyes and founder of Autotask Corp., suggested the answer is pretty high.

"I think in less than two years, the average partner will manage a portfolio of 50 cloud solutions," Godgart predicted, adding that the number of solutions managed could rise to 100 at some point. That scale of products on the line card represents a significant jump from the way business is done today. For example, a recent CompTIA survey found that, on average, a channel firm belongs to eight different vendor programs (see "Get Ready for 50 Solution Cloud Portfolios, More Vendor Conflict").

Channel professionals of the Millennial Generation are most comfortable with cloud solutions, skewing the portfolio even more cloudward. "Partners of the future may not even know what CAPEX means," Godgart said.

One of Godgart's other major forecasts was for "significant vendor-direct competition" with MSPs and IT services companies representing cloud offerings. "I'm sure this [opinion] is not going to be popular," Godgart said. Between the consumerization of IT and new "freemium" models, the temptation for vendors to go direct with cloud-based tools will be too big to pass up, he argued.

In the remote monitoring and management (RMM) tool arena, Godgart cited Spiceworks Inc., with its ad-supported model, as one example of the types of challenges MSPs will face.

Solution providers should take sensible self-defense measures, such as leading with their own brand by representing some products that they can white-label; entering into longer-term contracts with vendors; and demanding price-protection clauses in those contracts for the inevitable drastic drops in price.

Paths to Partner Success
Even as the mix of on-premises and cloud services changes, some things remain the same for MSPs. Those with good business models succeed, and those without, fail.

Ray Barber, product marketing manager at Kaseya International Ltd., has been working with MSPs for about 10 years in the United Kingdom and the United States. Over that period, he's noticed recurring characteristics of companies that do well.

"They focused on the things that made them a good company rather than focused so much on IT," Barber says. "They have the attitude that IT is the business they're in rather than who they are and what they're about." According to Barber, the key elements include focus on building relationships, being successful at marketing, being successful at selling and handling scale.

"They understand how to turn the art of IT service provision into a business, and they talk far more about business than they do about technology," Barber says. "They make sure they get the basics right. They're a good company and a good business first, and then they get the technology right. If they can get the business right and not be very good at the technology, it will slow them down, but they'll still survive. If they can get the business right and the technology right, they'll be unstoppable."

Garbutt also has watched which MSPs in the N-able partner community really succeed. He contends that at stages like this, when technology is changing rapidly, strong leadership in the company is critical.

"If the company is led by the employees, it's going to have a higher probability of not making it because the company won't change at the pace it needs to," Garbutt says. His view is that it's a problem when the company's direction is set by line engineers who think, "My customers only see value when I'm fixing stuff," which Garbutt argues is incorrect. That's part of the reason, he says, that most MSPs today still sell time-based services to their customers.

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To really take off, Garbutt says, MSPs need a strong management team with a plan. "It doesn't have to be 40 pages," he says. "It might be four pages with a good SWOT analysis, and they have an eye on the future."

Ulistic's Crawford also feels that successful MSPs are aiming beyond the IT department.

"There's still going to be a need for an [MSP] IT professional. Maybe it's no longer khakis and polo shirts, it's more suit and tie. It's time to step up your game; it's time to pull your suit out of the closet. Business owners respect the person who can speak at their level and understand all the things in front of them," Crawford says.

He also expects the trend to accelerate. "Most of the companies today having success with cloud solutions were born in the cloud. They know nothing of the way things used to be done," Crawford says. "As the business world starts to mature and younger guys move up, that's also going to push us in the direction to more and more of a turnkey, 'That's what I want.' Pay X dollars a month for the service. They can live with a few outages here and there because they're used to it."

Shifting Landscape
With all the pressures on existing MSPs, some Microsoft partners wonder whether it's too late to get into the market. The consensus among the MSP veterans we spoke with is that there's always room for energetic new entrants with good ideas.

They all acknowledge that parts of the last few years have been tough. It's difficult to get statistics on how many MSPs didn't make it through the recession, but Kaseya's Barber estimates it at "10 percent or so" based on signals he picked up at Kaseya. "It's a finger-in-the-air kind of thing, even as our business continued to grow during that period," he says.

Brenzel of KineticD and others see consolidation continuing. "We're not convinced that MSPs will be really around in the same way they are today five years from now. We think there's a shrinking happening in the middle, if you will," he says. "Among bigger MSPs there's a lot of consolidation. Smaller ones are really being kind of squeezed in terms of how they can be effective in the marketplace over the long term."

The model is especially tough for MSPs that want to do their own hosting. "They're faced with a landscape and a cloud computing environment that's making them really assess their businesses," Brenzel says. "More and more in the marketplace, cloud computing is all about driving costs to zero, and it's about economy of scale. Being a small MSP, they're really not able to achieve and benefit from that the same way bigger cloud vendors are able to."

Garbutt is convinced that the consolidation wave is intensifying. "As much as we're at a stage of maturity in the MSP market, hold on, because the next five years are going to be insane," he says. "There's a lot of consolidation going on right now, but just wait."

But none of that is a reason for a company with good ideas, good management and eyes wide open to stay out of the market. "If they just purely focus on the technical, there will be less and less of that need around," Crawford cautions, before offering his optimistic note: "I don't think it's ever going to be too late."

Kaseya's Barber sounds a similar theme. "It's not like there's been a sudden change where we got to the end of the market and we have to branch out. I think it would be unusual to come across end-user customers who've never used or heard of managed services. You have to be innovative with marketing and the way you sell [in a way] that you didn't have to be five to 10 years ago," Barber says. "In terms of companies' ability to grow, there's plenty of opportunity for them. We've seen that happen time and time again: new entrants go out into the market with a good idea."

And there's always an opportunity to clean up after other MSPs. "There's still plenty of services providers out there who call themselves MSPs who aren't really doing managed services," Barber notes. "It doesn't take long for the guys who can market themselves well to appear on the scene."

More from This Series:

• Part 1: Success in a 'Nested Doll' Environment
• Part 2: 9 Add-On Opportunities for MSPs
• Part 3: Microsoft Product Shakeup