Managed Services Usage Rises, But Pricing Falls
By Carolyn April
For many in the IT channel, managed services ushered in the Holy Grail of recurring revenue. The model also helped fulfill growing demand from cash-strapped customers to shift capex IT spending to a more predictable operational expense. While a recent CompTIA study shows continuing adoption by both buyers and sellers, it also shows declining pricing and a need for value-based sales.
The CompTIA study, “Trends in Managed Services,” finds managed services growth among both end users (adopting) and channel companies (selling) is expected to continue apace in the next two years. Additionally, planned investments in these services by both constituencies also are expected to increase.
The CompTIA study, fielded to both channel companies and end users in July 2011, examines the managed services market, adoption rates, usage patterns, business model challenges and future buying plans. Today, four in 10 channel companies report offering managed services. Half of solution providers who do so consider themselves dedicated managed services providers (MSPs). Dedicated doesnt mean 100 percent managed services, which is rare, but rather companies garnering more than half of annual sales via the MSP model and who consider it their primary business model. Another 37 percent operate what they characterize as a hybrid business that includes a mix of managed services (typically less than half of overall revenue) alongside more conventional IT product and services offerings.
Whats driving managed services adoption? In many respects, customers are and for good reason: they are saving money. The CompTIA study finds that end-user organizations that rely on MSPs for some or all of their IT needs are reaping significant annual costs savings. Among current users of managed services, 46 percent of firms have trimmed their annual IT expenditures by 25 percent or more as a result of their shift to managed services, including 13 percent that have slashed annual IT expenditures by 50 percent or more on the IT functions they are outsourcing. Another half of organizations have saved between 1 percent and 24 percent in IT costs annually on what they have moved to an MSP-managed environment.
The ability to deliver cost savings is fantastic, but the levels identified in the CompTIA study are staggering. The fact is the MSP market is far from saturated. The CompTIA study finds that while 68 percent of end-user organizations report some managed services in their organizations, the vast majority of their IT functions remain handled by in-house IT staff. With so much outstanding opportunity especially to sell higher-end managed services around applications, security and data it stands to reason that MSPs don’t need to charge bargain basement prices. And yet the opposite seems to be happening: MSPs discounting on price, which creates a fast track to commoditization in a market with lots of room still left to expand. Its awfully hard to raise prices once youve set the bar at a certain level.
A few factors are at play here. The slow economy, fierce competition and uncertainty about cloud computings impact have driven many MSPs to sell down instead of up, essentially undervaluing their services to snag customers. The most successful MSPs adhere to best practices and understand that pricing on value even if its higher than your competitors’ is best in the long term. Thats easier said than done in this economic climate, when resisting the urge to discount is difficult, if not impossible.
How can MSPs articulate value and justify normal market prices? Data from the CompTIA study points to some best practices and actions that resonate with customers.
Activity Reports. Communication is key to a successful MSP-customer relationship. MSPs doing their job right are often invisible to the customer who is experiencing no downtime, glitches or other technology problems in the course of the contract life cycle. The irony, though, is that the out-of-sight, out-of-mind situation can hurt MSPs when it comes time to renew contracts when customers are most likely to demand stagnant or lower prices. CompTIAs study found that among end-user companies that are highly satisfied with managed services, three-quarters say their MSP provides regular activity reports on all of the steps they take monthly to avert downtime, security breaches, performance declines and other measures to keep the customer up and running.
Quarterly Business Reviews. These meetings go beyond activity reports and should be held in person, ideally, and include C-level executives from both the MSP and the customer. QBRs encompass more than technical reports on actions taken; they are more prescriptive in nature in identifying places where the MSP can help support a customers ongoing business objectives through new services and initiatives. Done well, these meetings can cement the MSP as the trusted advisor and an extension of the customers staff.
Certifications and Training. Understand MSP best practices so that pricing and discounts are the go-to way to collect and retain customers. CompTIA, among other associations and vendor organizations, offers ways for budding and existing MSPs to get both the technical and business acumen they need to succeed.
Carolyn April is director of industry analysis at
CompTIA
, a nonprofit trade association advancing the global interests of information technology professionals and businesses. April can be reached at capril@comptia.org.
