managed service provider (MSP)

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. Today, the terms "cloud service provider" and "managed service provider" are sometimes used as synonyms when the provider's service is supported by a service level agreement (SLA) and is delivered over the internet.

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 cloud computing and companies that would provide remote support for customers' IT infrastructure. MSPs, for the most part, initially focused on the remote management and monitoring (RMM) of servers and networks. Over time, MSPs have expanded the scope of their services in a bid to differentiate themselves from other providers.

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While some MSPs may specialize in specific segments of information technology such as data storage, others may focus on specific vertical markets, such as legal, financial services, healthcare and manufacturing. Managed security services providers (MSSPs), for instance, offer specialized 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.

Pricing model for managed service providers

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, 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.

This was last updated in May 2019

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How do you see the managed service provider business model evolving?
100% agree with the article.

MSP are going towards MSSP path which organizations need to comply with various regulations.
This is a great primer on MSPs, and your insight on the MSPs struggle to stay relevant in a world where the adoption of X-as-a-Service is mainstream. End customers are led to a false sense of security, often believing the protection of data and configurations are minded by the XaaS provider. That's where we see the greatest potential for MSPs to grow into - efficiently servicing the Services and devices that traditional RMMs currently don't have visibility into. The opportunity to manage a customer holistically is huge if MSPs achieve the right automation.
This is a great article Margaret! 

You provided clear explanation as to what managed services are exactly, and why a company would need to utilize them. Digital Maelstrom is an example of an MSP that serves as the third-party for businesses to utilize in order to manage their technology duties. Many of our clients are small to medium-sized as stated in the article. Thanks for posting!

Great article, Margaret!

In terms of MSSPs future, I think that we're only now seeing the tip of the iceberg. The reality is that cybersecurity is becoming increasingly more complex, expensive, and essential. I've covered a number of these angles in a recent article . The upshot is that, as you've correctly pointed out, MSSPs are just much more efficient than a typical in-house IT team.

For that reason, as well as the growing threats that are facing companies/organisations/states, I strongly believe that MSSPs are the future of cybersecurity. Our ability to protect our networks and data rests upon their shoulders!
Agreed 100%.  We're in the middle of a sea change.  As infrastructure grows, security gets moved to the forefront.  MSSP it is.
This is a great article!  It's pretty straightforward and cuts to the chase of what the model is and what it looks like today.  We wrote an article that goes into more depth about the evolution of a Managed Services Provider to a Technology Services Provider which, we think is the next evolution.  
Good brief about managed service provider. You have describe very good explanation as to what managed services are exactly do. MSP have trained and experienced staff. They know how to solve your IT problems.
For reliable computer repair of MSP reach out to Comp Net, LLC.