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 Channel Futures

Sales & Marketing


The Biggest Threat to Managed Service Providers

  • Written by Joe Panettieri 1
  • May 5, 2008
What's the single biggest threat to managed service providers:

  • Commoditization?

  • Big vendors like Dell entering the market?

  • The economy?


Actually, I think it's something else.

The one word answer I'm seeking is "arrogance." It's great to hear vendors, MSPs and industry leaders speak with pride about the managed services sector. But there's a dangerous line between pride and arrogance. And we're all guilty of crossing that line from time to time.

What’s the single biggest threat to managed service providers:

  • Commoditization?
  • Big vendors like Dell entering the market?
  • The economy?

Actually, I think it’s something else.

The one word answer I’m seeking is “arrogance.” It’s great to hear vendors, MSPs and industry leaders speak with pride about the managed services sector. But there’s a dangerous line between pride and arrogance. And we’re all guilty of crossing that line from time to time.

Plenty of people have suggested that managed services and software as a service (SaaS) are immune to an economic slowdown. Yet, some SaaS companies (Example: NetSuite) see their stocks trading near 52-week lows because growth rates haven’t met Wall Street’s expectations.

Yes, managed services and SaaS providers are better insulated than traditional VARs from an economic slowdown or recession. But the rising MSP and SaaS tide won’t lift all boats. You still have to execute with your technology, sales, marketing and support strategies.

The Risks Ahead

Just because you have service level agreements (SLAs) in place, that doesn’t guarantee you’ll get paid on time — especially if some small businesses go bust.

Consider this extremely simple example: In the past month, energy prices and other factors have pushed the price of a 50 pound bag of flour to $50, up from a mere $12 in March or so, according to this AM New York article. Some restaurants are struggling to keep pace by raising prices even as some people begin to eat out less.

Now, when the bills come due at the end of the month, who is the restaurant owner going to pay first:

  • A food supplier?
  • Utility bills like gas and electric?
  • Chefs?
  • The landlord?
  • The managed service provider or VAR?

In this particular example, the MSP will likely be last on the list for payment — until a piece of technology melts down and threatens the restaurant.

Apply the same example to a small insurance agency, a real estate firm, and other vertical markets, and you begin to see that MSPs may be left holding the bag as entrepreneurs prioritize their supplier relationships.

Yes, MSPs are more insulated than VARs from an economic slowdown or recession. But we can’t lose touch with the broader economic trends around us.

Tags: Cloud Service Providers Digital Service Providers MSPs VARs/SIs Best Practices Sales & Marketing

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11 comments

  1. Avatar Phil May 5, 2008 @ 6:52 pm
    Reply

    I agree with you but want to expand the scope of this conversation. Arrogance is a real threat and it leads to blind spots in an organization. You get so focused on what you think you’re doing right, you overlook the things you’re doing wrong.

  2. Avatar Samuel May 6, 2008 @ 8:59 am
    Reply

    I keep reading quotes from executives who claim the recession won’t impact their companies. Your blog should be required reading for executives who remain in denial. I’m not a gloom and doom person but even Warren Buffet said we are in a recession.

  3. Avatar StuFinancesTech May 6, 2008 @ 3:55 pm
    Reply

    I met with one of my MSPs today and the threat we discussed was the aspect of paying for ‘non-events’, as in paying to avoid things happening. It’s not unlike the peace of mind people pay for when they buy insurance but insurances (at least for health, home and auto) are required and while insuring the network is running smoothly is required too, it may take the big bad event like being down for a whole day for some to see the value in paying a little more each month to insure against that from happening.

  4. Avatar Joe Panettieri May 6, 2008 @ 9:36 pm
    Reply

    Good points all around. I hope readers understand that I’m upbeat on managed services … but realistic about the economy.

  5. Avatar [email protected] May 7, 2008 @ 4:04 pm
    Reply

    I recently attended a seminar that really got me thinking. The presenter very pationately stated that he welcomed a recession as it was the best time to build a solid business. At first thought this may seem like an insane statement but when you consider it a bit more you may find it to be very true.

    You see with net new customers slowing and existing customers potentially leaving or stretching your receivables the only way to make more money is to become leaner. Focus on your bottom line.

    So while we are not recession proof, perhaps the economy does offer a unique opportunity for us?

  6. Avatar mcooch May 7, 2008 @ 4:20 pm
    Reply

    I’ll play devil’s advocate a bit. Of course our industry will be impacted by the economy…every industry is, and we will probably see industry-wide numbers get impacted in some way.

    However, I would suggest that anyone selling IT services to small businesses in particular has such a huge market to sell into – and most are starting from a very small base in terms of revenue – that there is always more opportunity than one could possibly handle. It’s just a matter of going out and getting it.

