Cloud, managed services distinction is a myth

CloudsManaged services providers may be an endangered species, at least in the way we look at them today. The evolution of services is dragging more applications and hosted infrastructure into the managed services equation. And, increasingly, traditional hardware and software is being used as a low-cost or loss leader for selling a broad array of services.

The net result: managed services, in its current form, could go the way of the typewriter or floppy disc.

The channel is already seeing this. In The 2112 Group’s 2014 Channel Forecast study, the number of managed service providers in the channel dropped by nearly one-third. Conversely, the number of value-added resellers — the box pushers of old — increased by 76 percent. And the number of solution providers identifying themselves as “cloud providers” skyrocketed 457 percent over 2012.

Channel IDs

The forthcoming 2112 Channel Profitability report, due for release this week, shows a similar slowdown in managed services, as profitability of the vaunted model fell by one-half to one-third in 2013. Managed services remains the single best profit source for solution providers, but it’s not throwing off the cash it once did when average margins were 40 percent to 60 percent. In 2013, managed services margins topped out at 40 percent.

To find out what’s going on in managed services, The 2112 Group launched a benchmark pricing study that asks about basic pricing for a number of services commonly delivered by MSPs, ranging from endpoint management to backup and disaster recovery to unified communications. (The study is still open; click here to participate.)

Initial feedback is interesting, as some MSPs tell 2112 that the questionnaire pushed the limits of what is a managed service. To many, managed services is simply the off-site, remote management of physical assets residing at a customer site. Increasingly, though, other MSPs and solution providers see managed services as an extension of other services – particularly cloud and professional services. In some cases, managed services is even incorporating the remote management of on-premises applications.

For years, the channel community debated the definition of managed services, as if the lack of definable parameters hindered adoption of the model. One resolution: Managed services is any function that is delivered remotely on a recurring payment structure.

You would think that settled it. Apparently, it hasn’t. To find out why, we have to go back to the origins of managed services – the replacement of class break/fix functions. Prior to widespread availability of managed services tools, value-added resellers would send technicians to customer sites to work on machines. The model was profitable, but limiting as the ability to effectively service customer needs was capped by time and distance.

Managed services as a break/fix alternative was a boon for VARs, transforming their business models and revenue sources. No longer were they capped by time and distance, or the constraints of expensive technicians. They scaled capacity and service radiuses, doing more with less and making more money. The model was so effective that many VARs abandoned products in favor of exclusive managed services.

While the original form of managed services is good, the market isn’t static. Despite resistance by MSPs and vendors alike, cloud and hosted services have crept into the managed services domain. Backup, endpoint security, storage management, virtual servers, telephony and cloud-based VoIP, cloud-based email and productivity applications are increasingly facilitated by third-party providers. Solution providers playing in the cloud are either delivering these services or managing the sales and relationship on behalf of their vendors.

The convergence of cloud and managed services is so pervasive that some vendors have even come to speaking of managed services as any technology that is delivered on behalf of the client, which includes cloud application and infrastructure, as well as remotely administered on-premises hardware and software. IBM started this trend, and calls it “managed services” and not cloud.

It’s a good twist. If anything the customer doesn’t touch on a regular basis is a managed service, the spectrum of potential services expands.

Managed services purists, on the other hand, argue that the model of managing on-premises infrastructure isn’t going away. In fact, they say, their customers are investing in more servers, desktops and on-site storage. This is true, but it doesn’t negate the potential for additional services riding alongside those iron boxes.

The trends indicate that managed services isn’t going away and the VAR model isn’t coming back, but rather that solution providers are becoming hybrids. There was never a good reason for abandoning conventional hardware and software sales, as they would drag services into deals. And there’s no reason to think of managed and cloud services separately. Instead, savvy solution providers are incorporating self-hosted services, third-party cloud services, managed services, hardware and software products, their own intellectual property and professional services to create better systems for their customers.

Convergence in which services in their various forms are a component no different than a server in the total system is where the market is headed. Failure to recognize or capitalize on this trend will, ultimately, place laggard MSPs sticking to their traditional models and definitions, at risk of disintermediation.

>> Managed Services Pricing: Tell Us How You Charge for Services

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