The New MSPs

If you're working at a midsize company, you probably depend on a valued-added reseller, or VAR. If you happen to be at a small business, your VAR might just be your entire IT department. So, in some cases, your reseller is a trusted business partner; in others, it's your business lifeline.

But despite your long-standing relationship with your VAR, its business model is wobbling on the edge of a cliff. The margins on the hardware and software that VARs install for you have collapsed to almost zero.

So, no matter how dependent you are on your VAR, now is the right time to evaluate its business model. Is it the old-fashioned VAR -- delivering and configuring systems, handling backups, troubleshooting your network on-site? Well, if the market dynamics continue the way they're going, you might not be working together much longer. At least, not unless your VAR has plans to morph into a managed service provider, or MSP.

Gartner's research indicates that as many as 40% of the nation's VARs could go belly up if they don't change their old business models of charging you a small premium to install your PCs, servers and routers and billing you by the hour to do problem resolution. What your VAR needs to do, Gartner suggests, is become an MSP and charge you a small monthly fee to manage your IT infrastructure among other services.

Luckily for VARs, you are becoming more interested in subscribing to MSP-style offerings. And not just those of you who work at large, corporate IT shops and are accustomed to outsourcing anything and everything. Forrester Research polled 869 IT decision-makers in small and midsize businesses (SMB) and learned that 12% are ready to outsource the management of their entire infrastructures. Doesn't sound like much, but it's up from a mere 8% in 2004. At the same time, 26% of SMBs are willing to offload at least the PC part of their infrastructures to an MSP, versus only 18% last year.

If you're working at a big company, you might think SMBs are small potatoes. But you'd be wrong. Forrester estimates that they will shell out nearly 50% of the $785 billion IT dollars spent in the U.S. this year. And while large corporations and government are spending 6% more year over year, SMBs are growing at 8% annually.

However, SMBs shouldn't blithely assume that their friendly VARs will be able to smoothly make the trip to MSP land. At the very least, to do the job right, your MSP will need a network operations center of some sort. Pay it a visit, if you haven't already. Does it have the remote monitoring capability, the tools and the right people to handle not just your needs, but every one of the VAR-cum-MSP's other customers as well? Remember, this is a shared service. That's the new business model for your longtime business partner. Yes, the VAR part of the business will still show up and install your PCs, servers and whatnot, but it'll make its real money by remotely managing them.

Still, some of you have been burned by MSPs in the not-so-distant past. When MSPs first emerged in the late 1990s, then known primarily as application service providers, they initially went after SMBs -- then promptly fell on their faces. The remote management tools weren't as effective as promised, and the costs to manage devices were higher than most SMBs could afford. This time, MSPs have learned their lessons and intend to win over SMBs along with larger companies.

"Managed service providers are making a comeback, just like Martha Stewart," says Christine Washburn, vice president of marketing at Billerica, Mass.-based SilverBack Technologies, which sells remote monitoring tools specifically for MSPs.

She recalls that in the late 1990s, MSPs would charge up to $2,000 per month to manage a single server. In the days when Unix systems administrators in Manhattan could bring down nice six-figure salaries, this might have made some sense. But in the post-IT-bubble economy, and with offshore tech talent pressuring salaries downward, that old model is stupid. However, Washburn says, improved monitoring tools let the new MSPs manage more endpoints and more customers with fewer technicians. So much so, she says, that the average price MSPs charge to manage servers is down to $110 per month.

The new MSPs stand a real chance this time around, in part because their ideal target market -- SMBs -- is ready to embrace them. And, in part, because the business model for MSPs now makes sense.

But your friendly VAR? It's toast.

Mark Hall is a Computerworld editor at large. Contact him at mark_hall@computerworld.com.

Special Report

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ASPs, Take Two

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