Monday, October 01, 2007

Business Justification for Managed Services - Is it Real?

One of the challenges we face as an MSP is the ability to justify the Managed Services business and associate it to the actual current market conditions. Well, of course recurring streams of revenue are a big step forward but it's not enough to justify the major upfront investment required. Not only is this important when building a business plan for our internal use, but also vital if you're trying to win over potential investors to help cover the costs of migrating to the MSP model. In my previous post, I spoke about how none of the industry types seem to be equipped to help in this regard, and it seems to be up you to figure this out. I did find a consulting report (somewhat roughly edited) that I have made available here which helps somewhat but is short on specifics.

In fact, when evaluating platforms I had asked Justin Ramsey at Kaseya for industry data such as market size data and received nothing in response, even after a few follow up emails. This was surprising and definitely gave some food for thought. When spending $132,000 on software, you'd expect that vendors would have some sort of business justification available for us would you not? I really am not sure if the reason for this was that there is no data available, or the data they do have applies only to their customers? (being MSP's). So the question remains whether the market for MSP's is real and if so, what is the market opportunity?

If you've every attempted to gather any research data on the MSP marketplace, one fact that becomes decidedly clear is that the MSP "bubble" (and I'll continue to call it that until industry proves me otherwise) is built upon consumption of products and services by potential MSP's and not by the actual end consumer of the MSP's offering - our customers. In other words, most of the investment in our space is currently going to software vendors who are either intrigued by the SAas model (such as AV vendors, security vendors and such) and it's associated lower cost structures, traditional hardware vendors and the MSP platform vendors themselves who are pushing the channel into the managed-services space because of its fat margins, scalability and appeal to customers of all sizes. It's an apt replacement for hardware and software product sales, whose margins are sinking into the low single digits.

Therefore, their success depends entirely on their ability to first, develop an effective channel to market by encouraging service providers to migrate en-masse to the MSP model and second, to make sure that the end consumer of their products either buy solutions from this channel or continue to buy direct or through traditional channels. They are understandably concerned that they don't cannibalize from their existing markets and therefore may have less interest in promoting the MSP market to anyone that is not an MSP in order to avoid this cannabilization.

To a marketing expert this strategy makes perfect sense as developing dual sales streams that are independent and not co-dependent, makes their businesses more capable of weathering market changes. However, by taking a less macro and a more nuanced approach, they would realize that without marketing targeted to the end consumer of any type of MSP product or service, they leave the job to the MSP himself - a terrible strategy for so many reasons.

When an MSP approaches a new customer with the concept of purchasing managed services, we first have to explain to them what Managed Services actually is and then sell our flavor of managed services. We can usually knock 'em dead selling ourselves but getting over the education part is tough. You see folks, the fact is that the I.T services market is already commoditized by the mostly unsophisticated participants in the market, and our customers are seeing it every day and that molds their perceptions - The guys down the street who quit his Help Desk job last week; the Computer Repair Franchisor, Geek Squad ad and of course my favorite target - Onforce, are all responsible. I've linked to their site in the hopes it will cause a DOS attack not because I want to drive any traffic I assure you :-).

Therefore, unless the MSP Vendors do something about it by counteracting this reality, we're going to continue to struggle uphill. This conceptual sale requires more resources than we have available and also why would a prospect take our word for it anyway?

IBM's highly successful channel strategy, puts millions of marketing dollars into making sure the end consumer of the product or service knows that it's OK to buy from their small channel partners, and that they will be supported by IBM. I see none of that personality in the MSP context. Most of the case studies
that tout MSP success, which I have read anyway , remain in geographic areas that have a high concentration of wealth. For example small finance firms or law firms in NYC or LA, who have the resources and are able easily justify the "expense" associated with the "new" model due to their high availability and efficiency requirements. All without any industry education!