Managed Services: This Brand Is My Brand

If you're an accountant in California, you know Spidell Publishing. It's the source of the most accurate information on the Golden State's burgeoning tax code. And because most of the information published by Spidell is done over the Internet, network availability and security are paramount to the company's operations.

Does Spidell's network have a firewall? President Lynn Freer knows it does but can't say what make or model it is. And to her, it really doesn't matter. "I'm sure it's a good one," she says. "We haven't had any problems--knock on wood."

Spidell's network is protected by a SonicWall firewall, which is fully managed by Alvaka Networks. The fact that Freer doesn't know the name of her firewall manufacturer, or that she associates IT networking and security with anyone other than her service provider, is just the way Alvaka CEO Oli Thordarson likes it.

"At the end of the day, [clients don't] really want to buy a spam appliance or a router. They want to purchase the ability or have someone, for instance, squash spam before it reaches their networks and wastes their time," Thordarson says. "If we can assist our clients in achieving their goals, they're happy to pay us, and they buy the Alvaka brand. There are certainly underlying technologies that come from valued and important manufacturers, but that's all under the hood or behind the curtain--our clients don't ever want or care to see [the branded technology]."

The Rising Tide
Managed and professional services are the wave of the channel's future. Solution providers are gearing up such wide-ranging service offerings as network management, off-site storage and disaster recovery, e-mail management, and security monitoring and response. Vendors are pushing traditional VARs to take on services because they offer greater margins and business opportunities than straight hardware and software sales. And end users are pushing for more services as a means to milk capabilities and efficiencies from their own cash-strapped and staff-starved IT departments.

According to the 2006 VARBusiness State of the Market survey, 44 percent of solution providers are offering some form of managed services, and 22 percent are looking to launch service offerings this year. The State of the Market Midyear survey found that managed services were either meeting or exceeding sales expectations for the first half of 2006.

What few expected, though, is that the services movement is changing the dynamic of the channel away from the traditional vendor-VAR relationship--which was entirely based on the strength and marketing power of the vendor--to one where the service provider becomes the end customer that takes technology and repackages it for client consumption under its own brand.

"I'm extending a promise to our clients that their servers aren't going to get any worms, that they'll have 24/7 availability and that they'll be able to send e-mail 24/7," Thordarson says. "We at Alvaka are making those promises; those promises aren't coming in the form of a vendor brand name. We're assuming all of the cost and liabilities for providing that service, and if we fail, it's Alvaka that failed to provide that service, not another [company]."

Under this new paradigm, the vendor's brand becomes increasingly irrelevant. The service provider will look to protect and promote its brand and the services it offers. The brands of the technology and products that power services are, at best, a distraction to the service-provider brand.

"We are an industry in flux," Thordarson says. "We're going to see the relationship between manufacturers and VARs change, and I think the manufacturers who come out the winners are the ones that recognize change and adapt programs that provide services, and team with their partners in delivering services and solutions to the customers."

NEXT: The Changing Dynamic

Vendors have primarily followed two paths into this market: providing technology and support that enable partners' services or providing end users with services that are sold through the channel.

VARs-turned-managed-services-providers find themselves in an interesting position of strength. As many begin to realize the importance and strength of their brand, they're also learning that they have greater leverage with their vendors. In this dynamic, the service provider is actually the end user of the vendor--the vendor is selling goods directly to the provider. The service provider takes the technology, "unbrands" it and then resells it as a self-branded service to its clients.

Service providers that build and reinforce their brands are the most successful, according to the Institute for Partner Education and Development (IPED). Services traction comes from VARs that leverage their trusted adviser relationships, offer exceptional technical support and help their customers reduce costs and risks. Least important to service providers are vendor relationships and certifications, vendor reputation and service pricing.

"This will represent a significant shift in the ultimate buyer of network technologies. It will go from the channel being the influencer and conduit to the end user who is the owner, increasingly to the larger outsourcers, who will become the outright owners of the technology," IPED wrote in its Managed Services Marketplace report. "This, in turn, will change the nature of what these companies will need from their vendors to be successful, versus their requirements as technology conduits."

While service providers want to claim brand-independence from their vendors, they don't want to lose the technical support or wholesale purchasing power of their reseller legacy. In the case of Endsight, the transition from VAR to service provider was lengthy and required the support of its vendors.

"We're still kind of a channel company--that is, we still buy and resell hardware and software," says Endsight president Michael Chaput. "We're more like a large customer that's quickly growing."

IPED reports that most service providers are looking to vendors for technical and sales training, customer leads and postsales technical support.

And, in point of fact, even VARs that emerge as full-fledged service providers are still reselling product in a sense. All services are based on some product that's either hosted by or remotely managed by the service provider. That product has to come from somewhere, and in many cases it's the service provider simply installing an appliance or application and managing it through an agent where they once merely recommended product.

"We consider ourselves a channel organization," says Ron Culler, CIO of Secure Designs, a service provider based in Greensboro, N.C. "We look for systems integrators or companies that are looking to put their solution out there, and they need security, a firewall or VPN to be the enabler of that product. We're able to work with those organizations to bring a lot of our expertise from years past to be a technology resource and a sounding board for them. At the same time, [we have] a channel focus, so if these guys sell, then we sell."

NEXT: The Morphing VAR

A service provider's brand takes on a different dimension as some VARs take on the role of a vendor.

One of the daunting challenges facing anyone getting into managed services is building capacity that can scale and meet customers' expectations. This means infrastructure that can absorb peak flows and events, expert staff that can monitor, analyze and respond to incidents, and support that can ensure compliance with service-level agreements.

Recruiting and retaining expert staff is hard enough for small VARs. Add supporting, nonrevenue-producing staff and infrastructure can sometimes be a back-breaker. This is leading some smaller service providers to take on peers as partners in order to resell their services across broad geographies.

Do IT Smarter, a San Diego-based services company, transitioned from a VAR to a service provider only to discover that it didn't have the capacity to expand with its customers' growth. When a large customer opened new locations, Do IT Smarter took on a partner to cover the customer's new regional office. From there, it started marketing its services to other would-be service providers. This is helping to fuel Do IT Smarter's national growth while lowering the barrier to entry into services for other VARs.

"Once you're in as a managed-services provider, it's going to be very difficult for you to be unseated," says Don Begg, CEO of Do IT Smarter. He currently works with 50 partners that resell his company's managed services. "If you think it's hard today to get a new customer, imagine how it's going to be a couple of years from now when customers get aligned with managed service providers."

Ironically, many of the service providers morphing into a vendor-like role are on the smaller side, as are their partners.

By banding together, many nascent service providers believe they may help each other grow and, at some tipping point, turn the balance of power in the channel away from the vendors and towards them. For some, it's even a matter of survival.

"The whole IT marketplace is undergoing tremendous changes," Thordarson says. "If people don't see that coming, they'd better open their eyes because the relationships between the manufacturers and the VARs are changing. We, the traditional VARs, are struggling to find out what our real identities are."