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MSP 501


MSPs Worry Whether Cloud Means Boon or Bust

MSPs Worry Whether Cloud Means Boon or Bust

  • Written by Aldrin Brown
  • June 29, 2016
CompTIA’s 5th annual Trends in Managed Services report finds deep concern about the impact of cloud computing.

Rapid adoption of cloud computing appears to be a seminal event in the IT world, with managed services providers (MSPs) torn about whether to expect new, lucrative revenue models, or watch customers flock to self-service offerings that eliminate the need for third-party providers.

That’s the portrait of the industry painted by the 5th annual Trends in Managed Services report, released today by CompTIA, the Computing Information Technology Industry Association.

According to the survey of 400 MSPs, VARs, systems integrators and IT consultants, “cloud computing” was the top concern keeping them up at night, with 62 percent of respondents agreeing with the assertion.

At the same time, cloud is seen by MSPs as a top opportunity driver for the future.

“MSPs say that the biggest challenge facing them is ‘cloud’ – as in how to deal with it,” said Carolyn April, senior director of industry analysis at CompTIA. “Does it threaten them or provide them with opportunity? That’s the biggest question they are trying to answer.”

On the one hand, MSPs see growing opportunities in helping customers devise sophisticated IT strategies and manage workloads in environments that utilize public and private clouds, and on-premises servers.

“In a cloud-based world, the channel is beginning to view itself as an orchestrator of a customers’ entire set of solutions, from on-premises infrastructure to cloud offerings,” the report states.

“The role of ‘cloud orchestrator’ is bandied about today across the channel and it is very real,” the authors continued. “MSPs that are able to serve as the conduit for all things cloud and in-house for their customers are positioning themselves as indispensable service providers.”

But the jury remains out on whether the explosion of cloud might just as easily result in an existential threat to MSPs.

“Many MSPs … fret that as customers become more comfortable with cloud-based applications and services, they will increasingly opt to consume them directly, obviating the need – in theory – for a third-party solution provider or MSP,” according to the report. “MSPs continue to worry about cloud enabling the customer self-service option for procuring IT.”

Already it’s clear that MSPs that sell hardware as part of infrastructure upgrades are feeling the pinch, with worldwide server revenue down 2.3 percent year over year, the study said, citing Gartner research.

Continued growth expected

Challenges aside, CompTIA’s April said MSPs are overwhelmingly sounding an optimistic tone about the future.

More than half of the companies that responded to the new study expect significant growth over the next two years.

What’s more, survey respondents anticipate “more than 70 percent of their revenue will come from the sale of managed services,” April said, significantly more than the last time CompTIA polled channel companies about MSP sales in 2013.

But to arrive at that bright future, MSPs will have to overcome some significant hurdles, the study suggests.

“Today, end user organizations of all sizes, from SMBs to enterprises, want MSPs that can deliver advanced services, such as cloud infrastructure management, application management and even business process outsourcing,” the report says. “This will require technical skills that many of today’s MSPs do not yet have, which means training and/or recruitment of new employees.”

That won’t be easy for many MSPs.

“Recruiting is the single biggest challenge for small firms, with half of them citing it as a major hurdle, compared with a third of medium and large MSPs,” according to the study.

MSPs more experienced

The survey found a maturing MSP market, with 43 percent of firms in existence for five years or more, 45 percent between two and five years old, and slightly more than one in 10 MSPs (12 percent) less than two years old.

Perhaps as a result of that maturing trend, nearly two thirds (65 percent) of companies described themselves as skilled experts at managed services, up sharply from 39 percent who reported that level of proficiency during a 2012 study.

That maturity could also be translating into improved operational efficiency, with three quarters of responding MSPs describing their business as a “very efficient/well-oiled machine.”

About a third reported that level of internal operational acumen during the 2012 survey.

That data point is particularly important, the authors opined.

Though operational efficiency is important to any business, an MSP that wastes resources and effort with faulty processes will directly damage its bottom line.

“Unlike other channel business models that drive revenue by maximizing the number of billable project and break/fix hours that staff is working, the MSP model ironically reaps more when doing less,” the authors wrote.

To that end, the study found that most MSPs have adopted remote monitoring and management (RMM) and/or professional services automation (PSA) software, with 6 in 10 describing the purchase as “well worth the investment.”

The top reasons given by those firms not using RMM or PSA platforms: They didn’t believe their business was large enough to need the tools and a feeling that commercial platforms are too expensive.

Other market insights

CompTIA’s study also highlights some valuable insights about the manner in which many MSPs run their businesses.

For example, the largest share of MSPs (29 percent) reported customer acquisition costs of about $1,000 per customer. About 23 percent cited costs of $2,500 per new customer, while about 19 percent reported spending $750 for each client engagement.

The report found that most MSPs maintain a ratio of one technician for every 20 to 40 customer-seats, and that 36 percent of MSPs – the largest share – add a new tech for about every 30 new customer seats.

More than half of respondents said they plan to specialize in one or more vertical industries, and about half intend to align with a new set of vendors.

“A majority of (channel firms) said a main reason they would drop a vendor from their line card is because the vendor’s products and/or services no longer fit their customers’ needs or their own business model,” the authors said, citing other recent CompTIA research.

More than 58 percent of MSPs reported that growing their share of wallet from existing customers was a major strategic priority for the next two years, while 57 percent said they are focusing on expanding into emerging practice areas, like Internet of Things.

Below concerns about cloud and waning customer demand, responding MSPs said they were most worried about margin erosion.

“Eroding margins are not all due to natural market economics,” the study states. “This trend can also be blamed in part on the MSP community itself … In the quest to win customers’ contracts, many MSPs are undervaluing their services or constructing pricing models that do not drive maximum profit.”

The study adds: “Commoditization and margin erosion become a self-fulfilling prophecy as competing MSPs drive one another’s rates down.”

 

Send tips and news to [email protected].

Tags: MSPs MSP 501

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