Survival of the fittest managed service providers

The market for managed service providers sprang up and flourished in the late 1990s and early 2000s, then wilted just as quickly. Many went bust or succumbed to acquisition, but the savviest adapted their business models and tweaked their offerings to survive the changing market.

Today some survivors are thriving, some with upwards of 70% year-over-year revenue growth, and new providers are emerging. Industry watchers say the current market climate is right for customers, who have grown more confident of managed services' reliability and security, and for MSPs themselves.

"Specialty managed services such as security and storage, and software-as-a-service licensing models are popular among IT buyers now," says Jeff Kaplan, managing director at ThinkStrategies. "Similar to Salesforce.com, today's services provide customers with an on-demand model for management."

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The market for managed service providers sprang up and flourished in the late 1990s and early 2000s, then wilted just as quickly. Many went bust or succumbed to acquisition, but the savviest adapted their business models and tweaked their offerings to survive the changing market.

Today some survivors are thriving, some with upwards of 70% year-over-year revenue growth, and new providers are emerging. Industry watchers say the current market climate is right for customers, who have grown more confident of managed services' reliability and security, and for MSPs themselves.

"Specialty managed services such as security and storage, and software-as-a-service licensing models are popular among IT buyers now," says Jeff Kaplan, managing director at ThinkStrategies. "Similar to Salesforce.com, today's services provide customers with an on-demand model for management."

Newer companies such as Corente, Kaseya and N-Able Technologies package their software platforms for use by systems integrators and for value-added resellers (VAR) to sell directly to customers. Others such as CenterBeam focus primarily on small and midsize businesses, and Perimeter Internetworking provides managed security services to enterprises. Managed e-mail messaging and archiving products from companies such as FrontBridge Technologies, MessageLabs and Postini also have become popular with customers. In addition, IT buyers over the past two years have invested more in managed storage services from EMC, HP and IBM.

Charles Weaver, president of the MSP Alliance, says one reason providers continue to emerge is that getting started is not as much of an obstacle as it used to be.

"In the past you needed a huge pile of [venture capital] money to get started, because the infrastructure and management tools were cost-exorbitant," he says. "Now that software licensing models are more flexible and it's been proven there is no need for a hardened [network operations center] to deliver services, new companies can get off the ground more quickly."

Here are the stories of three MSPs that have weathered the industry's ups and downs.

Everdream

Among the survivors, Everdream is the one that had to change the least. Founded in 1998, Everdream got $50 million in venture funding in 2000 and another $20 million in 2005. It has done more than survive over the past few years, but not without making a few changes.

Lyndon Rive, co-founder and vice president of Everdream, says as soon as the company abandoned being a hardware, software and services provider, its business benefited.

"Our full-service offering that addressed the entire life cycle of the PC required a greenfield environment, which meant we had to replace existing hardware, and that didn't work," Rive explains. "Now we are hardware-independent and customers can subscribe to just the services they want, with a flexible licensing model, which puts a lot of them at ease with going with an MSP."

For example, Everdream used to enforce a three-year contract. Now customers can sign on for just one year, which Rive says can cut down a budget's line item from $10,000 to close to $3,000. "It takes the long-term, big-budget commitment down for the customer. It removes a barrier," he says.