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Survival of the Fittest Managed Service Providers

Posted on: Thursday, 16 March 2006, 09:00 CST

By Dubie, Denise

The market for managed service providers sprang up and flourished in the late 1990s and early 200Os, then wilted just as quickly Many went bust or succumbed to acquisition, but the sawiest adapted their business models and tweaked their offerings to survive the changing market.

Today some survivors are thriving, some with upwards of 70% year- over-year revenue growth, and new providers are emerging. Industry watchers say the current market climate is right for customers, who have grown more confident of managed services' reliability and security, and for MSPs themselves.

"Specialty managed services such as security and storage, and software-as-a-service licensing models are popular among IT buyers now," says Jeff Kaplan, managing director at ThinkStrategies. "Similar to Salesforce.com, todays services provide customers with an on-demand model for management."

Newer companies such as Corente, Kaseya and N-AbIe Technologies package their software platforms for use by systems integrators and for value-added resellers (VAR) to sell directly to customers. Others such as CenterBeam focus primarily on small and midsize businesses, and Perimeter Internetworking provides managed security services to enterprises. Managed e-mail messaging and archiving products from companies such as FrontBridge Technologies, MessageLabs and Postini also have become popular with customers. In addition, IT buyers over the past two years have invested more in managed storage services from EMC, HP and IBM.

Charles Weaver, president of the MSP Alliance, says one reason providers continue to emerge is that getting started is not as much of an obstacle as it used to be.

"In the past you needed a huge pile of [venture capital] money to get started, because the infrastructure and management tools were cost-exorbitant," he says. "Now that software licensing models are more flexible and it's been proven there is no need for a hardened [network operations center] to deliver services, new companies can get off the ground more quickl/

Here are the stories of three MSPs that have weathered the industry's ups and downs.

Everdream

Among the survivors, Everdream is the one that had to change the least. Founded in 1998, Everdream got $50 million in venture funding in 2000 and another $20 million in 2005. It has done more than survive over the past few years, but not without making a few changes.

Lyndon Rive, co-founder and vice president of Everdream, says as soon as the company abandoned being a hardware, software and services provider, its business benefited.

"Our full-service offering that addressed the entire life cycle of the PC required a greenfield environment, which meant we had to replace existing hardware, and that didn't work," Rive explains. "Now we are hardware-independent and customers can subscribe to just the services they want, with a flexible licensing model, which puts a lot of them at ease with going with an MSP."

For example, Everdream used to enforce a three-year contract. Now customers can sign on for just one year, which Rive says can cut down a budgets line item from $10,000 to close to $3,000."It takes the long-term, big-budget commitment down for the customer. It removes a barrier!' he says.

With the exception of a few services, Everdream places agents on the machines to be managed.The agents send outbound-only communications to Everdream's data center, and from there customers can choose to have Everdream staff manage their desktop environment or to manage it themselves with Everdream's technology in a hosted- application model. Rive also attributes the company's approximately 250 customers to the nature of desktop management.

"It's such a mundane task that doesn't add any competitive advantage to a company that it's perfect for managed services," Rive says.

InteQ

After signing two major deals -one with Exodus (which later went bankrupt) and one with Compaq (which was acquired by HP) - InteQ had to determine how to endure what its CEO calls "two very unfortunate events"and keep business operations running. Despite having $72 million in venture capital funding by 2001, InteQ needed to adapt to survive.

Santhana Krishnan, CEO of InteQ, says getting his company through the lean years required InteQ to up its service offerings from simple monitoring to indepth management. About 10 years ago, InteQ emerged as a professional services firm and systems integrator and branched out around 2000 to provide remote management services. InteQ supports a NOC and delivers services to customers via secure VPN connections.

Krishnan says the company reverted to its beginnings, focused on enterprise customers and coupled technology services with best practices. Now InteQ services are interlaced with Information Technology Infrastructure Library best practices. "Our model was that customers maintained control. We didn't claim to do it all," Krishnan says. "Now we manage more than 50 enterprise customers' infrastructure in 20 countries. More customers are outsourcing all of their infrastructure management."

A brief history of MSP mergers and acquisitions

The company has increased revenue by 70% year-over-year (or the past three years, Krishnan says, and although it has broadened what it does, more than 70% of InteQ's business remains managed services. InteQ has expanded to support a second service company, InteQ India.

Krishnan says InteQ's history in professional services helped it maintain operations while managed services suffered. "Start-ups five years ago didn't focus on enterprise accounts, which we had already been doing, and they didn't think through how to address anything other than an e-business," he says. "You have to constantly prove that you managing their network is better, that you're reducing events, improving up-time and moving them from reactive firefighting mode."

SilverBack Technologies

When Dan Phillips became CEO of SilverBack Technologies in 2001, he saw the opportunity to adapt its management-software platform into simply software and sell it to other aspiring MSPs. Phillips, who joined SilverBack from management-software maker Concord Communications (now part of CA), says he found SilverBack's core expertise was delivering software, not services. Now SilverBack, which brought in about $38 million in four rounds of venture funding by April 2003, sells its IT network- and security-management software platform to emerging MSPs.

"We got our costs and expenses down early enough to get through some difficult years in the market," Phillips says."It took years for us to make the transition, but it was a better market approach to become a software company and enable other companies like systerns integrators, VARs and MSPs to use our software to deliver their managed services."

With four years of 85% growth year-over-year, Phillips credits the company's 70% customer renewal rate with recent successes. SilverBack doesn't sell its software and run; it works with its 105 partners, or customers, to develop their MSP delivery processes. Phillips dubs this a franchise model and says SilverBack helps each company change its business model to that of an MSP, building pricing models, contracts and even marketing materials.

SilverBack developed its own management-software platform that covers network- and application-monitoring and security-management tasks. Part of its selling point, Phillips says, is that the software supports an architecture that can work on a one-to-many basis, because service providers manage multiple customer networks. The company competes with BMC Software, CA, HP and IBMTivoli.

Phillips says SilverBack is working to integrate its offerings further with complementary services from companies such as Everdream to win customer dollars from traditional management vendors. "There is an entire ecosystem of managed services that are complementary to our software and can be easily integrated into an overall managed services offering," he says.

Tips for working with managed service providers

Here's what industry watchers say to consider when outsourcing:

Customer support: A fancy network operations center may not be necessary, but be certain the MSP dedicates support staff to your account.

Integration: With multiple best-of-breed services available, ask the MSP how its offerings can work with other services you might have in place or are considering,

Reporting: Make the MSP accountable. Require it to provide extensive reporting as part of your managed services contract,

Scalability: The MSP could be addressing an isolated IT task, but be sure the niche service can scale to your network's needs.

Copyright Network World Inc. Feb 27, 2006

Source: Network World

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