The managed services space is about to undergo a dramatic transformation, and soon. The Big Boys are coming.
With Dell's acquisition of SilverBack Technologies and Insight Enterprises' purchase of Calence, two massive, multibillion-dollar competitors have entered the MSP space. Each brings marketing resources, customer reach and vendor influence many smaller channel companies that have bet their businesses on the MSP model simply can't touch.
It's a scenario that the smaller MSPs say they have no choice but to adjust to because the days of making good margins on simple monitoring and patch-management services are over. The introduction of new, large competitors is bound to lead to the commoditization of some services that have been their lifeblood.
"We sit around the table and ask what can we do to keep our services from being commodities," said Wes Herschberger, CEO of MapleTronics Computers, a Goshen, Ind.-based MSP.
The Lay Of The Land
In some respects, MSPs have had a greenfield for offering managed services for the past couple of years. There have been challenges getting customers to buy into the model, but the market itself was fragmented enough that small, nimble players could gain first-mover advantage. There simply weren't many companies offering managed services on a national level and the small guy prevailed.
Today, there still aren't many national players, but the investments that Dell, Insight (Tempe, Ariz.), and others are now making indicate that those companies will be in the business for the long haul and small MSPs have a clear choice in front of them: adapt or die.
Both Dell and Insight have spent the past few months formulating their go-to-market strategies, keeping details--and pricing--close to their vests.
What we do know is that Calence has made millions of dollars in investments in systems, processes and compliance. And now, with access to Insight's 30,000 customers, "The sky's the limit," said Mike Fong, CEO of the $300 million networking specialist. The plan, said Fong, is to be the No. 1 global pure networking VAR with a managed services practice.
Initially, an Insight-Calence merger has only been able to offer networked managed services. But both Fong and Insight CEO Rich Fennessy have said they plan to expand their services. "We have to be rigorous about the best opportunities and go after them," Fong said.
Fennessy said Calence, Tempe, Ariz., has about 120 employees focused on managed services and that Insight can now provide those services to its existing base of 30,000 customers. Calence has 1,500 clients, Fennessy said. He could not say how many clients Calence provides managed services for, but he said the company manages 25,000 nodes.
Insight isn't all that small MSPs have to worry about. Dell is now looking to integrate its varied offerings into a unified managed services strategy after making three acquisitions in three months: Everdream, Fremont, Calif., SilverBack and MessageOne Inc., Austin, Texas. If history holds true, it appears Dell will be as competitive in services as it has been in products.
"I would tell you that our value proposition is going to get more aggressive," said Raj Kushwaha, vice president of services at Dell. Kushwaha offered a glimpse of how Dell's services initiative may look: Staying true to its heritage of letting customers build their own PCs, Dell plans to let customers pick and choose which services they want, he said.
"They will be able to pick from a menu of offerings. If I want antivirus and I want the technology to monitor printers and cartridges, and e-mail continuity, but those are the only three things I want, I can do that. The platform will be integrated as a configurable set of SaaS services that customers and partners can choose from," he said.
The Round Rock, Texas-based company's acquisitions have been tactical in targeting the SMB market where VARs play, wrote Lindy Hanson, senior analyst at Technology Business Research Inc., Hampton, N.H., in an e-mail. "Dell has an advantage in serving the SMB space vs. its numerous services competitors, including Accenture, HP Services and IBM Global Services, who tend to focus on larger engagements," Hanson wrote. "Once Dell has built out its portfolio and successfully penetrated the SMB market, we expect it to move up the value chain to offer similar services to its installed base of enterprise clients."
Small VARs and MSPs will face additional challenges competing with larger companies broadening their portfolios with new technologies and new services, Fong said, adding that he expects more managed services acquisitions from larger companies, because it's difficult to build the business from scratch.
"Managed services matters," he said. "You better get in quickly because there's going to be more competition from the Big Boys."
Pick Your Path
So, what's an MSP to do?
