In-Depth

Do MSPs Face an Identity Crisis?

The phrase "managed services provider" means different things to different people, and the connotation isn't always positive. But MSPs are working to build credibility and show that their market holds big opportunities for customers, vendors and the channel.

• By Lee Pender
• February 01, 2008

As of January, Chalk -- a respected member of his local business community until the time of his arrest -- was still awaiting trail, according to the Westchester County Business Journal. Ultimately, of course, the justice system will determine Chalk's guilt or innocence. However, the always-powerful court of public opinion -- in this case, technology blogs and the trade press -- has, fairly or not, largely convicted him of being a white-collar criminal and a bit of a sinister one to boot.

Unfortunately for other MSPs, Chalk identified himself as one of their number. And while his alleged antics had nothing to do with his company being an MSP, he became something of a Michael Vick to other MSPs' Atlanta Falcons (minus a conviction at this point). In other words, like the disgraced quarterback, Chalk is now the unfortunate public face of a market that didn't deserve or need the negative attention.

Even with Chalk's story fading, many MSPs still struggle to portray themselves and their market positively. One of the few wide-open categories left in the ever-consolidating IT industry, the MSP space includes companies ranging from the largest enterprises (IBM Corp. and Siemens AG, for example) to small shops of fewer than 10 employees. The very notion of what an MSP is sparks debate, and legitimate MSPs of all sizes worry that some of their less-diligent competitors will sully the MSP concept and ruin the potentially profitable party for everybody.

Still, despite some negative press and identity questions, the MSP business can be a lucrative one for both channel members and vendors, as well as a lifesaver for customers. And partners that know how to play the MSP game can set themselves up to be revenue winners.

Dave Sobel doesn't use the phrase "managed services provider "with his customers. As the CEO of Evolve Technologies, a Gold Certified Partner and MSP based in Fairfax, Va., Sobel doesn't want his company lumped into a category that's difficult to define and doesn't always have the best reputation.

"There are so many definitions for what a managed services provider is," Sobel says. "Your managed service and my managed service could be different. If I don't latch on to calling it that with customers, they won't compare me that way. I think there are going to be a lot of people who don't do [managed services] well. By removing the industry terms and simply having a discussion around what my solution is to your problem, it becomes a clean, easy-to-have conversation."

Confusion about the term "MSP" is a problem Charles Weaver understands all too well. Weaver is the president of MSP Alliance, a professional association that focuses on establishing standards for MSPs and ensuring that the term "MSP" carries credibility as well as meaning. For Weaver, the definition of MSP is simple: "It is the proactive management and maintenance of IT infrastructure and IT assets on behalf of a client," he says.

MSPs, for the most part, essentially become their clients' IT departments by providing basic services such as network monitoring and maintenance and application hosting, charging clients flat monthly fees rather than billing for consultants' hours. It's possible for an MSP to go far beyond the basics -- some have branched into hosting unified communications applications or providing e-mail or security capabilities. Managed services can save customers huge amounts of money in IT expenses.

The problem, in Weaver's view, is that companies calling themselves MSPs provide a wide variety of different services -- and at different levels of quality. While the Compulinx story created some bad press for MSPs, he says, inexperienced and unstable companies that fail to effectively provide services pose a much bigger problem.

"We have a bunch of people who, in trying to jump on the boat, are doing more harm than good," Weaver says. "The major and very real perceptible threat is lack of professionalism and lack of awareness."

The 10-year-old MSP Alliance, which started with a handful of members and now boasts nearly 5,000 worldwide, has made an effort to enhance the credibility of the MSP market. It administers an MSP accreditation test that probes everything from a company's technological savvy to its financial resources to its executives' backgrounds. MSPs that pass the test may then advertise themselves as being accredited by the MSP Alliance.

"While we embrace new and young companies getting into managed services, it would be foolish for us to not want these MSPs to be abiding with best practices," Weaver says. "It would be like a whole bunch of students showing up at Harvard Law [School] and saying, 'We just watched 'The Paper Chase' a couple of times, and we want to be your peers.' They'd be laughed at. We have to have good business, good financials, good client references. It's absolutely in line with the medical profession, the legal profession, the accounting profession."

Still, says Leslie Rosenberg, research analyst for network channels and alliances at analyst firm IDC, the MSP Alliance seal of approval, while useful, might not be enough by itself to convince potential customers of an MSP's credibility. Legitimate MSPs have to not only convince customers of their credibility but also educate them on merits of the MSP model itself, she says.

