The Biggest Risk to the Managed Services Market

The Biggest Risk to the Managed Services Market

Managed Services Danger ZoneWhen 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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