Insight, along with its chief competitor CDW Corp., Vernon Hills, Ill., clearly see that the future involves both a high-touch solutions and services model and a low-cost products procurement option, according to Brian Alexander, senior vice president of equity research at Raymond James & Associates Inc., St.Petersburg, Fla. "This goes to show that being just a direct marketer or just a VAR is probably not the way to go," Alexander said. "... You need to offer the solutions capabilities of a VAR combined with the efficient logistics engine of a DMR to compete effectively."
To MapleTronics' Herschberger, that means it's time to take charge. He and others think they can offer that "high-touch" a lot better than the Big Boys. The solution provider came up with its own flavor of managed services that includes monthly reviews with customers that better help the client to make the proper business decision, Herschberger said.
That model has been successful both in terms of increasing customer loyalty, but also staving off competition, Herschberger said.
He said he doesn't envision Dell, Insight or any other national player being able to replicate that hands-on approach. "I don't even look at Dell or Insight anymore. ... We're basically a business consulting firm that solves business problems with technology," he said. "You have to be inside their doors to understand their business problems. ... Can that be commoditized? I haven't figured out a way."
Steve Meek, co-founder and president of The Fulcrum Group Inc., Keller, Texas, agrees the key to staving off a larger competitor is to maintain a close relationship with the customer. "We want names and faces that customers know. That's something we are able to offer, that other firms can't offer," Meek said. "These national organizations, they do all those things remotely, but there is still value in having us on-site."
Chris Andreozzi, founder and president of KnowledgeCentrix Inc., a Brea, Calif.-based company, said one way to add perceived value to a client is to build relationships with MSP providers or distributors to bulk up your offerings. The more managed services you can offer to clients, the better, he said.
It may take some effort to manage and integrate a suite of offerings, but customers notice, Andreozzi said. "We have this ability, a deeper expertise than you can provide yourself. Our model could scale to thousands of users with the way we've designed our systems," he said.
Managed services will quickly become a commodity if you strictly talk remote monitoring to customers, Andreozzi said. "Managed services is a couple of words--it rolls up a lot of things. Today what is the differentiator are strategic advisory services, becoming a virtual CSO, CIO. That's the role that VARs can play," he said.
Kevin Learned, director of professional services at Whalley Computer Associates Inc., a Southwick, Mass.-based solution provider, said his company is very selective about whom it targets for managed services. "We look at who spent what on a project basis to see if they're a good candidate. Some are not going to be a fit," he said.
Whalley Computer Associates markets managed services to customers with 25 to 50 users because larger companies often have their own IT staff. "We've already seen some strained relationships with [larger companies] because of the trust factor of the IT guy thinks you're trying to take their job," Learned said.
Over The Horizon
Surprisingly, many observers think the acquisitions by Dell and Insight are good for small MSPs, because they validate the market's future. Justin Crotty, vice president of Ingram Micro Inc.'s services division, is one of those people. Crotty said that now, with the MSP model established in the market, it's all about how you execute your go-to-market strategy.
"There's no reason small, high-value MSPs should get beat by Dell," Crotty said. "If you help that customer understand how you help them and the value you drive, they will focus on those value points when they look at Dell or someone else."
Crotty also has a value proposition for smaller MSPs. He thinks they need to partner with distributors so they don't get "steamrolled" when the inevitable commoditization occurs.
Distributors like Ingram Micro, Santa Ana, Calif., can help MSPs find ways to differentiate themselves, Crotty said. For example, Ingram Micro now offers managed services to customers from about a dozen different companies. Using a distributor for managed services requires little investment from a solution provider, he said, which leaves more time to get close to the customer and prove their differentiating value.
"The key point is to stay competitive. People building their own NOCs, data centers, help desks, for their managed services portfolio, those are VARs that will struggle under the weight of that investment," Crotty said. "The guy who thinks he needs everything ... will be crushed. ... Small MSPs must be surgical."
The key point is to stay competitive, he said. The way to do that is to partner, rather than go it alone. Crotty believes that MSPs that build their own NOCs, data centers and help desks for their managed services portfolio, will struggle under the weight of that investment. And that's why MSPs such as KnowledgeCentrix are trying to think a step ahead. "Can I compete with Dell's marketing dollars? Absolutely not," Andreozzi said. "But my experience, personal touch, that's how we built up our managed services business, and it's how we're going to [keep] building."