Recession boosts uptake of managed services

The provision of managed services is likely to be one of the brighter spots in an otherwise difficult economic landscape this year and has the potential to become a safe haven for those channel partners that get their offerings right.

The provision of managed services is likely to be one of the brighter spots in an otherwise difficult economic landscape this year and has the potential to become a safe haven for those channel partners that get their offerings right.

Moreover, the fact the market continues to be in a state of flux means there are still opportunities for partners who have not yet dipped a toe in the water but are prepared to risk diversifying their business.

As to what managed services actually comprise, they are essentially a form of IT infrastructure outsourcing sometimes referred to as out-tasking.

Andrew Carr, managed services and solutions director at IT service provider Capita’s ComputerLand business, explains: “Outsourcing is about taking on a full function or multiple service lines for customers and delivering them back on an SLA basis. It’s more of a strategic partnership and tends to last for seven to 10 years.”

Managed services, on the other hand, tend to consist of more tactical point solutions, dealing with single lines of infrastructure service such as storage or networking. They are more transactional in nature, do not usually entail the transfer of staff to a service provider and contracts are generally shorter, lasting between three and five years.

Kate Hanaghan, a senior analyst at the Bathwick Group, puts it another way: “Managed services tend to be standard services with limited customisation. It’s almost about productising a service, which means doing the same thing over and over again for different clients and that’s where the benefits come in financially for the provider,” she says.

But precisely because they are more tactical in character, such services are generally less frightening than outsourcing, especially for organisations that haven’t done it before, according to Carr.

As a result, while the managed services market had been starting to experience a bit of a buzz and was growing faster than the overall services market even before the recession kicked in, Hanaghan believes today’s difficult economic environment means that it will in fact be one of the better places to be.

“A lot of discretionary spend is going, but looking after things like storage and email and keeping services up and running is absolutely critical and there’s only so much fat that can be cut from that,” she explains.

“So, because a lot of organisations are focusing on saving money wherever possible, if you’re a partner that can offer a cheaper, better way of doing things, you’re well positioned for this year.”

Key appeal
One of the key appeals for customers moving to a managed services model is that pricing, on a monthly or quarterly subscription basis, is fixed and predictable, while it also has the advantage of generating recurring revenues for channel partners rather than one-off product or project sales.

Another benefit is that customers can shift fees from their capital to
operational expenditure budgets, which in the main have not been slashed as heavily yet, although they are being scrutinised.

A further plus point is the guaranteed service levels that managed
services provide as well as access to skills that may otherwise be too difficult or expensive to find or retain, particularly if 24x7 cover is required.

Growing uptake
This all means that, while the sector is in the fairly early stages of adoption, uptake is likely to grow over the year. This will be the case particularly among smaller organisations where IT staffing issues are a problem anyway or in medium-sized companies keen to cut head count or manage increasingly complex technology more effectively at branch or remote offices.

Nonetheless, Simon Kelson, managing director at Atlanta Technology, which provides managed and hosted services to SMEs and is a partner of disaster recovery software provider FalconStor, warns that the market is getting tougher. This is particularly the case in commodity areas such as email or desktop management, where he says customers don’t see his company that much unless things go wrong.

“Clients are unwilling to fork out as much and they want more for the same or the same for less. Everyone’s looking at their operational costs and expenditure so as contracts come up for renewal, it’s about tough negotiations at each stage” he says.

This change in dynamic means that some customers, with which the company has built long-term relationships, are either trying to change payment terms or even look elsewhere for cheaper alternatives for the first time.
“People are putting cost ahead of trust and long-term relationships, which is quite a shift,” Kelson explains.

“Everyone’s got tunnel vision to varying degrees across all industries at the moment, although it’s more prevalent in sectors that have been stung very badly by the speed of the downturn, such as retail and leisure.”

Where Kelson does see more lucrative growth is in higher value-add managed services such as disaster recovery and hosted networks and servers.

“A year ago, if we talked to organisations about this, they turned up their noses and said they wanted their data where they could see it,” Kelson says.

“But now they seem to be taking the view that the benefits of doing this outweigh their reservations and the key is how they pay for it. Rather than undertake big capital expenditure to refresh their infrastructure, they can pay a flat cost over three years and do it that way.”

Increased flexibility
Another means by which the recession is making itself felt is in a growing customer requirement for increased levels of flexibility in contract and payment terms. As a result, says Carr, there is a growing trend towards requests for one year rather than the more traditional three to five year deals, especially among organisations that are going down the managed services route for the first time and are therefore erring on the side of caution.

Among new and existing customers there is rising interest in demand-based rather than fixed-price charging. Carr explains: “In the SME space, people are increasingly saying they want to pay for service use. So, for example, if a customer pays for 1,000 desktops to be managed in the first quarter but closes their production line for two months in the second, they’re asking if they should have to pay the same price.”

Providing flexibility is one of the key advantages channel partners have over vendors providing similar services themselves.

“One of the things the channel can do is to deliver value over and above the contract by being flexible. Partners were originally called value-added resellers and the first two words of that phrase are important,” says Carr.

