The Biggest Risk to the Managed Services Market
When it comes to our own lives, high blood pressure is considered the “silent killer.” In recent weeks, I think I’ve spotted a silent killer in the managed services industry; it’s an unspoken threat that could harm both the software vendors and the managed service providers themselves.
It’s called shelfware. Simply put, a few (though certainly not all) software providers are pushing far too many licenses on managed service providers. In some cases, I believe selected software vendors have installed bases where 35 percent to nearly 50 percent of their licenses sold are not being leveraged by MSPs and end-users.
Those licenses essentially are shelfware — sitting unused, and causing some potentially serious problems:
1. For MSPs: In some cases, they are struggling to pay for licenses they don’t need — at least not yet. And there’s a chance they may never need those “extra” licenses.
2. For software vendors: In some cases, I believe a few software vendors are addicted to licensing models that force MSPs to accept more licenses than are really required. As a result, the software vendors’ revenue becomes somewhat artificially inflated.
3. For market disrupters: The opportunity for pure-play SaaS (software as a service) companies is huge. Without worrying about legacy licensing models, “pay as you go” SaaS-driven software providers can disrupt on-premise software providers that have been pushing MSPs to buy more licenses than they need.
Knowing the Risks
In some very selected cases, I think one or two software vendors may be running a house of cards. Here’s why: As those software vendors attempt to transition or extend from on-premise to SaaS (software as a service) solutions, their expensive, artificially bloated on-premise licensing models no longer work.
MSPs, like end-customers themselves, want fair “pay as you go” licensing models.
- If I’m an MSP who manages 300 customer devices, I don’t want to pay for 500 monthly managed services licenses from my software vendor simply because the solution is only sold in “convenient” 250 license increments.
- Also, I don’t want to pay for 1,000 licenses because it’s a “good scalable deal with special discounts” for 700 extra licenses that I may never use … at least not short term.
MSPs put up with the old licensing models because, until recently, they had no other options. But now, I suspect MSPs will push back against shelfware models because they can use pure-play SaaS alternatives as leverage.
Sorry I’m not naming names. The information above is more of my own theory based on side conversations I’ve had with a few MSPs. There’s no “smoking gun” to suggest a specific MSP software provider is about to fall. But as I watch some vendors struggle to offer both on-premise and SaaS options, the on-premise shelfware problem is becoming more apparent to me.
And if I can pinpoint a few specific examples over the next few weeks, I promise to do so for you.
Another Judgment Day
In the early 1990s, temporary channel stuffing and client-server software licensing models often allowed technology vendors to “sell” products that actually sat on shelves. Eventually, those practices caught up with the channel stuffers.
I believe judgment day will arrive in the MSP space within the next 12 to 18 months. Some MSP software providers will attempt to acquire companies and/or get acquired. Software companies that sold thousands or millions of unused software licenses will have a difficult time selling their companies at a healthy valuation.
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Joe, I just emailed this post to my software provider. My company was an early adopter of what you call onpremise MSP software. When we signed up the licensing levels required us to take on more software than we really needed. That was three years ago and now we’re rethinking everything. We expect to make our decision in July. Whether we choose SAAS or onpremise we will only take the licenses we need no matter what the software companies try to sell us.
BTW we met a Breakaway two years ago and you were working for a magazine I think. I am pleased to see you in the online world.
Hi Mike,
Thanks for the comment. I’ve received seven “off the record” emails today, all expressing similar shelfware concerns. Five of the emails were from MSPs, two were from mid-level managers within software suppliers who are concerned that their executive teams are out of touch on licensing models.
So the problem seems real but most people don’t want to go on the record. If people would simply break their silence on the issue, it would force the industry to take the medicine now and kill the shelfware problem before it gets even larger.
Regardless, I’ll keep poking around and trying to determine where the shelfware problems are real, and where the claimed problems are nothing more than rivals trying to poke holes in competitor business models…
Mike, you also mentioned we met at Breakaway. I will be back there again this year, moderating a couple of sessions and blogging live. Feel free to email me (joe [at] ninelivesmediainc.com) if you’re going to attend.
Joe-
Great topic! This has been one of the few sore points with me since I entered into the MSP arena in 2002. I like the term “shelfware”, it really sums up the reality of some of the licenses I have purchased. And those licenses erode profits.
I remember purchasing licenses when I first started on an annual basis and having many go unused for the entire term. Perpetual licensing models helped, but I still pay support annually on unused inventory.
I have lived through the two purchasing examples you listed above and for smaller MSP’s those purchases, no matter the discount, can truly be a challenge. MSP’s like most businesses fight the good fight daily around cash flow, and those licensing models often don’t make financial sense.
So why not change platforms (maybe to a SAAS provider as your described above)? Generally it is the combination of the investment for both the platform and the learning curve for my staff. There is true opportunity for those that offer MSP’s simplicity and act less like traditional vendors and more like partners.
Brian Doyle
Brian,
Thanks for jumping in using your full name on a touchy subject. Please keep me posted as you evaluate various directions you may potential go.
Of course, many MSPs feel loyal to their current software providers because of the key issues you mentioned (investment, learning curve, completed training, and “the software works”). But even if the MSPs remain loyal, software vendors that push shelfware will hit a wall.
