VARs Gripe About Managed Services Hype

Like the red-hot U.S. housing market, the trend toward the adoption of remote managed services may be beginning to cool.

New research from CRN indicates a double-digit decline in the number of solution providers planning to add managed services in the next three months. Many MSP products are just point solutions, and the hype surrounding them is a distraction from the real goal of building profitable services businesses for the long term, said Dan Maude, president of Beacon Application Services, a 16-year-old systems integrator based in Westborough, Mass.

"Five years ago, everyone wanted to be an ASP; now it's MSP. I'm pretty skeptical of the 'value' of these type of services," he said.

The CRN research data, gleaned from a survey of 268 solution providers, shows that in September, only 35 percent of those surveyed planned to add managed services, an 11.6 percent decrease from the June figure of 47 percent.

Slide Show: VARs discuss whythey're opting out of managed services.

Those solution providers surveyed also showed less interest in selling remote-access and CRM products—two categories tightly coupled to MSP offerings. Interest in selling point products, including PCs, storage and antivirus, was high on the survey.

Defining managed services as remote monitoring and management of IT systems, CRN contacted all 58 of the survey participants who specifically said they did not plan to add managed services in the next three months and asked them why.

Common among the reasons they cited was an aversion to distancing themselves from their customers, disagreement with the MSP economic model and MSP hype fatigue. Some had stopped offering managed services because it had either become unprofitable or their customers did not like the experience. Several said technical problems with some popular MSP platforms crippled their fledgling MSP businesses.

Solution provider Dragonfly Technologies has been doing business in New York for 17 years. The MSP craze is just a bunch of hype driven by vendors who took an old idea like remote network access, started helping IT administrators keep up with Windows patching, then expanded into network management, said Dana Friedman, CEO of Dragonfly.

The MSP hype is beginning to hurt customers, she said. Not offering managed services has cost Dragonfly two good customers in the past year, even though the solution provider was essentially saving these customers money by not being an MSP, Friedman said. "I've been fired from two clients in the past year because I'm not being 'proactive enough,' " she said.

These two clients latched on to the "proactive" line after being approached by Dragonfly competitors parroting the proactive IT management talking points of the MSP platform vendors, she said.

Dragonfly could have made more money from these clients through subscription-based MSP contracts, but these customers also would have begun to see less and less of Dragonfly, Friedman said. "They had the money to pay more for an MSP, but I preferred not to spend their money on distancing myself from them," she said.

MSP platform vendors have made a bogeyman out of on-site service by labeling it "the costly truck-roll," but costs can be controlled even if services are being delivered on-site, Friedman said. "Let's just say, for example, one managed service offering costs $500 a month. That's the equivalent of four hours on-site of a senior-level tech at my company, and in four hours a month on-site, we could do the same things and spot even more opportunities, so all we are doing with managed services is distancing ourselves from the client and saying. 'We really don't want to see you,' " she said.

Beacon delivers nothing but services to very large enterprise clients and focuses on ERP and applications such as PeopleSoft. But Beacon's Maude said, "Solution providers moving toward becoming an MSP as quickly as they can might be fooling themselves or simply moving toward getting a little more revenue out of their customers as quickly as they can."

Much of what has been hyped by vendors in the MSP market has been the long-term security solution providers can achieve from locking customers into contracts that promise recurring revenue.

But if the focus of an MSP is to get as many customers as possible on fixed-fee subscription payment plans that require the MSP to keep the customer's network up and running, then the focus might as well still be selling a point product and making sure it stays under warranty and maintenance, said Deborah Hagar, CEO of The Data Institute, a San Bernardino, Calif.-based solution provider that does not plan to get into managed services.

Solution providers adding a remote managed services offering still are selling technology for technology's sake, she said, "The purchasing of technology for technology's sake is slowing," she added.

"I believe very strongly that the market for purchased services from IT are in a decline until technology starts producing real business value," Hagar said. "I fully believe that the use of technology to solve real business problems will be where the growth is."

NEXT: Managed services not a sure thing.

THE BIG GAMBLE

This is a very dangerous time to be taking a chance with your solution provider business by dramatically changing your business model, several survey participants said.

The market has quickly crowded with cutthroat competitors, many of whom bought their MSP platforms before the summer price war, paying higher prices that haven't been—but must be—recouped.

Reckless competition has begun to take the margins out of the MSP business, said Harlan Podber, president of LAN System Services, an MSP in Norcross, Ga. "No margin business is actually showing up in the MSP business," he said.

The rapid drop in the price of managed services products and offerings is a major concern for Steve Lubahn, vice president of marketing at LockNet, a two-year-old MSP in La Crosse, Wis., who participated in the survey. In the past two years, LockNet has struggled with MSP platform products, battled to find salespeople who can effectively sell managed services and watched larger MSPs gobble up market share, he said.

"We will hit a point where people start to back out of managed services or decide not to enter the MSP model," Lubahn said.

Vinny Paragone, owner of KK Enterprises, a 2005 CRN Fast Growth 100 solution provider in Huntsville, Ala., and took part in the survey, has been involved with enterprise managed services in the past, but not today.

To survive in the current MSP market, you need a large base of managed customers to support your technician costs, he said.

The basic math is to be able to cover 75 percent of technician costs with monthly recurring revenue and earn the other 25 percent from other services and product sales, Paragone said.

Why the need for such scale? Because managed services are like an insurance policy, Paragone said. "I'm gambling it's going to work, and the customer is gambling it's going to fail," he said.

