Born out of the Canadian infrastructure consultancy Networkshop, Coradiant is one of the few freestanding managed service providers that seem to have weathered the dot-com fallout. The company makes the MSP business model work in part by steering away from unreasonable New Economy business risks like fast expansion and large lines of credit to customers. Coradiant remains unprofitable, but after receiving $20 million from Doll Capital Management, Grandbanks Capital and Sandlot Capital, CEO Alistair Croll says black ink is only a mezzanine loan away. Croll recently spoke with Senior Writer Max Smetannikov.
Q: Seems like not all MSPs will survive the recession.
A: I get a call a week about potential combinations. Philosophically, there were a number of MSPs that were built on New Economy assumptions. So if you were a dot-com, what you wanted the most was to get up and running next week, and money was no object, because your venture capitalists were telling you: "The sooner you get up and running, the sooner we can do an IPO, the sooner you can drive a Ferrari." I think a lot of business plans were built on that.
Q: So are MSPs a New Economy phenomenon?
A: The idea of an MSP is a sound one. There is a set of tasks that need to be accomplished, that lend themselves very well to economies of scale and skill. [But] some companies got reckless and were essentially hiring contract employees and not having control over what those employees did, and they were paying accordingly. We have a customer who was paying $67,000 a month for three servers before they hired us. That company was getting 20,000 hits a month - thats $3 a hit! You know what? If somebody wants to pay me this kind of money, I can build a business on that. But this is ludicrous. Those kinds of dollars dont exist. So anybody who has built an MSP business on numbers like that is doomed.
Q: How is Coradiant different?
A: There are a number of newer New Economy MSPs - and Id like to think Coradiant is one of them - who have taken a harder look at this. Outsourcing has been around forever, like with payroll systems. That business model is still very sound. What we are seeing now is a lot of internal resistance, because the internal IT staff get worried when they hear the word "MSP." Our strongest selling point is: "Did you outsource too much?"
Q: Why would that be a problem?
A: Many people who have outsourced everything are now finding that their MSP is going belly-up or their data center is no longer letting them in, and are desperate to take back control. But they cant take back the whole thing because that is economically unsound. So how do you take back some control? The answer is, you outsource a lot more selectively and strategically than you have in the past. Thats really the change we are seeing: The guys who are one-stop shops are floundering, and the guys who focused on a specific piece of the puzzle are doing quite well.