Trying to Keep the Door Open

MSP concept still alive despite string of closings.

The trickle of closings among management service providers is poised to become a torrent in the coming months as consolidation among MSPs accelerates. But the gloom apparently hasnt dampened enthusiasm for the MSP concept at large.

The latest string of closings includes the Chapter 11 filing earlier this month of Intira Corp. and Devine Inc.s announced intention to acquire Intiras assets at fire sale prices. Inc. last month shut down after a failed bid at a second round of funding. Other closings include ManageIT Inc., Xuma Inc., Logictier Inc. and iSharp, as well as a merger between SevenSpace Inc. and StrataSource Inc.

"We still think [MSPs will] grow," said Corey Ferengul, an analyst at Meta Group Inc., of Stamford, Conn., who has projected that MSP revenues will boom to $10 billion by the end of 2004. "But it will be spread out across a larger variety of vendors and services."

For now, an overabundance of MSPs in the early adopter phase, coupled with the economic downturn, has led to a consolidation trend marked more by closings than by mergers and acquisitions.

"The early adopter phase means 3 [percent] to 5 percent of the market is engaged," Ferengul said. "At this point, the market should have a certain number of vendors—say, 20—but instead we ended up with 120."

With the bad news piling up on closures, potential users will likely hesitate before taking the plunge, lengthening the early adopter phase and pushing out serious growth—estimated at between 20 percent and 25 percent—into late next year and beyond.

While it is difficult to tell which independent MSPs might survive, the likely survivors will share several characteristics, industry insiders say.

"The stronger ones that have been there awhile [are likely survivors]. The companies that have more customers tend to have more money, have a stronger image, and their offering might be a bit wider," said Mike Coffield, senior vice president of Nuclio Corp., in Oakbrook Terrace, Ill., and president of the MSP Association.

Among MSPs funded by venture capital companies, those that spent cautiously and still have significant cash reserves are also more likely to survive.

That seems obvious to the MSPs left looking back. "If we had known what the financial situation would look like in July 2001, we would have made different decisions in July 2000," said David Greene, former marketing vice president at defunct, in Mountain View, Calif.

Also key to survival through the shakeout is a business model that does not require a high capital expenditure, said Thanos Moschopoulos, chief financial officer at Coradiant Inter- Web Technologies Inc., in Boston. Moschopoulos company, which provides network monitoring, does not require a lot of upfront spending on equipment to provide its service.

"The cost of goods is the people youre paying at the NOC [network operations center] to watch things," he said.

Analysts say users should look for an MSP with the flexibility to offer customers only the services they want initially, but then be able to easily add other services. Loudcloud Inc. discovered that requirement and last week added more a la carte types of service options rather than requiring customers to implement everything their professional services evaluations recommended.

Greene said its also important to know exactly how to get to customers. In the case of small to midsize companies or departments in larger enterprises, that means working with the channel, he said.

In the case of larger enterprises, however, the way to reach those customers lies elsewhere.

"The data center guys and the systems integrator guys are good avenues into the enterprise customers," said Coradiants Moschopoulos.

MSPs that are not likely to survive share a different set of attributes from their successful brethren.

"Many werent focused on enterprise data centers until recently," said Mark Nicolet, an analyst at Gartner Inc., in Stamford. "Most worked through co-location facilities and hosters."

At the same time, others were creating business models that made it impossible to make money while serving their customers, Moschopoulos said. "Some companies were selling a service below the cost to provision the service. Thats where you have a lot of companies running out of money," Moschopoulos said. Intira, for example, spent more than $40 million creating data centers that Devine will acquire for a fraction of that cost, he said.

Despite the dire picture, even users burned by closures are optimistic about the long-term prospects for MSPs.

"I certainly do [still believe in the MSP model]," said Tom Guidry, director of IS at WNYC Radio, in New York, and a former customer. "While the service was operational, it did exactly what they said it would do."

But Guidry is now looking to protect his operation from a fast meltdown when dealing with service providers and is paying much closer attention to their financial health. "I want to make sure I have a good 30- to 60-day warning before something else like this happens,,Guidey said.

Whether the MSP model morphs into something different in the long term, the need still exists, and theres money to be made in the out-tasked management of IT infrastructure components.

"Long term, Im convinced someone will make a huge amount of money in this business," Greene said.