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How to add value, boost margin in maturing managed services market

Managed service providers change their business strategies to overcome commoditization and price erosion in the managed services market.

Kirill Bensonoff, co-founder and principal at ComputerSupport.com, has seen the technology landscape change considerably since launching the Framingham, Mass.-based IT services company in 2006.

For one, the managed services business has become increasingly crowded as resellers transition out of the product business and new companies enter the market as managed services providers (MSPs). The result: services that were at one time the gateway to higher margins are now subject to price pressure.

"Desktop support and the management of the network -- that is the traditional MSP business and that is becoming more and more commoditized by the day," Bensonoff said.

ComputerSupport.com's response has been to offer a mix of managed IT services and cloud services. Bensonoff said more and more companies have adopted the public cloud, but noted that customers still maintain a lot of legacy, on-premises gear that still needs to communicate with the public cloud. Against that backdrop, ComputerSupport.com has been finding ways to offer managed services that fit the public and hybrid cloud approaches, he explained.

As price erosion happens, you want to expand your product set.
Jack Knockeprincipal and lead consultant, The VAR Advisor

For example, Bensonoff's company created a managed Amazon Web Services offering, which designs AWS cloud environments, assists with migrations, and provides 24/7 monitoring from its network operations center. ComputerSupport.com also rolled out a hosted desktop service, dubbed ITAnyWhere Cloud. That product taps Citrix technology for delivering applications or desktops and AWS for infrastructure services.

But the company isn't stopping there. ComputerSupport.com is now moving into Microsoft's Azure public cloud and plans to ramp up a DevOps-related service that leverages the cloud.

"The only way to really combat commoditization ... is to constantly move upstream," Bensonoff said. "That is how we are trying to stay ahead of the curve."

Bensonoff's experience with commoditization in the managed services market is something that many, if not most, service providers know about. Companies enter a promising market and eventually see other competitors move in, as well. The service soon becomes a commodity and prices erode. Channel partners, however, can prevent the slide if they look for new ways to add value and boost margin.

Vertical lift

Solution selling is a time-tested way to battle commoditization and price erosion. The idea is to encourage customers to look at the business impact of a bundled solution, rather than the technical particulars and pricing of individual components. Tailoring the solution to particular markets can create value-adds.

Valley Business Solutions, an IT service firm in Huntsville, Ala., takes a vertical approach with its managed Wi-Fi service, pursuing business with private schools and churches. VBS partners with networking and communications vendor Adtran Inc. to offer the wireless service through Adtran's ProCloud Wi-Fi managed service program.

The Wi-Fi service, he said, is flexible and can adjust to light usage and heavy usage periods, noted Alex Dizon, general manager at VBS. For example, VBS configures the wireless service to accommodate a school's changing demands for bandwidth. A school may request higher bandwidth for students when they are taking standardized tests or participating in group events where the students use school-issued devices such as tablets or Chromebooks, Dizon explained.

The service, which VBS offers on a private-label basis, also accommodates different bandwidth requirements for a school's teachers and administrators, as well as students. In addition, schools may seek additional services on top of the wireless networking base. Dizon said education customers ask for content filtering, which VBS layers on top of the Wi-Fi service.

Another VBS vertical: contractors doing business with Huntsville-based government entities such as the NASA Marshall Space Flight Center and the U.S. Army Aviation and Missile Command. Dizon noted that contractors frequently have guests who need wireless Internet access. For such customers, the security layer becomes particularly crucial. VBS can segment wireless network traffic with its managed Wi-Fi service, letting guests tap the Internet but not the customer's LAN.

While detailed product discussions may not interest government contractors, a dialog around security and traffic separation hits them where they live.

"[Government] customers are interested in that story," Dizon said.

Jason King, director of marketing for Adtran's Bluesocket business division, also cited universities, manufacturers and retailers among the vertical market customers adopting ProCloud Wi-Fi managed services.

Circuit, cabling services

Sometimes differentiation comes down to pursuing a niche that other service providers have overlooked or have yet to exploit.

Jack Knocke, principal and lead consultant at The VAR Advisor, a consulting firm that advises IT service providers who want to become MSPs, cited the installation of telecom circuits as one overlooked area. He said MSPs have an opportunity to select and implement the circuit, a task often left to the carrier or a telecom partner. The MSP who owns the circuit selection process can avoid the potential for trouble down the road. The MSP who trusts third parties to handle the circuit could end up doing a lot of support work if the circuit fails to offer the appropriate quality of service.

