Definition

managed service provider (MSP)

This definition is part of our Essential Guide: Cloud data warehouse guide: Using Redshift, rival platforms
Contributor(s): John Moore

A managed service provider (MSP) is a company that remotely manages a customer's IT infrastructure and/or end-user systems, typically on a proactive basis and under a subscription model. The MSP business model differs from other types of channel companies, such as value-added resellers (VARs), in numerous ways described below. Please scroll below the download box for more information on the MSP business model, pricing approaches and evolution as a channel partner category.

Pricing model for managed service providers

MSPs charge for their services under a number of differing pricing models. Typical approaches include per-device, per-user and all-inclusive pricing.

In per-device pricing, the MSP charges the customer a flat fee for each device under management. In per-user pricing, meanwhile, the MSP charges a flat fee for each user, accommodating users who use multiple devices. In all-inclusive pricing, also referred to as the all-you-can-eat model, the MSP charges a flat fee for all the IT infrastructure support and management services the MSP plans to offer.

In each of those pricing approaches, the customer pays the flat fee on a regularly scheduled basis, often monthly. Such pricing methods let MSPs sell services under a subscription model. This approach provides the MSP with a monthly recurring revenue (MRR) stream, in contrast to IT projects that tend to be one-time transactions.

MRR is one aspect of managed services work that differs from other business models in the IT solutions provider and channel partner space. Solutions providers pursuing the break/fix model, for example, usually price their services on a time and materials (T&M) basis, billing an hourly rate for repairing a customer's IT equipment and charging for parts or replacement gear.

Companies performing IT project work, such as computer systems installation and integration, may charge a fixed price for products and services. Either way, those solutions providers generate revenue on a one-time basis from each project. An exception would be large projects with multiple milestones and associated payments. But, in general, the conventional solutions provider business is mainly transactional. An MSP's recurring revenue stream, on the other hand, potentially provides a more stable and predictable base of business.

Service-level agreements

An MSP often provides its service offering under a service-level agreement (SLA), a contractual arrangement between the MSP and its customer that spells out the performance and quality metrics that will govern the relationship.

An SLA may be linked to an MSP's pricing formula. For example, an MSP may offer a range of SLAs to customers, with the customer paying a higher fee for higher levels of service in a tiered pricing structure.

Challenges of managed service providers

Regardless of pricing model, a key challenge for MSP business management is to set pricing low enough to entice customers to buy their services but high enough to maintain an adequate profit margin.

In addition to pricing, MSPs pay close attention to operating costs and the cost of maintaining skilled employees. Labor is typically an MSP's greatest expense. To keep labor costs in check and improve efficiency, most MSPs employ remote monitoring and management (RMM) software to keep tabs on clients' IT functions. RMM software lets MSPs remotely troubleshoot and remediate issues with servers and endpoint devices. With RMM, MSPs can manage numerous customers' IT systems simultaneously. MSPs may also use automated scripts to handle routine systems administration functions, such as checking hard disks for errors, without human intervention.

Another challenge MSPs face is the mainstream adoption of cloud computing. As more of their customers' IT infrastructure components migrate to the cloud, MSPs have had to find ways to manage hybrid cloud environments. MSPs also seek to provide their own cloud computing services or resell other cloud providers' capabilities, with cloud-based backup and disaster recovery (DR) a common entry point.

In addition, just becoming an MSP can prove challenging. The prospect of MRR has attracted many traditional solutions provider companies, such as VARs, to the MSP business model. However, would-be MSPs have struggled to establish themselves in the market. The MSP line of business calls for companies to adopt different performance metrics, technology infrastructure components and sales compensation programs, to name a few challenges. As a result, many MSPs derive revenue from business lines other than managed services, such as IT project work, break/fix business and on-site support. Pure-play MSPs are relatively rare in the IT services industry.

What MSPs are used for

Small and medium-sized businesses (SMBs) are typical MSP customers. Many smaller companies have limited in-house IT capabilities, so they may view an MSP's service offering as a way to obtain IT expertise. Larger enterprises may also contract with MSPs, however. For example, government agencies, facing budget pressure and hiring limitations, may contract with an MSP to supplement in-house IT staff.

Chart showing small- and medium-sized business use of managed services
Small business use of MSP services

The MSP subscription model provides customers of all sizes the advantage of predictable IT support costs. And because MSPs take a proactive approach, they may be able to prevent IT problems from occurring and, therefore, from disrupting business operations.

Development of managed service providers

The evolution of MSPs began in the 1990s with the emergence of application service providers (ASPs), which offered remote application hosting services. ASPs helped pave the way for companies that would provide remote support for customers' IT infrastructure. MSPs, for the most part, initially focused on the RMM of servers and networks.

Over time, MSPs have expanded the scope of their services in a bid to differentiate themselves from other providers. MSPs now often remotely support a client's endpoint devices and build offerings around mobile device management (MDM).

Types of MSPs

Managed service providers have developed specializations. Managed security services providers (MSSPs), for instance, offer services such as remote firewall administration and other security-as-a-service offerings. Managed print services (MPS) providers, meanwhile, offload the task of maintaining printers and supplying consumables.

MSPs may also specialize in business continuity (BC) and DR or data storage solutions. Others may focus on specific vertical markets, such as legal, financial services, healthcare and manufacturing.

This was last updated in January 2018

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