What happens over the course of the next 12 months or so will determine whether or not Tenet Computer Group, a 22-year-old solution provider in Toronto, decides to add remote managed services, said Carlos Paz-Soldan, president of Tenet Computer and a participant in the CRN study.

Software-as-a-service (SaaS) and the whole idea of applications and productivity suites being hosted on the Web presents a bigger threat to MSPs than anyone is letting on, Paz-Soldan said. SaaS is the elephant in the room for proponents of midmarket MSP business models because few want to think about what would happen if SMBs suddenly migrated to them, he said.

For example, if a pandemic computer virus attack cripples IT, that could leave SMBs saying, "We don't need to have our own IT network; we're in the business of selling widgets, not dealing with IT," Paz-Soldan said.

Whatever comes of the current battle over hosted applications between Microsoft and Google could alter the IT landscape like the commercial Internet did in the 1990s, Paz-Soldan said.

In 1995, Tenet Computer sold its first Web server—a Netscape httpd—for $9,000. Less than 12 months later, Microsoft was giving its Internet Information Services (IIS) away with Windows NT, "and it wiped out the Web server software market virtually overnight," he said.

Just before Tenet Computer agreed to buy an ISP years ago—one fully loaded with 9600 baud modems and 14.4 baud modems—Paz-Soldan did his homework and discovered that cable companies were about to introduce Internet service. "These are seismic industry shifts that can make your investment useless overnight," he said.

NEXT: Managed services may not be right fit for a VAR.

ROUND PEG, SQUARE HOLE

In many instances, managed services simply don't work for solution providers or their customers.

Jay Mahini, president and CEO of MicroNet Systems, a 17-year-old solution provider in Niles, Ill., and CRN 2004 Fast Growth 50 Leading Systems Builders winner, said he has been wined and dined by MSP platform vendor LPI Level Platforms and treated by the vendor to all-expenses-paid events in an effort to win Mahini's business. But Mahini is not interested in adding a formal remote managed services offering, he said.

SMB customers understand the value proposition of managed services in theory, but in practice they are uncomfortable being billed for services they do not see, and they do not like the distance that remote managed services puts between them and their solution provider, Mahini said.

With a customer's permission, one of Mahini's technicians every so often will pop into a customer's network to eyeball a situation through an open port they have identified, he said. But in all, customers "like to see a body at their location before I can invoice them," he said.

Roger Jermyn, CEO, of Plug-N-Play PC, a full-service, eight-year-old solution provider in Waltham, Mass., for now has stopped offering managed services to the small-business and SOHO customers that comprise the bulk of his clients. "I think the overall marketplace in our area is unstable," Jermyn said, adding that customers "are very reluctant to take advantage of any subscription-based services that we have offered in the past."

Let's not forget that large swath of SMBs with computer networks not even hooked up to the Web, said Ruth Herring, president of RTH Associates, a 23-year-old solution provider in San Francisco. "You wouldn't believe how many [SMBs] do not have their accounting or business systems connected to the Internet," she said.

Large family carpet and flooring companies, importers and a host of other lucrative businesses that have maybe one PC for e-mail access keep the computers running their business applications offline, Herring said. The upside, network security. The downside, forget remote managed services.

How do you retain these "off-line" customers over the long haul without recurring revenue contracts? "It's the old-fashioned reason why anyone is successful in the business: You do good work, they trust you," Herring said.

Some customers look at managed services the same way they view those extended warranties offered by retailers that sell consumer electronics, said Steve Brumer, president of Wireless Rain, a master agent specializing in wireless products and services in Suwannee, Ga., who took part in the CRN survey.

Brumer said he has had little luck getting his corporate accounts to sign on for managed services offerings developed by Wireless Rain that include remote management, remote deactivation ("killing") of lost hardware and replacement insurance.

"The additional monthly costs to our corporate accounts to successfully provide a complete managed services agreement is not being well-received," Brumer said. "I have made numerous proposals both direct and through our channel partners, and we have only received one yes."

Two survey participants plan not to offer managed services on principal alone. Michael Smith, owner of Smith Consulting, Nicholasville, Ky., said that because an IT department should be staffed by a number proportionate to the size of the network—even if that number is one—that staff should be able to keep the network up the same way an MSP would propose.

"I just can't in good conscience try and sell something I don't believe in," Smith said.

With similar conviction, Alex Bricker, a consultant at Outfit IT, Longmeadow, Mass., said managed services take the IT reins from the hands of end users, dumbing down the entire industry.

"If we cease to educate the end users and instead only provide for them, the growth and development of the IT field will eventually stop," he said.

Right now, it just makes sense to stick with what you know, said Arthur Sands, COO of AC Technology, a 15-year-old solution provider and survey participant in Dulles, Va.

"There are so many people out there that are saying, 'I'm going to jump up and sell managed services now because it's the last great bastion of profit,' " Sands said. "Well, that may be true, but you have to be prepared."

If it is true and you're a solution provider that stays out of managed services, are you making a mistake?

Tenet Computer's Paz-Soldan does not think so. By constantly expanding its on-site services, the company has grown and adjusted to changing times, a strategy which should work in the long run, he said.

"Right now, we are working on a system for a customer and selling them the servers and implementing the firewall and the Windows system and the SQL Server. But 15 years ago, we would have just sold the firewall and the server, [and] 10 years ago, we would have done the networking as well," Paz-Soldan said. "But now we are actually discussing with the client what makes sense from a statistics point of view for data collection and reporting. It's all about more consulting."