Take This Contract And...

Breakable contracts—that sounds like quite the oxymoron, especially when taken in the context of the managed-services market. Part of the reason many traditional VARs have left their product-sales-heavy approach and moved to managed services is because the latter guarantees a juicy stream of dependable, recurring revenue over a period of time.

At least that's what it's supposed to be in theory. But what happens when that managed-services contract delivers recurring losses, as is the case with EDS? The systems-integration giant has been racked with red ink, including a $153 million loss in its third quarter, thanks to its mega-contract for the Navy Marines Corps Intranet (NMCI) project. Once thought to bring EDS billions in revenue, NMCI has yet to contribute 1 cent of profit for the industry's second-largest solution provider. Unfortunately, a contract is a contract, as they say. Thus, EDS is stuck with the cumbersome NMCI project and all its delays and cost revisions, much the same way the New York Yankees are stuck with monstrous million-dollar contracts for aging superstars like Jason Giambi.

But what if solution providers could have some type of escape clause in their managed-services contracts to prevent such a disaster? Imagine the savings of being able to avoid such a train wreck.

"Two years ago, if you had told managed-services companies to go for flexible, short-term contracts instead of ironclad, multiyear deals, they'd have said you were crazy," says Charlie Weaver, president of the MSPAlliance, an industry consortium of managed-services firms.

Enter Inforonics, a managed-services provider based in Littleton, Mass. The solution provider's standard managed-services contracts include a provision that allows either the customer or Inforonics to cancel the contract after 90 days.

"Cancellations don't happen often, but it's nice to have the option if you find you're in over your head," says Mike Medaglia, vice president of sales and alliances at Inforonics.

The escape clause is just one example of how solution providers are taking different approaches with the maturing managed-services models. Here's a look at some other means to an end.

Alternate Apppoaches
Ironically, Bruce Mills doesn't like long-term deals. The CEO of Inforonics believes shorter, smaller and more flexible managed-services contracts are the right way to go for both the MSP and its customers. "One of the things we've learned is that service relationships can create tension over time," he says. "So we don't want to hold on to them forever and keep them tied to us against their will."

As a result, Inforonics' managed-services contracts include not only an escape clause for either party to trigger, but they also involve "knowledge transfer" services that allow the clients to assume more control of their IT processes over time and allow a smooth transition when they decide to leave the solution provider's keep. Since Inforonics specializes in managing customers' custom-built software, that can be harder than it seems. But while building flexible contracts and teaching customers how to manage IT on their own might seem counterproductive, Mills says it's all part of the strategy of building trust with clients, which he says is the most important aspect of managed services.

"This business is about managing relationships, so you have to start by building trust," he says.

CompuLinx, based in White Plains, N.Y., also has taken some different routes with its managed-services business.

"We evolved into a managed-services company over time," says CEO Terence Chalk. The company has been around for 14 years, but was formerly known as Computek until last year when it acquired Linx Logic, which was part of EYT (formerly Ernst & Young Technologies); the purchase included Linx Logic's data-center operations and its secure collaboration technologies. CompuLinx today has its own proprietary software platform for hosting customers' networks, dubbed Manage:Now. As a result, CompuLinx recently launched a partner program that allows other resellers to team up with it on managed-services projects and leverage Manage:Now.

CompuLinx also has a different plan when it comes to managing client requests via its massive IT infrastructure, which includes four data centers, more than 300 servers and a whopping 40 TB of storage. The solution provider ditched the call-center approach and instead created a client Web portal for all service requests and help-desk questions. Chalk says that 95 percent of all requests are solved the same day they are entered into the portal, and that the maximum response time from CompuLinx's staff is 30 minutes, an impressive benchmark.

Emerging technologies also are leading to new managed-services opportunities. "The really good MSPs find a practice within a technology and make that a strong discipline," MSPAlliance's Weaver says. "Voice over IP has been the hottest, and areas like disaster recovery and e-mail have also gotten a lot of traction."

Like many solution providers, F.I.T. Communications of Land O'Lakes, Fla., has combined two of the more lucrative opportunities in today's channel: managed services and security. The 3-year-old company has been specializing in network-security services, specifically 24/7 intrusion-monitoring services, since its inception. But now the company is focusing on spam filtering and e-mail management. While network-infrastructure services are still F.I.T.'s bread and butter, e-mail security is a growing business for the solution provider.

Jeff Pennett, president of F.I.T., says there's more pressure today for solution providers to differentiate themselves and develop unique offerings.

"Spam is a major issue for a lot of corporations, so it has become a strong business for us," Pennett says. "It's important to have a niche skill because it seems like everyone is moving to managed services."

And then some. Managed services appear to be in high demand, as merger and acquisition activity has picked up around MSPs. Weaver highlights Sun Microsystems' recent acquisition of SevenSpace, a managed-services provider based in Ashburn, Va., that specializes in business applications from such vendors as SAP, Oracle and PeopleSoft. Will this be a positive or negative development for the channel? It could be both, according to Weaver. On one hand, the increased attention on managed services will help raise the profile for many solution providers. On the other hand, MSPs could end up competing more with some of the major vendor partners.

"There are a lot of vendors calling around asking about good MSPs that are available to buy," Weaver says. "The deals for MSPs won't be bottom-feeding deals, either. These solution providers will have strong valuations and get good multiples."

Whichever path solution providers take, the wave of managed services will continue to swell this year.