Cisco takes on managed services

The NetSolve acquisition can be seen as a typical Machiavellian move by Cisco. Rather than build an in-house managed service capability, Cisco has acquired it to quickly leapfrog its competitors, which must now either accelerate their internal build-out efforts or make their own acquisitions to remain competitive.

Cisco's acquisitions historically have been early indicators of the company's strategic direction and bellwethers of broader industry trends. Whether acquiring companies such as Komodo Technology to build its VoIP product portfolio or Linksys to enter the home network market, Cisco's deals have been a critical component of its product development and new market-penetration initiatives. But Cisco seldom has used acquisitions to expand its support services. That is why Cisco's recent acquisition of managed service provider NetSolve is so intriguing.

Founded in 1987, NetSolve became one of the first independent providers of remote network and IT infrastructure management services in the mid-1990s. Despite surviving the dot-com crash, NetSolve has limited name recognition among enterprise decision-makers because it has sold its services primarily through indirect channels, private-labeling them to companies such as AT&T and NEC.

Cisco's acquisition of NetSolve comes at a time when industry acceptance of managed services appears to be on the rise, but NetSolve's viability at the time of the purchase was still uncertain. Nearly every analyst firm has forecast double-digit growth for managed services. Yet in July, NetSolve reported a quarterly revenue decline and significant operating losses. Much of NetSolve's problems were attributed to the termination of three reseller agreements with AT&T: for managed router services; managed DSU services sold as part of AT&T's Frame Relay Plus offering; and as part of a WAN management contract AT&T had with The Home Depot. Despite its long relationship with NetSolve, AT&T decided to deliver these managed services on its own.

Under the circumstances, it isn't hard to understand why NetSolve was happy to accept Cisco's acquisition offer. What is less clear is why Cisco decided to acquire ailing NetSolve.

Cisco has a long history of offering automated, Web-based technical support services rather than the labor-intensive field support services that have weighed down more traditional vendors such as Avaya, Lucent and Nortel. Although Cisco's competitors have invested significantly in managed services in an effort to shift their service delivery models to more economical, remote management techniques, these services haven't become a major piece of their revenue yet.

That is why the NetSolve acquisition can be seen as a typical Machiavellian move by Cisco. Rather than build an in-house managed service capability, Cisco has acquired it to quickly leapfrog its competitors, which must now either accelerate their internal build-out efforts or make their own acquisitions to remain competitive.

Cisco is betting that its strong channel relationships and experience with automated service delivery systems will let it capitalize on the growing demand for managed services. If Cisco's managed services initiative is successful, corporations can bet that other vendors and service providers will make managed services a more prominent part of their value propositions. And independent MSPs can bet that they will become more attractive acquisition candidates for the vendors and service providers playing catch-up in this market.

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Copyright © 2004 IDG Communications, Inc.