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Managed services providers bill themselves as hybrid subscription services for companies that want to augment IT staffs without relinquishing control of their technology.
Alix Stuart, CFO Magazine
November 1, 2000
When web portal company Ibelong.com went looking for tools to manage its operations-critical network, which supports clients ranging from Avon to the AFL-CIO, it expected to buy software and handle the job itself. But when Mike Harvey, director of operations at the Waltham, Massachusetts-based firm, paid a visit to Inteq Corp. in nearby Burlington, Massachusetts, he left not with software, but with a service agreement. While Inteq sells the tools Harvey was looking for, it also operates as a managed services provider (MSP), which for a monthly fee now manages various facets of a client's IT operations: everything from network performance to disk-space availability.
"We're putting a lot of faith in them, but I felt they could deliver the services better than my team could have," says Harvey, adding that the tools Inteq provides are "any IT manager's dream set. They're probably collecting 20 times the data points we were." And financially, the decision "was a no-brainer. What I pay our MSP is about half the annual salary for an employee, and requires no capital investment."
Inteq, formerly a technology consulting group, was the first to create the MSP space. Billed as a hybrid subscription service for companies that want to augment their own IT staffs without relinquishing control of their technology, MSPs have multiplied like fruit flies in the past six months, led by such fledgling companies as 2ndWave, SilverBack Technologies, Nuclio, siteROCK, and SiteLite. Established companies including EMC and Hewlett-Packard also offer MSP services.
But sorting out just what MSPs do and don't do can be tricky. They can "merely monitor your Web site," says Caryn Gillooly, senior analyst at Hurwitz Group Inc., an E-business strategic consulting firm based in Framingham, Massachusetts. "Or, on the other end of the spectrum, they'll monitor your entire IT infrastructure." In general, however, MSPs concentrate on the nitty-gritty of IT infrastructure, addressing such tasks as network stability, security, and management reporting.
While the market may be struggling to define itself, analysts expect demand to be strong. Meta Group Inc.'s Corey Ferengul puts the current market at $1 billion, and expects it to reach $10 billion by 2004. Part of that growth, he says, will be driven by Internet service providers crossing over to MSPs in search of higher-margin business. In addition, MSPs expect to eventually offer software services and consulting, along with managing IT infrastructures. "We're eliminating the need to buy software," claims Inteq CEO Santhana Krishnan. Because MSPs can (or will) overlap with the products and services of many other types of companies, analysts predict a wave of consolidations.
Driving this anticipated boom is the critical importance of networks to all businesses, even those well outside the technology sector. CarrAmerica Realty Corp., for example, relies on a wide-area network (WAN) to route everything from E-mail to accounting software between 55 locations. Because the network is "exceedingly important," says telecommunications vice president Barry Krell, he tapped the services of Netsolve two years ago. He frankly admits it would be "impossible" to have his in-house IT team do the same job. "You'd have to put on so many people, it wouldn't be worth your time and effort," he says. He considers the price the company pays — about $14,000 per month — small in light of the benefits gained. Netsolve monitors the WAN continuously, provides a beeper or E-mail alert if anything goes wrong, and then works the bugs out at Krell's behest.
Average start-up costs for MSP services run from $15,000 to $20,000, says Ferengul, although some are notably lower, such as those of SilverBack, which says its initial costs run from $1,000 to $4,000. Monthly charges also vary, from $5,000 to $150,000. Price may be less important, however, than knowing that a service contract forces MSPs to deliver on their promises. "They assume the risk — that's how they make their money," says Ferengul.
Another benefit is flexibility. As MSPs continually expand their range of services, clients can try out various applications without making a big investment.
As this new market shakes out, would-be clients should "do a lot of homework" before choosing a provider, says Hurwitz Group's Gillooly, especially since "there's no history as to whether [it] can deliver." Her advice: Figure out exactly what problems you're trying to solve, and shop carefully, because nearly every MSP offers something different.