Endangered species
The weak economy has decimated the MSP industry, leaving the door wide open to larger providers.
 
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Once considered an innovative alternative for outsourcing the management of enterprise networks, pure-play management service providers now face possible extinction as industry giants move into their territory.
After burning through tens of millions of dollars over the last couple of years, MSPs have been scrambling for more funding, to avoid the fate of Xuma, eManage, AppGenesys and others that have shut down. Some have been acquired, like Luminate, SiteSmith and FreshWater. Others have merged, such as SevenSpace and StrataSource (see timeline).
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Meanwhile, big names such as Sprint, IBM Global Services, Deutsche Telekom and Qwest Communications went after management services through partnerships, acquisitions and spinoffs.
With name recognition - and more importantly, without the stigma of failed dot-coms clinging to them - these established companies are likely to pull business out from under the weaker and smaller stand-alone MSPs, industry watchers say.
"With [telephone companies] offering management services, the little MSP boutiques will not survive on their own," says Martha Young, an analyst with Enterprise Management Associates.
Those boutiques initially plugged a management hole left by data center and hosting providers, says Carrie Lewis, an analyst with The Yankee Group. But in doing so, they showed industry heavyweights the tremendous user demand for management services. "The hosting providers realized the need for management services on top of the infrastructure they provided, but they didn't know the demand for those services would explode overnight," she says.
IDC shows the MSP market in 2000 reached $172 million and projects the market will grow to as much at $1.1 billion by 2005.
Boom and bust
The MSP concept has gained acceptance because many small companies want to deploy network and systems management software without employing a large IT staff to support it. MSPs can help by remotely monitoring customers' networks and notifying them of problems. They usually do this over the Internet, on a subscription basis.
South Shore Mental Hospital in Quincy, Mass., uses MSP InteQ to manage critical network switches, routers and hubs.
"For me to do in-house what InteQ does would cost me a lot of money and take me a lot of time I don't have," says Thomas Riemer, IS manager. "Outsourcing the management takes me out of reactive mode, prevents problems from ever happening, making me and my staff look credible to our users, and it all costs less money than doing it here."
MSPs have much of the same appeal as their cousins, application service providers, which provide software as a service. But MSPs also suffer from the same downsides.
For instance, there have been many approaches to management services, resulting in far too many companies and confusing much of the user community, says Jasmine Noel, an analyst with the Hurwitz Group. The MSPs realized this, and tried educating users on the differences earlier this year (www. nwfusion.com, DocFinder: 7462).
Plus, the dot-com bombs instilled a certain fear in users, making them shy away from fragile start-ups - particularly when it came to the management of critical networks. "The most sensitive issue for potential MSP customers is for them to be assured that they not choose an MSP that is about to be voted off the island," Noel says.
The long ramp up
"The MSP business is not a cheap business to be in. There are a lot of upfront costs, and it's hard to make money as a pure-play MSP," says Ovum analyst Marc Jacobson. "Like any business, you have to match the expense with the revenue you're bringing in - and for most of these MSPs, the numbers don't add up."
Those costs vary as much as MSPs do. They usually include the cost of network and systems management software and the IP VPN connection between the MSP and customers' networks.
The costs also include that of employing IT staff with management expertise to simultaneously monitor several customer networks. Ironically, the same high price of IT expertise that can send an MSP's costs through the roof is also one of the main reasons companies decide to outsource network management to an MSP.
Even the smallest MSP start-ups need at least $500,000 to get a network operations center (NOC) running and can take as long as 12 to 18 months to establish themselves, says Oli Thordarson, CEO of MSP Alvaka Networks and chairman of the Global MSP Network, a consortium of MSPs developing business practices to provide better management services.
By contrast, a company extending its services may need as little as $50,000 and 30 days to establish a NOC and become an MSP, he says.
Those economics have made it easier for larger players to get involved. Sprint licensed NOCpulse's Command Center network and application management software for its Application Infrastructure Management service. IBM Global Services partnered with NetSolve to provide NetSolve services to IBM customers. And Deutsche Telekom in January spun off a stand-alone MSP, T-Systems, which has become Europe's second-largest provider of IT and telecommunications services.
These are companies that can easily offer network management services alongside their professional and hosting services - and back them up with financial stability. MSP start-ups are left to scramble to make a living.
A rare few, such as SilverBack Technologies and NOCpulse, have morphed into software providers to survive. This strategy suits some users, such as Paula Chesbrough, vice president and senior IT officer at Eagle Bank in Everett, Mass. "With SilverBack, we get what we need from the software without having to give up control of our network to a service provider," she says.
Paths to success
Service providers can succeed with users who prefer to keep the number of service provider contracts to a minimum by getting management services from the same provider as other services.
One approach that is likely to gain momentum is for providers to offer a range of management capabilities and offer each as a separate service, so companies can sign on for as little or as much as they want.
Loudcloud recently unbundled its managed services to give customers the option to outsource only certain IT management functions. "Companies that just manage, say, desktops, where are they going to go with that?" Enterprise Management Associates' Young asks.
Ultimately, the MSP idea has struck a chord with users; it's just that many of the industry's pioneers won't be around to enjoy the rewards.
"All the customer [return on investment] benefits of an MSP are sound. [Working with an MSP] is cost-effective; it frees up staff resources for higher-level tasks and it provides management software that people often don't want to buy," Hurwitz's Noel says. "But there is just such a huge number of them. We'll see that diminish to only those with strong offerings and solid customer bases."
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