Independent MSPs struggle to survive

Last month, another independent managed service provider was acquired by a major carrier. This latest acquisition offers lessons for the remaining independent MSPs and the various carriers, vendors and value-added resellers trying to win a share of the rapidly growing managed services market. It also has important implications for corporate decision-makers who are considering managed service alternatives.

MCI's plan to buy Totality represents the carrier's second major MSP acquisition of the year, following its purchase of managed security service provider NetSec. These acquisitions follow Cisco's purchase of NetSolve a year ago and Sun's acquisition of SevenSpace in late 2004. These transactions are being fueled by rising demand for managed services from companies and government agencies of all sizes.

The first generation of independent MSPs have been on a roller-coaster ride since their segment of the market took shape with plenty of fanfare in the dot-com era. Although many predicted that the MSP model would disappear with the demise of the dot-com boom, the managed services market has instead experienced a resurgence over the last two years as corporations seek to offload various parts of their IT operations.

While the escalating demand for managed services is certainly good news for early entrants in the market that have struggled to survive, it hasn't produced overwhelming financial success for many of these service providers. These first-generation MSPs are disappearing for three reasons: 1) They lacked sufficient visibility and credibility in the market; 2) They don't have broad channels to market; and 3) They carry too burdensome a cost structure as a result of building a broad set of IT infrastructure and application services around extravagant, showcase operations centers and homemade management systems.

In order to offset these challenges, most of the first-generation independent MSPs augmented their remote management services with professional and consulting services to open customer doors and build customer trust that could be converted into managed service sales. The new specialized MSPs are building their businesses on a more narrowly defined set of application, desktop, e-mail, security, storage and other managed services with more strictly structured service packaging and pricing models, along with more highly automated service delivery mechanisms.

As the first-generation MSPs disappear, corporate decision-makers who prefer to out-task their day-to-day IT infrastructure and application management requirements may be left with only two alternatives: either cobble together a set of individual, stand-alone managed services from a growing array of niche-oriented service providers with specific management capabilities, or turn toward larger carriers, vendors, resellers and outsourcers that are aggregating an integrated portfolio of managed services within their broader set of products and services.

Kaplan is managing director of Thinkstrategies, a consultancy in Wellesley, Mass. He can be reached at jkaplan@thinkstrategies.com.

Learn more about this topic

MCI to buy managed security service provider

01/20/05

Sun finalizes SevenSpace buy

01/11/05

Cisco to acquire network monitoring provider NetSolve

09/09/04

Cisco takes on managed services

10/04/04

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