Nevertheless, the sector is still not overstocked with organisations that have decided to make the move, not least because of fear of the unknown. David D’Orazi, managing director at reseller Virtual Planet, indicates that a lot of people still remember how the application service provider model of the late 1990s failed due to factors such as lack of network bandwidth and of technology such as virtualisation, which was not available at the time.

“It was an idea ahead of its time and technically, managed services are a different proposition anyway. But having been burned once, people don’t want to be the first ones to take the pain this time, so they’re waiting to see what’s happening,” he says.

D’Orazi set up Virtual Planet only 10 months ago as a specific vehicle to provide managed IT infrastructure services. However, after selling his former product-based desktop management business to a rival because margins had become too low.

“The catalyst was that we perceived the managed services business was starting to come to the fore. After completely rejecting it two years ago, customers were starting to ask about it and, if they’re at least willing to try and embrace it, the battle’s half won,” he says.

While other organisations are likewise at least starting to dip in a toe in the water, many are also talking up the extent to which their business model has shifted in an attempt to change how the market perceives them.

But as Hanaghan says: “There’s nothing wrong with being a reseller and bigging up your managed services stuff. Customers are interested now and it gives you a conversation point and a foot in the door.

“Some channel partners have cash to invest and are moving faster than others, but there’s still a degree of uncertainty and even large service companies are wondering how much more they should invest to get further into this.”

In reality, this means that, although the market has been in a process of transition for a number of years now, the plates are still shifting.
“The sector is still an ill-defined, nebulous, bubbly thing, which means that, although it has a buzz around it, there’s also a vagueness in terms of how it’s defined and the number of things it covers. But what this means is that it’s not too late to enter and, in fact, it’s potentially a good time,” Hanaghan says.

Even if the decision is taken to simply add a managed services arm to the existing business rather than go for complete transformation, however, there are still challenges to be faced, not least in terms of investment, which can be a difficult proposition when credit lines have all but dried up.

Partner organisations
But organisations do not necessarily need to spend vast sums on either setting up their own back-end datacentre infrastructure or purchasing an existing market player. A possible alternative model, for example, is to partner with one or more complementary organisations.

Virtual network operator TFM Networks, which resells space on Tiscali, Claranet and Viatel’s networks, takes this route, for one. In 90% of its managed network accounts, the company acts as prime contractor and co-ordinates the activities of sub-contractor partners, which provide the skills that it lacks in-house.

The remaining 10% of deals see customers managing all of their partner relationships themselves, but most prefer to have a single contract, helpdesk, service level agreement and the like in place to reduce their management burden.

Brett Rowe, director of sales and marketing at TFM, says: “I think collaboration is the way forward. It can be a bit tricky if you overlap on the sales element, but we just back away from the elements that others might want to sell. It’s about building up trust levels and finding people that are complementary in their activities – that’s the nirvana.”

Another secret to getting it right is ensuring there is a clear demarcation point between the roles of different partners so grey areas are minimised.

“You’ve got to go into a lot of detail at the contract stage so it’s critical to work hard on the proposal in advance. The devil is really in the detail because you’ve got to ensure that your support processes dovetail into those of your partners,” Rowe explains.

A second option, however, is for channel partners to act as aggregators for a variety of managed services provided by a range of different vendors or distributors.

David Ellis, director of e-security, professional services and training at distributor ComputerLinks, explains: “It’s almost like white-labelling and it’s quite a nice business in terms of recurring revenues. The user is billed monthly or quarterly and the reseller takes a percentage of the billing and acts as the customer interface.”

While some resellers understand the concept and make the transition quite easily, Ellis does acknowledge that some find it more difficult as the business model is different to that of making a one-off product sale.

“It’s less about technical skills and more about commercial and business expertise, which means being able to educate users on the benefits and to demonstrate return on investment. But it’s also more about developing an ongoing relationship with them and so doing things like having regular meetings and service reviews,” Ellis warns.

A third, related option, meanwhile, is for partners to resell the services of a single infrastructure provider and to wrap their own professional and technical services such as consultancy and data migration around them.

Virtual Planet, for example, partnered with ThinkGrid and buys its services at a price-protected, fixed rate before selling them on to customers at a margin of its choice. Channel conflict is avoided as ThinkGrid only sells basic infrastructure access on a reactive rather than proactive basis and does not offer any additional services, although it does undertake active lead generation.

“It wants to develop and grow its channel, which will be key to its success, so why would it shoot the goose that lays the golden egg? But the advantage for us is that we don’t have to borrow millions to build out infrastructure and the recurring revenues are useful,” says D’Orazi.

Evolution of the channel
So, although managed services are unlikely to take over the world any time soon, the market is nevertheless maturing and, according to Kelson, is likely to constitute the next stage in the evolution of the channel.

“Ten years ago, people made pots of money from selling tin, but over time, they found that they needed to add services as there was no margin any more. The problem now is that even professional services are starting to become commoditised and so people are having to look at other opportunities,” he concludes.

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