We too are re-evaluating our MSP Licensing because of the economic downturn. I’ve expressed to our provider time and time again that we should have the same pay as you go benefits as our clients. We were one of the very first providers in our area to invest in these tools and my thought back in 2004 was that the vendor should have been on a pay as you go model then. It only seemed fair!
Some of our larest clients went belly up with the recession and we are paying the maintenance for a large number of licenses we are not using. In our most recent evaluation, it appears that it may very well be cheaper to move on to another vendor with our existing clients than continue investing in the ongoing maintenance we are currently paying. We are currently testing the SAAZ model with a few clients to evaluate whether it’s worthwhile to change.
Don’t you think these MSP software vendors would rather keep the clients they have, than to loose us to their competitor because of their pricing models.
Oh well… business is business. The funny thing is is that it’s the same mentality that our clients have these days. Clients don’t care what backup solution a vendor uses… as long as the backups are good! So, wy should we care what MSP software vendor we use as long as the pricing is fair and the tools allow us to do our job effeciently
David W: Thanks so much for sharing your perspectives. I think the situation comes down to the following:
Software companies will hold firm to their existing MSP licensing models until some disruptive, pure SaaS-centric companies (pay as you go) get a little stronger and a bit more prominent.
At that point, some MSP software companies that sold shelfware will need to decide whether to (A) lose to a disruptive SaaS rival with a better price model or (B) compete with the SaaS rival by cannibalizing existing software licensing models. Either way, anyone who currently forces MSPs to buy more licenses than they need will face some pain down the road…
Joe,
Fantastic comment, and very timely.
I guess, for the very reasons you outline, we’ve more than doubled our MSP customers in the last year, and our new customers often relate your position (above) as being one of the chief reasons.
Chris Martin
HoundDog Technology
Easy, Affordable Tools for IT Support
Chris: Thanks for the note. One small point of clarification in terms of my opinion. As I re-read the comment string above, I realized I sounded like I’m promoting SaaS over on-premise. I don’t want readers to think I’m stating that SaaS is better than on-premise. The best model truly depends on each MSP’s specific needs.
However, the SaaS vs. on-premise inflection point has caused MSPs to take a step back and really look at licensing models, costs, etc. MSPs only want to pay for the licenses they use. SaaS is forcing the issue, because SaaS often involves pay-as-you-go.
May the best model (and licensing deal) for each individual MSP win.
True amp; timely topic. As a small MSP we haven’t felt the licensing policies of some vendors in the “MSP tools” space make sense financially for us, or are sustainable in a competitive vendor environment.
We can buy essentially the exact quantity we need of anti-virus, operating systems, router features, office suites, SPAM filtering, mailboxes, desktop applications and server databases either through the very wide amp; efficient existing channel, or directly from the manufacturer. There is no reason to believe the same distribution model won’t also apply to “MSP tools”.
One vendor will break, the others will follow to preserve market share. Wholesalers existing only to add value around licensing pain points become irrelevant. Soon after, the consolidation you have previously discussed begins.
Hi Ed: Thanks for the comment and please keep us posted as you negotiate licensing deals with your software providers. Very curious to see which vendors blink first…
OK, Joe, I couldn’t not weigh in on this article as, frankly, we’ve built a good chunk of our business around understanding the whole “shelfware” concept, and what it does to the small VAR trying to become an MSP.
As we see it, software vendors simply can’t afford to go after low volume sales. The cost per customer has to be worth the marketing and sales efforts. Conversely, the MSP-to-be can’t commit at high levels to every product that interests them, so something has to give.
VirtualAdministrator was born as a way to bridge the gap between the MSP’s need to afford ALL of the tools they might find useful for their clients and the software vendors need to ensure that their sales and marketing dollars were well spent. We supply the commitment levels, and allow our partners to, as you say, pay as you grow.
In truth, it’s a much more time intensive and somewhat expensive way to develop a market, but that’s where variety comes in. Having several different SaaS options makes it so that the MSP can provide a wide variety of services, while not being force to be more concerned with paying off their vendor than serving their clients. And the variety of services helps us recover some of the cost of time / training / marketing / advertising.
It’s just not fair to expect a 1-3 man shop to fully buy into a managed backup solution, a firewall management solution, an e-mail filtering solution, an RMM tool, etc., etc., etc. if there are high volume requirements for all.
I believe, and frankly, we’re banking on the belief, that it isn’t even so much the cost savings provided by companies like ours (in fact, in sufficient quantity, all SaaS apps ultimately cost more), but it’s the CHOICE and ability to provide new and useful services on demand that will ultimately cement the Master MSP as a key component of the market. As larger companies like telcos get more involved in outsourced IT, it will be more and more important that service providers repeatedly and routinely demonstrate real understanding of their clients’ businesses and their value in applying the right mix of tools to those businesses. They can’t effectively demonstrate the right focus on their clients if their agenda is to use up licenses.
I appreciate the forum. I never like to pass up an opportunity to espouse the value of keeping the focus on the eventual end user. Ultimately this is what has caused the Apples and Googles of the world to flourish.
Thanks.
Rich Forsen
VirtualAdministrator.com