Managed Services Market Is Booming

July 9, 2009

That scenario has changed big time. The market is mature. Brand-name services have emerged from countless vendors including Cisco, IBM, McAfee, and Microsoft. National distributors Avnet, Ingram and Tech Data offer managed solutions to VARs, who no longer have to pay vendors dearly to play. In addition, the Master Managed Service Provider (MMSP) model gives VARs the choice of working with a fellow VAR experienced in the ups and downs of managed services.

The growth of hosted services, specifically hosted applications or SaaS (software as a service) are driving managed services revenue growth in the United States, according to a recent report from researcher In-Stat.

The researcher has forecast that hosted application revenues will grow from $8 billion in 2008 to $16 billion by 2012.

Another recent market study, released by Ovum Research and commissioned by Cisco, projects that the global market for four managed services (metro Ethernet, IP VPNs, IP voice, and security) is growing at a compound annual growth rate of 18 percent. Ovum forecasts that the market will be worth $66 billion by 2012.

Distributors’ Different Approaches to Managed Services Give VARs More Options

The rampant growth of the managed service market has been seized upon by major distributors as a revenue opportunity for them and their VAR customers. Both Ingram, with its Seismic strategy, and Tech Data, with its VARChoice strategy, are taking the market seriously, although with different approaches.

The big difference: Ingram Micro, via third-parties, hosts managed services for its VARs, while Tech Data doesn’t.

Ingram’s position is that hosting applications and infrastructure lowers the barrier to market entry for many VARs and speeds them along the revenue-generation path, said Justin Crotty, vice-president of Ingram Micro's services division.

He said many VARs lack the financial ability or technical expertise to build and manage a 24×7 data center.

“Our success in this market is dependent on the VARs’ success, not on the vendors’,” said Crotty.

Tech Data’s strategy is to offer VARs a spectrum of MSP options through Zenith Infotech – without hosting any of them.

“By doing this, we offer VARs a choice of managed services and avoid any channel conflict,” said Joe Quaglia, Tech Data’s senior vice president, U.S. Marketing.

Do Managed Services Help or Hurt VARs?

Love them or hate them, managed services are here to stay.

The Managed Services Provider (MSP) model is very attractive for traditional VARs burned out from selling low-margin products, doing one-off projects and receiving unpredictable revenue from break-fix maintenance gigs.

The chief lures of being an MSP are high margins, recurring revenue, strong differentiation, strong account control, and the low cost of acquiring new accounts.

But, often, VARs are unprepared for the reality of switching roles. Many lack the business expertise and technology infrastructure to move from a manual to an automated service delivery model.

Small VARs eager to tap into the managed services market, but leery of high upfront costs are the main customers of Do IT Smarter, a San Diego-based MMSP.

Do IT Smarter offers a low-risk, pay-as-you-go MSP program that incorporates key services such as remote monitoring, enterprise help desk, email and internet security, and remote backup. The program gives VARs the opportunity to sell a suite of managed services for a monthly fee that starts at $299 after they pay a sign-up fee of $1,999.

The sign-up fee includes training that helps VARs learn about managed services, how to succeed, and how to tailor managed services to their business, said Don Begg, the company’s CEO.

Begg added that VARs receive technology training and learn about establishing SLAs, marketing, collateral, pricing, help desk, contracts, and selling their services.

“In return, VARs gain the opportunity to earn between 30 and 60 percent margins,” said Begg.

Managed Services Will Grow More Critical to Channel

Demand for managed services will rise for at least the next two years as businesses seek to control costs, but channel partners will need to sharpen their execution and sales skills to capitalize on the managed-services trend, according to a new research report on the managed services market from Forrester Research.

Faster technology change, an impending long-term growth cycle for IT investment (despite the current economic downturn) and the increasing cost of capital will drive many businesses to managed services, wrote Forester analyst Henry Dewing in the report entitled “Market Overview: The Broad Opportunities in Managed Services.”

Dewing identified four major managed-service categories in the report – IT infrastructure, network and telecom, applications and security – and noted that such services can be offered either on-site or as part of a network. Telecommunications has emerged as a top managed-service area as businesses increasingly seek to minimize IT management and costs and instead focus more on their core business processes.