What’s Driving Managed Services Adoption

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 cap-ex IT spending to a more predictable operational expense. CompTIA’s recent 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 are expected to increase.

Our study, fielded to both channel companies and end-users in July, examines the managed services market, adoption rates, usage patterns, business model challenges and future buying plans. Today, 4 in 10 channel companies report offering managed services. Half of solution providers who do so consider themselves dedicated MSPs. Dedicated doesn’t mean 100 percent managed services, which is rare, but rather refers to companies garnering more than half of annual sales via the MSP model and whom 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.

What’s 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 study are pretty staggering. Fact is, the MSP market is far from saturated. 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 be fair game for MSPs to continue charging competitive, non-bargain-basement prices based on value. 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. It’s awfully hard to then raise prices once you’ve set the bar at a certain level.

A few factors are at play here. The down economy, fierce competition and uncertainty about cloud computing’s impact have driven many MSPs to sell down instead of up, essentially undervaluing their businesses to snag customers. The most successful MSPs adhere to best practices and understand that pricing on value – even it’s higher than your competitors – in the long term is best. Easier said than done in this economic climate, however, 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 point to some best practices and actions that resonate with customers.

1. 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 lifecycle. 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. CompTIA’s study found that among end-users 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.


2. Quarterly business reviews (QBRs): 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, but are more prescriptive in nature, 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 customer’s staff.


3. 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, offer ways for budding and existing MSPs to get both the technical and business acumen they need to succeed.