The Fine Line of Managed Services

Channel Strategy
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Vendors are finally getting the message that managed services is the wave of the future. Unfortunately, their entry into the managed services market could spell trouble with partners already there.

When it comes to managed services, it’s the worst of times and the best of times.

The worst of times has to do with the state of the economy, but the best of times has everything to do with a fundamental shift in how customers want to pay for IT.

Up until recent, customers had a capital budget bias towards IT. In fact, all too often about roughly half the capital budget was consumed by IT products. Obviously, as credit has become hard to come by, customers want to reserve what little access they have for credit for core investments. For example, a trucking company would rather use their capital budget to acquire new trucks rather than pay for new IT infrastructure.

This shift toward thinking about IT as an operating expense is good for solution providers that have migrated into managed services. The whole managed service model is to treat IT as an operating expense that allows customers to pay for things either as they grow or contract. That means that a customer does not have to make expensive capital investment bet when they not really sure how big their own business is going to be a year from now.

In fact, a recent survey conducted jointly by Channel Insider and Amazon Consulting found that vendors expect as much as 25 percent of their revenue to come from managed services in 2009. That’s good news in the sense that vendors are finally recognising the value of managed services, but it’s also bad news in that it creates a recipe for conflict with the channel.

A lot of vendors are going to opt to either sell managed services directly or through partners that are essentially serving as agents of the vendor. That means that there will be a lot more solution providers in the market offering managed services, but not many of them will have invested in the network operations centres to run those services. This approach will clearly be popular in some quarters of the channel, but managed service providers that have invested in building their own NOC might have an issue with a vendor that suddenly starts offering managed services through hundreds of partners.

Truth be told, a lot of solution providers that have not invested in managed services will feel vindicated. They have long argued that as time evolved, they would not be able to justify the capital investment in a NOC when vendors would essentially be providing that service. Of course, the problem with that model is that the valuation of your business is going to be a lot less when all your business is really doing is acting as an agent selling a low-margin, undifferentiated service.

Ultimately, solution providers are going to have to rely on a blended approach to managed services. In some instances, it will be simpler to just resell a branded vendor service. But in other instances there is a clear opportunity to deliver higher value-added services tailored to the specific custom requirements of the customer. The challenge is going to be to try to figure out exactly where that fine line is going to be over any given three year window.