    If I were a $1B/year provider of services to small businesses and the economy tanked, I would expect my numbers to tank as well because it’s a much harder swing to try to reverse with good old hustle.

    My point is that we should all be very careful to not let the economy dictate the success of our business to us or slow down our efforts because the economy stinks. If anything, it should be the other way around.

    I hope that doesn’t sound arrogant!

    Mike
    http://www.smbitpros.com
    http://www.everonit.com

  7. Avatar Joe Panettieri May 7, 2008 @ 9:20 pm
    Reply

    Arrogant? Nope. That sounds realistic. One of the biggest mistakes MSPs can make is (A) cutting Ramp;D or (B) cutting marketing during a weak economy. When others are hurting, that’s the time to really make your brand and your services stand out from the crowd.

    In terms of our own coverage, I’m just trying to draw a clear line between the following two statements:
    1. MSPs are immune to the economic slowdown (false)
    2. MSPs, compared to traditional VARs, are better insulated from the economic slowdown (true)

    Too many people are hyping statement one.

  8. Avatar mcooch May 8, 2008 @ 1:58 am
    Reply

    Good distinction Joe. Agreed.

    Mike

  9. Avatar Simon C May 8, 2008 @ 6:07 pm
    Reply

    A resounding Yes Sir(s) from me too.

    FACT: MSP’s are vunerable – assuming you have a decent user base – to economic slowdown. BUT……..

    I will share one with you. We are backup guys.

    We look after a large hedge fund manager in the City of London. Its not Warren Buffett (US reference inserted to keep my “across the pond” readers interested) but put Warren in a Black Tie and Penguin Tails rather than on a big stage and a Motorbike or something and you have our client.

    They have hit the rocks.

    But they are canny and I like them. And they are looking for line items to displace from the moment they wake up to the moment they go to sleep. They see Backup Managed Service £XXXX. They choose between feeding their kids next month or maybe “sh** happens” and their data isnt there next month. And they want to cancel. Right Now.

    I am not arrogant. And I try and work with them. Because I have to think about my cost – right now – to service that account.

    And please Joe delete my post but our margins month on month are a very very happy place to be – and we can genuinely offer a respite to our fallen comrades. And we wait to see for a few months and hope that they sort their stuff out. Infact we have backed them – just like they backed us 36 months back.

    And lets hope the staus quo will resume.

    If not then chalk one up to the Sub Prime Loonies and the Current US recesssion.

    In the meantime we are killing the UK public sector world because my dear friend Tony Blair has fed the budgets and they have never heard the phrase “economic downturn” !!

    Simon

  10. Avatar Bob Godgart May 9, 2008 @ 6:00 pm
    Reply

    Hi Joe, this is a great topic. I’ll weigh in and say that I think the biggest threat is “The Speed of Change”.

    I’ve been in some form of IT technology for more than 25 years, and today the velocity of new products coming out, exhisting product enhancements, new managed services that are offered and the rate customer expectations are increasing at a rate that is almost impossible to comprehend. I am not sure how IT service Providers are going to keep up with it all. It is clear to me that MSPs will need to specialize and then use partners (like Master MSPs or Subcontractors) to meet the needs of their customers. Focus on what you do best is a good recipe for success.

    As far as the economy goes, Autotask sells business Automation software for MSPs, and we’ve actually seen the rate of adoption for smaller MSPs INCREASE since the beginning of the year. I think the economy has helped MSPs realize value of internal systems Automation to “execute their technology, sales, marketing and support strategies” in a more efficient way.

  11. Avatar Joe Panettieri May 9, 2008 @ 10:01 pm
    Reply

    Bob: We really appreciate your perspectives. And anecdotes about the rate of sales to small businesses INCREASING since the beginning of the year are great to read.

    You definitely have a point on “the speed of change.” MSPmentor is a small business itself, and we consider ourselves pretty Web 2.0 savvy. Yet, I struggle to keep pace with new widgets, social networks and potential site enhancements that will make MSPmentor even more valuable.

    Ultimately, I think MSPs will “keep up” with the speed of change through three methods.
    1. Partnering, as you mentioned, with Master MSPs and subcontractors, etc.
    2. Using automation software to make sure trouble tickets and other transactions flow easily between MSPs and other types of service providers that partner up. And as you mentioned, these relationships will need to push far beyond technology. Sales, marketing and support will certainly be crucial.
    3. Sticking with open APIs (application programming interfaces) so that you can easily “plug” new functionality into your platform.

    Similar to how Windows dominated the 1990s because so many ISVs wrote to Microsoft’s platforms, I think the most successful MSPs will choose open platforms that allow them to pick and choose the features and functions they need most.

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