Outsourcing Picks Up Steam

The budding MSP market is gaining traction as a new outsourcer.

After months of false starts characterized by intense hype and widespread confusion, the managed service provider (MSP) market finally appears to be gaining both clarity and traction.

Driven partly by corporate Americas pressing need to cut costs—and partly by a growing interest by integrators and consultants to offer outsourced desktop and network management as one element of broad-based solutions—players in this field are starting to figure out what works, what doesnt, and how the market will evolve over the next couple of years.

That still means making regular adjustments to their services model, but many report sales are now on the rise, and analysts project $10 billion in revenues for MSPs by 2004.

"Were starting to see the uptick," says Gary Griffiths, CEO of MSP Everdream. "From a logical point of view, this all makes sense. But theres been a lot of confusion about what it is and how does it work. Outsourcing is supposed to make things simpler and less expensive, but one model doesnt fit everyone because no two existing infrastructures are identical."

In addition, outsourcing is anything but a simple decision for companies with an installed IT infrastructure, says Griffiths.One of the big questions that routinely surfaces, he says, is who should manage a companys centralized systems. Is it the service provider or the IT department?

"At the end of the day, you can make a case that managed services and outsourcing is good at a time of an economic slowdown," he says. "The question is, how do you shock the system into trying something new?"

The catalyst—in this case—appears to be the economy, coupled with a growing realization that established companies need to build an integrated infrastructure incorporating both legacy systems and Internet access. That process now routinely entails questions about how to maximize return on investment and where to trim costs.

MSPs contacted by [email protected] Partner say that customers who outsource save about 25 percent. The actual margin to services providers acting as agents for MSPs varies, depending upon how much of a cut they take for themselves. In most cases, the end user never knows exactly how much an MSP service costs because it is part of a much bigger solution.

Pricing for services varies by MSPs and the exact services being offered. Kaseya, which makes an engine for desktop management, says prices for partners range from $11 per seat in small companies down to $3 per seat in large companies. "The invoice at the end of the month is a function of total volume over a year," says Bob Davis, Kaseyas CEO.

Trial and Error The budding MSP market is trying to do for service and support what the application service provider (ASP) model has done for software—without missteps that have all but crippled many fledgling ASPs.

To that end, the Management Service Provider Association, an organization of about 100 MSPs and software firms, was formed last June to build a better traction base for MSPs. The goal is to educate the market and create a presence and understanding for MSPs.

"Because [the MSP model] is new, its starting to become more recognized. We have an education committee and have released a buyers guide on our Web site that allows companies to see a list of what MSPs provide," says Linda Shannon-Hill, chairperson of the MSP Association.

Hill says a lot of MSPs started out as ASPs but since have migrated in search of a more lucrative model. And while the field is about to get far more crowded as big players such as IBM join in, Hill says theres plenty of work for any MSP with a solid value proposition.

Some of the companies that have entered the market are startups such as HiFive, which acts as a virtual network operations center for companies. Others are classic systems integrators with technical integration skills offering remote management to monitor a companys software and hardware.

Collective Technologies, a systems integrator, last year repositioned itself as an MSP of sorts, calling itself a managed infrastructure provider. "We are not like other MSPs that just offer a notification service that a server is down. We get into the application layer and fix it," says CEO Ed Taylor.

Collective also has teamed up with Avnet Hallmark to offer Avnets resellers data backup and a monitoring service with service-level agreements.

New MSPs like Nuclio, a subsidiary of integrator Forsythe Co., took the MSP plunge last year, targeting large companies, says Michael Cofield, senior VP at Nuclio.

Private vs. Public Still, John Jazwiec, president and CEO of Nuclio, believes the dull thud that was Loudclouds recent IPO effort is just about ruling out the public markets for fledgling MSPs that have relied on venture capital and not strong revenue models.

"The first point about MSPs or any outsourcing is that there is a certain minimum amount of people required to run the business," says Jazwiec. "It takes about 100. In order to make money with 100 employees, you need to get revenues in the $20 million to $30 million range."

Last year, Nuclio, which has been around for five years, had $32.8 million in revenue and "is on track to do about $80 million this year, says Jazwiec, who notes his company is growing by acquisitions and new customers. As with many new markets, timing is everything.