Knocke said commoditization and price erosion will eventually impact any product or service, noting that the managed services market is becoming increasingly competitive. The task for the MSP is to protect itself by adding new products and services that potentially have solid margins. Circuit services provide one example.

"As price erosion happens, you want to expand your product set," Knocke said.

Knocke said an MSP with an engineering staff grounded in telephony, data and voice technologies may be in a position to provide circuit selection and implementation services. He recommended that MSPs less familiar with those technologies initially align with a full-service master agent with an MSP-focused program. Over time, the MSP can migrate to a larger role.

For MSPs, taking over circuit services adds another component of recurring revenue to their businesses, Knocke added.

Cabling services represent another add-on sale.

Dizon noted that VBS' managed Wi-Fi business has helped generate revenue for the company's structured cable service. He said VBS crews run the cabling to get customers' infrastructure ready for wireless access point installation. The managed wireless service, he said, "helps pull other revenue."

ComputerSupport.com, meanwhile, is targeting the DevOps field with a service that aims to help developers use the cloud for cost-effective software development and deployment, Bensonoff said. DevOps is a software development approach that brings developers and IT operations personnel together to speed up the software release cycle.

Bensonoff said the new DevOps service will assist developers with the baseline infrastructure, whether private or public cloud. ComputerSupport.com will also help developers automatically deploy and scale their applications.

"Moving into these more high-value activities and newer technologies is where we see the future," he said.

Cloud advisors

As organizations move more production workloads to cloud, MSPs have a chance to advise customers on where to best place their workloads for performance, latency and data residency requirements. John Humphreys, vice president of marketing at Egenera Inc., a Boxborough, Mass., company that makes cloud and data center infrastructure management software, said MSPs have an opportunity to add value and generate higher margins in cloud advisory relationships.

The challenge for MSPs, he said, is to help multinational customers run workloads as geographically close as possible to their users. MSPs that opt to roll out their own cloud -- a VMware cluster, for instance -- could spend $500,000 to $1 million per location, Humphreys said. The cost to operate and maintain each cluster can run from $100,000 to $200,000 per year. Those costs make it difficult for many MSPs to offer the localization customers expect.

"It becomes very challenging for these guys to offer that location-based service," Humphreys said.

Against that backdrop, white-label, wholesale cloud services providers have begun to emerge. Humphreys said such providers will offer wholesale cloud services to MSPs, letting them place customer workloads anywhere in the world. He said an MSP can consume that wholesale cloud infrastructure at a lower cost per unit than if it had built its own capability. Wholesale cloud services let MSPs increase their margins for reselling cloud services, while meeting customer requirements for workload localization, he said.

Egenera has updated its software stack to address the wholesale cloud distribution model and plans to enter relationships with colocation companies and distributors in the coming months.

Humphreys said he sees the overall cloud market transitioning from short-term test and development uses to longer-life production workloads. MSPs can potentially hold out against price erosion in that arena.

"This kind of 'cloud 2.0' will be all about enabling the MSP to compete with higher-margin services, but also compete on a global basis with a lot of the public cloud offerings that are out there," he said.

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This was last published in December 2014

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What steps have you taken to avoid commoditization in the managed services market?
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As a result of services that were once the gateway to higher margins becoming a subject to price pressure, I have been able to offer a combination of IT managed services and cloud services. This way, customers maintain a lot of legacy. I have also ventured into solution selling. This way, customers are boosted to view the business put in place clustered solutions rather than on a few particulars and pricing of individual commodities.
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Super great read. Align 100% that MSPs have to move up the value chain. Another angle has to do with the services they offer insofar as hosting apps / desktops is higher-margin than traditional server hosting... http://blogs.citrix.com/2013/06/05/differentiate-or-die-why-msps-and-hosters-need-to-change-their-game/
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@KOestreich, thanks for the comment. Re the vertical market focus you mentioned in your blog post, about 70% of our readers also report (in our Channel Directions 2014 survey, 208 solution provider respondents to that question; this story [http://searchitchannel.techtarget.com/survey/IT-channel-research-results-What-your-peers-are-doing] reports on the 2013 survey results, with roughly similar data on that question) that they don't focus on a particular vertical industry. So our data is consistent with what you've seen elsewhere. That's not to say that they don't differentiate, just that they aren't focused on a single vertical industry.
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Thanks for your feedback, Ken. I have noticed more channel partners providing hosted desktop services. A few are actually focusing on desktop as a service. http://searchcloudprovider.techtarget.com/feature/DaaS-providers-see-promise-threat-in-AWS-VMware-DaaS-offerings
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