Managed Services Are Oversold and Underdelivered

Managed Services

Managed services are driving channel revenue and profitability. They’re just not sending money back to vendors and not producing the full value to customers. The problem is the industry has oversold and underdelivered on the promise of managed services.

By Larry Walsh

It’s that time of year again when the center of the managed services world returns to Orlando, where the ConnectWise and professional services automation (PSA) faithful gather for IT Nation, and where the agenda and discussions focus on the marvels of building strong and profitable managed services practices.

Managed services have delivered on their promise. Over the past decade, the channel has transformed the way it delivers services and support to customers. Gone are the truck rolls for every server reset at a customer site. Gone are the days when technicians had to touch a PC to troubleshoot and fix configurations. And gone are the dependence on hardware and software sales for revenue and profitability.

Vendors across the board tell 2112 that they’re struggling to get their partners engaged in managed services. Most vendors say their partners are merely dabbling in this area. Worse, many vendors say their partners struggle with the OpEx revenue model – as if a decade of primers, workshops, and conferences hasn’t done enough to explain the mechanics and virtues of operational expense-based revenue.

Perhaps, though, we as an industry have done too good a job of selling the obvious benefits of managed services and not the complete story behind them.

Today, according to our research at 2112, the average solution provider earns as much as one-half to two-thirds of its annual revenue through managed, professional, and cloud services. In many cases, these services are virtually indistinguishable on solution providers’ balance sheets. Recurring revenue from services is recurring revenue from services, regardless of the source.

From solution providers’ perspective, managed services are their primary revenue source and biggest identifier. They’ve invested in systems, resources, and staffing to deliver managed services to their clients. They have the predictable revenue and corresponding managed services they were promised. And, as a result, they believe they’re doing well; in fact, they believe they’re doing even better than when they were dependent upon hardware and software sales for their revenue.

In 2112’s Midyear Channel Performance Report, 77 percent of solution providers said they expect full-year 2015 revenue to end ahead of their 2014 receipts. Four in 10 solution providers believe their 2015 revenue will grow 16 percent or more. Of all the various channel business models, solution providers identifying themselves as managed service providers – with at least 40 percent of their revenue coming from services – report significantly higher revenue and profit growth. This lends credence to the managed services model delivering as expected.

[ctt tweet=”77% of solution providers expect full-year 2015 revenue to end ahead of 2014 receipts.” coverup=”O6vW2″]

The problem for the vendor community is that MSPs are pulling away from their products as a means of driving revenue. Companies that specialize in enabling managed services – such as ConnectWise, Autotask, and Kaseya – are doing quite well, as their customer is the MSP. Companies that provide services via the cloud, such as backup, are also doing quite well, as their offerings tuck nicely into the no-hardware framework. All others are struggling to find their way in the managed services paradigm.

Recently, I conducted a workshop of solution providers that offer a mix of hardware, software, and managed services. When asked about how they could package their offerings to create a more valuable solution for their customers and their growth plans, nearly every solution provider pegged their futures to managed services. In fact, relatively few mentioned any hardware or software technology – on-premises or in the cloud.

The reality is that hardware and traditional software licenses are under pricing and margin pressure. The transition to cloud-based delivery and pricing models is rapidly changing the way vendors charge for their applications. Managed services, which have seen open profit margins dip slightly over the past couple of years, are still far more lucrative than legacy products.

Yet, what many MSPs fail to see is the need for continuing to sell and support hardware and software as part of their services. Rather than looking at hardware and software as a gateway to managed services, some MSPs see their services revenue purely as replacement revenue and surrender legacy product sales to vendors’ direct-sales teams or third-party volume resellers.

Further, MSPs often fall short of providing complete solutions that solve the totality of their customers’ needs. Many of the services offered by MSPs are replacements for commoditized hardware and software solutions – e-mail, backup, storage, collaboration systems – or service analogs of their legacy maintenance services – server management, storage, endpoint troubleshooting. Few MSPs have a critical mass of offerings to remove IT issues from the plates of their customers completely.

And, on top of it all, managed services haven’t done much to change the way solution providers approach the market. Most solution providers, regardless of their offerings, aren’t good sales and marketing organizations. They have a hard time attracting, finding, and closing new customers. Ironically, while many solution providers are pinning their futures on managed services, they overlook the model’s need for the continuous addition of new customers to keep the recurring revenue flowing and growing.

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As a result, many MSPs sit on their existing accounts, growing through the expansion of services utilization.

What’s needed is a rethinking of how vendors advocate managed services.

Rather than focusing on the recurring revenue and predictable profitability, vendors should look at the technology models and architectures. MSPs need more than just guidance on what individual technologies can do; they need help mapping the needs of the market with the technologies and services available. After that, they need additional support in understanding how to approach the market with holistic offerings composed of products and services.

Most of all, vendors and solution providers need to work on solving business problems and taking the operational burden and expense of IT off of their customers’ hands. End users want the benefits that come with technology and services; they just don’t want to own it. No end user – except in the IT industry – wakes up in the morning thinking about working with technology. The goal for vendors and solution providers is not to make technology transparent but to make it invisible compared to the benefits that come with it.

Larry Walsh, The 2112 GroupLarry Walsh is the founder, CEO and chief analyst of The 2112 Group. Follow him on social media channels: Twitter, Facebook, LinkedIn.