Somethings Not Right in MSP Land

Its supposed to be a high-growth sector, but making money in managed services is proving to be a lot harder than anyone expected.

That comes as a surprise to many, given the upbeat projections of market forecasters for companies that deliver monitoring, application management and other IT infrastructure services via networks. Meta Group last year predicted such subscription-based services will become a $10 billion market by 2005. International Data Corp., meanwhile, believes the market will expand at a healthy 16 percent annual clip through 2004. And in line with those expectations, the ranks of the MSP Association, an organization that promotes managed-service providers (MSP), has grown to more than 70, up from 18 at its formation seven months ago.

But strip off the gloss, and the scene looks quite different. The MSP market is running into the same volatility that has plagued the entire Internet professional-services arena. For example, eManage.com, an MSP, launched in March 1999, filed for Chapter 11 bankruptcy protection in November and sold its assets two weeks ago.

Nor is the churn limited to startups. Comdisco Inc. earlier this month exited the managed-network services business to focus on higher-growth areas. And other companies in that space have rewritten their business models.

Whats going on here? Some industry observers suggest that companies tightly focused on monitoring and management may be painting themselves into a corner—one that could be darkened by increased price competition. James Hunt, CEO of EYT, believes management services will become “pedestrian,” as all of the major hosting vendors and telcos get into the act. That situation will lower rates, and the resulting commoditization will make for a tough market.

“You have to provide more value than just simple monitoring,” notes Eric Goodness, a principal analyst at Gartner Group.

Goodness suggests a better strategy is to provide management services as part of a broader offering. He cites the case of Comdisco, which dropped remote network-management services as a standalone business but continues to provide the service as part of its core business-continuity operation. He also points to startup AimNet Solutions, which offers both network professional services and managed services.

Ed Nalbandian, CEO of AimNet, says his companys midmarket customers have small in-house networking shops and need to call on service providers to design, implement and manage networks.

EManage.com, meanwhile, has been reborn with that design/ build/manage philosophy in mind. Acropolis Systems, based in Milpitas, Calif., has purchased eManage.com, which now operates as a division of Acropolis. Acropolis designs and installs networked computing infrastructures, using eManage.com as its managed-services arm. Acropolis announced the arrangement on its Web site, but company officials could not be reached for comment.

Partnering also can help embed managed services into a wider array of services.

Bob Davis, CEO of Kaseya, which makes desktop-management software, says one of the key differences between companies competing for a slice of this market—and one that should make a big difference in how well they fare—is their partnering strategy. He says most startups dont have the deep customer relationships necessary to take the general-contractor role in multiplayer solutions.

To take advantage of market realities, Kaseya has focused instead on signing up partners that can reach most desktops. The company has inked deals with broad-based resellers, MSPs and HiFive, which offers a suite of remote management services through a network of resellers.

Alliances also are key to Riptech, a security MSP that expects 80 percent of sales to go through channel partners by the end of this year.

That could be the path to stability.