Rosenberg cites certification programs set up by large hardware and networking vendors such as Cisco Systems Inc. as another important element in legitimizing the MSP concept. Several large vendors, including Cisco, offer thorough third-party certifications of MSPs as part of their MSP-approval programs, she says. In December 2007, PC giant Dell Inc. introduced an MSP certification program as part of its first formal channel initiative.

"It allows these larger partners to have some competitive differentiation," Rosenberg says, noting that Cisco's program in particular is geared for telecom carriers and systems integrators. "I do think that the bigger brands certifying their partners in terms of what's being delivered on gives a little more street cred."

Points of Entry
For those companies that do manage to establish MSP credibility, the opportunity to profit in the market is significant. IDC is currently sizing the MSP market -- itself hard to define, as it can include not just services but hardware sales influenced by MSPs -- and Weaver says that most analyst estimates pegged the industry at about $30 billion in 2007. He also says that the market isn't finished growing yet.

"What I would conservatively guesstimate is that if $30 billion was the mark for this year, and you take all of the varieties of managed services and you take the services plus the hardware, you're easily looking at a $40 billion or $50 billion industry before the decade is out," he says.

Just as there are different types of MSPs, there's more than one way to become an MSP. Rosenberg notes that not every partner can afford to build its own network operations center (NOC) and compete with bigger players. For smaller partners, she says, there are ways to ease into managed services with smaller, more targeted programs and investments and without splurging on building hosting facilities.

For instance, she says, massive distributor Ingram Micro Inc. offers a program through which budding MSPs can pick and choose particular services -- such as e-mail, security or voice-related capabilities -- to offer customers; Ingram Micro hosts the applications for its partners in its NOC. Other big industry players offer similar "white-label" programs -- in which a vendor does the hosting, but the service carries the partner's name -- that can help resellers become MSPs. "[Resellers] can buy this a la carte," Rosenberg says. "Small and midsize resellers safely get into it and begin to realize recurring revenue."

Larger players might go ahead and build a NOC and host applications themselves. Either way, traditional partners looking to get into the MSP market will need to shift their thinking in one area in particular: billable hours. Many partners make money by logging as many hours as possible for their consultants. MSPs, Sobel notes, want to do just the opposite. Because they're already charging customers flat fees for their services, MSPs want their consultants spending fewer, not more, hours with customers.

"The motivation is not 'bill more hours,' it's 'do it right,'" Sobel says. "When you focus on how utilized your consultants are, you're measuring utilization and you want that number as high as possible. When you switch to managed services, you want that number as low as possible. You're looking to run these networks in such a way that they run as problem-free as possible."

It's important to explain that difference to customers because it demonstrates the advantage of the MSP model over more traditional services, he says: "We want our customers to stop thinking of IT as a cost item and think of it as an investment. It allows us to move into the position of the trusted advisor. A good consultant wants that, too. The problem is that a good consultant is still charging you hourly. They're sitting on different sides of the financial table. If you're billing your customers hourly, your interests and their interests do not align."

The shift in billing philosophy isn't always easy for VARs to make, Rosenberg notes: "If you have sound business practices and you get that bigger picture, you can do that business planning," she says. "It's very easy for the large carriers. That's always been their business model. A midsize VAR just doesn't work that way."

A Market Still Emerging
Midsize VARs who do break into the MSP game might soon find themselves competing with much larger vendors -- and possibly even with Microsoft, although partners and analysts currently play down Microsoft's potential influence as an MSP. Companies like Microsoft and Dell are still hashing out MSP strategies; at this point, they're offering some hosted services on their own and some through partners. That situation has Sobel worried.

"What keeps me up at night is Dell actually being able to deliver on a checkbox that says 'complete services agreement,'" he says. "They're not close right now, but they want this space. We need to be ahead of that."

Other partners, though, seem content to form alliances with bigger vendors and make the most of their opportunities. Tim Hebert, CEO of Atrion Networking Corp., based in Warwick, R.I., spoke at the announcement of Dell's channel program in December, saying that Dell's influence has been positive for his company.

"When you pick up trade journals and magazines that are focused to the end client, you don't hear about managed services. The end-user community isn't savvy about managed services. When my team goes out, they're educating about what managed services are. Because of [Dell's] name-brand recognition, clients are now starting to ask about [Dell]."

Meanwhile, Weaver doesn't see large vendors completely edging small and midsize businesses (SMBs) out of the MSP market, and he says that the best MSPs will continue to succeed based on their relationships with clients and their service quality.

"The big players realize they can't do anything without the channel," Weaver says. "It's the SMB that holds the relationship. That is the intimacy that the big vendors will never be able to replicate. It is the professionalism and the high-level relationship that the MSP has with a client that defines their status, not the fact that they send them a bill every month."