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A Winning Combination: Software-as-Services Plus Business Consulting and Process Services
By Laurie McCabe
January 30, 2004

The abrupt exit of Loudcloud from the managed service provider (MSP) market in June with the sale of its hosted operations to EDS has cast a spotlight on the future of all MSPs.

The MSP sector has been characterized by rapid expansion followed by an intense and equally rapid round of consolidation. The big question is whether it’s possible in the long run for MSPs to survive on their own — or are the managed services they provide best delivered as part of a larger IT service offering by giants of the industry like IBM or EDS?

Advantage: Big Companies
The big IT services companies have a huge advantage in this sector, Laurie McCabe, vice president at Boston, Mass.-based Summit Strategies, told ASPnews. “It is often the new startups that have the good ideas, but not the money, the brand or the customers. EDS, IBM, CSC and others have recognized that there is an opportunity here, and I think with their experience in outsourcing they are looking good to succeed in the MSP sector,” she said.

Recipe for MSP success
  • Business knowledge and process expertise
  • Technology that incorporates automation, management, and help desk integration
  • Strong partnerships
  • Direct and indirect sales channels
  • A value proposition that provides a “holistic” view of an infrastructure.
  • Global reach
  • Service level agreement (SLA) expertise
  • A delicate mix of software and services knowledge/employees

    (Source: Stephen Elliot, Hurwitz Group)

  • However, McCabe also sees an opportunity for specialist MSPs that, for example, focus on providing security services to government agencies. “You’ll either have to be able to offer a very broad range of services, or be very niche. I just don’t see the mid-tier guys offering a lot of value,” she said.

    Stephen Elliot, a research director at Framingham. Mass.-based research and consulting firm Hurwitz Group, is less optimistic about the prospects of niche MSPs. “I believe down the road, for the remaining smaller players, many will be acquired by larger systems integrators and, (less likely), product companies,” he told ASPnews. “Most of the revenue early in this market has gone to the larger vendors such as IBM and EDS as they had the relationships and sales channels established to reach customers.”

    Larger, more-established player also baked in managed services in large outsourcing deals so revenue was easier to obtain. As for niche players, Elliot says that it’s going to get tougher because IT shops want a more “holistic view” of their infrastructure. They also increasingly want business process to overlay with their technology and internal processes, so MSPs will have to have both technology and business expertise to survive.

    If some niche players are to survive at all, they will have to be offering the services that customers want. So what managed services are in demand today? Elliot identifies network, system and application infrastructure management, and Internet management as services that are gaining traction today. Specialist MSPs offering service level and performance management services are getting attention from organizations that need to track their service level agreements (SLAs) and quality of service (QoS), he said. Growth in these areas, he warns, is likely to be small, however.

    If You Can’t Beat ’em, Partner
    In addition to offering the right services, a key consideration for smaller MSPs is getting enough customers to be able to leverage their technology using the service provider model sufficiently to actually make money. And the evidence is that MSPs are rapidly discovering that the only way to take on the big boys and win is by establishing partnership agreements with the big consultants or even with the established IT service companies themselves.

    “The two most important assets for any MSP are clients and partners,” Megan Pulliam, president of the MSP Association and director, marketing and business development at San Francisco-based MSP Avasta told ASPnews. “A major success factor is partnerships. For Avasta, having a partner has meant being able to break in to their client base.”

    Santhana Krishnan, chairman and co-founder of Bedford, Mass.-based MSP InteQ, says that establishing partnerships is so important that every deal now done at InteQ involves one. “The MSP sector is for big players like EDS and IBM, and for MSPs with partnership agreements,” he told ASPnews. “We had focused on direct sales but since last year we have changed that. The partnership strategy is the one that is going to work.” InteQ also provides parts of its partners’ overall service offerings under its partners’ brands, Krishnan said.

    Survival Is a Possibility
    So can the independent MSPs survive? The analysts believe it might be possible, if those service providers can find a profitable niche and if they can find the right partners.

    As for the MSPs themselves, those that have survived thus far believe there is a future, “I think there is a strong place for niche players,” Avasta’s Pulliam said.

    InteQ’s Krishnan agrees: “People want a solution in a very short space of time and niche players can provide that. Partnerships will be crucial for survival. There are only a handful of players left now in the sector, and those are the ones that are going to survive. But partnerships are critical.”


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