A new report from Ovum, a British research firm, says that Managed Service Providers (MSPs) will be wiped out by other companies better able to survive the economic downturn.

by Ovum Staff [November 14, 2001]

The executive summary of Ovum's latest report, "Managed Service Providers: Opportunities for MSPs, Telcos, and IT Suppliers," details the opportunities and challenges inherent in the Managed Service Provider (MSP) market. Ovum provides an overview of market along with key strategies and predictions for the future.

Graham Titterington, lead author, explains, "While establishing a niche core competency is the best course of action for emerging MSPs, the stand-alone model will fill only a short-term need. Because they will be unable to compete with the financial resources, reach, capacity, or the ability to withstand market downturns of the Telcos and Professional Service Organizations (PSOs), most MSPs have a future supplying the one-stop shop MSPs, or being bought by them—but they don't realize it yet."

An abbreviated version of the executive summary of the report follows:

Key Messages

MSP is a $15 billion market opportunity by 2006
The online managed services market is currently a market estimated to be worth $2.5bn and there is space for many different types of providers to operate and gain market share. Over the next three years, the market will be increasingly dominated by global suppliers from the telecommunications and professional services sectors. Many smaller new entrants will be squeezed out.

Web operations drive MSP market growth
Many large organizations, especially those with numerous remote offices, have already web-enabled the operation or have begun this process. In effect, this is increasing the style and degree to which networks are used for both internal and external purposes. Increased networking within the organization will drive the adoption of MSP. This is because:

• delivery of service occurs over the Web or other IP network
• managed service operates primarily upon networks themselves, networked systems or networked applications

It's a buyer's market, so start small
The key to success in the MSP market is to start small, build up trust in the targeted customer segment, and then add services in a modular fashion. A monolithic sales strategy does not work in the current economic climate. The MSP outsourcing model must be built up gradually, particularly if it is to appeal to small- and medium-sized enterprises (SMEs).

MSP is a value-added service, not a stand-alone business
The 500-1000 self-described MSPs that have sprung up in the marketplace in the last two years are an interesting phenomenon that will not last more than 5 years. This is because many other larger, better-established service providers such as telcos and the major professional services organizations (PSOs) are better positioned to offer MSP as a service. They have deeper pockets, wider reach, more capacity, and the ability to withstand market downturns.

However, the stand-alone MSP phenomenon is a real one. What makes it particularly interesting is that it is serving a market need not met by other providers. It enables enterprise and mid-sized companies to outsource part of their IT operations. The modular, or even granular, level of outsourcing these companies are willing to engage in makes MSPs the most attractive choice for customers in the short-term.

Falling giants create space
Exodus, CityReach, and Genuity are all online managed service providers in jeopardy at the moment. Consolidation in the market is proceeding apace. Stranded customers, having had their appetite for managed services whetted, are typically engaging other providers rather than retreating in-house.

Big users of service whose businesses are stable or in growth mode will migrate upward to larger service providers such as IBM and the PSOs. PSOs have learned from the online service provider phenomenon, and can offer the new type of service accompanied by financial stability and longevity.

Smaller users will move laterally to other mid-size providers still in business, but they will scrutinize providers' financial statements and ongoing viability.

MSPs must be global to succeed
Medium- to large-sized companies seeking MSP help are likely to have global operations or to be planning them. MSPs with strictly national capacity will lose many sales—even at entry level—if they are not prepared to operate globally, either with partners or in their own capacity.

Problems with the MSP business case
MSPs currently risk having their offering viewed as a luxury, not a necessity. The current economic climate is not hospitable to small, stand-alone service providers when there is no compelling reason why they could not be part of a larger organization. Nor is there a compelling reason why potential customers could not continue to provide IT operations themselves.

Service providers delivering services remotely are suffering in the marketplace in general because they are filling a need that is just beginning to emerge. As a consequence, online service provision is not viewed by early adopters, nor by the market, as essential.

Because adoption of service provision (whether online or traditional) is not well-entrenched in all market segments, customers in some areas such as SMEs feel they can step in and out of it. Customers are not yet dependent upon service. Service is viewed in many cases as an augmentation to corporate IT.

In only a few cases are businesses dependent upon service provision.

Performance-centric MSPs lack stickiness
The performance-centric MSP may be considered a luxury, should a greater call on corporate resources arise, or a better way of doing things. While there are significant benefits to using performance-centric MSPs, these are not well-known or well-understood yet. In an emerging market, deployment of MSPs is likely to be at a tactical rather than strategic level, and therefore may be considered more dispensable than a solution that is viewed more strategically.

Niche MSPs and Virtual IT Department MSPs are better-positioned
Because the nature of their offerings is likely to make them more difficult to replace, niche MSPs and virtual IT department MSPs are in less danger of commoditization and are more likely to build a good business case over the next several years. Once a relationship is established, customers are less likely to cancel service or change providers because the niche MSP or virtual IT department MSP has become sticky. Outsourcing security, storage, or crucial aspects of IT operations would put the business at risk should service suddenly become unavailable.

Large Professional Service Organizations (PSOs) with managed service provision, such as EDS or CSC, are well-known for having contented captive clients. This is because they serve clients with a broad range of offerings, including strategic system design, and may have provided managed service to large clients for long enough that client corporate culture has assimilated this way of doing business. In addition, PSOs are likely to have Fortune 1000 clients to whom the strategic value of managed service outweighs cost issues.

Boutique full-service MSPs are likely to benefit from many of these same conditions, for a small- to medium-sized customer base.

Market scenario and forecast

A6.1 The global market for MSP

The global maket for MSP will be worth $14.8 billion in 2006, compared to $2.5 billion in 2001. Revenue growth will remain steady throughout the forecast period, starting at $450 million between 2001 and 2002 and ending at $4.23 billion between 2005 and 2006.

The MSP market development scenario

The MSP market will follow three phases of development:

Phase 1—nascent stage (pre-2003)
Large corporations, motivated by demand from employees, partners and customers, will begin moving core business applications to Web-based interfaces. Widespread migration (among large corporations) from traditional client-server applications to Web operations will present a new set of challenges for corporate IT departments. The rules for performing tasks such as security, integration (both application and infrastructure), systems management and storage management will change in a Web-based world. This development will force enterprises to consider outsourcing evolving aspects of their IT operations.

MSPs will quickly become wise to this development and they will respond by encouraging piecemeal adoption of their managed services. Network and Web monitoring services will often be the point-of-entry from companies that choose to outsource a piece of their Web operations.

Phase 2—MSP establishes itself (2004-2005)
By 2004 all organizations will be operating an e-business. E-Business will be about value-added services that help enterprises conduct business with richer, multi-access functionality.

From an MSP revenue perspective, storage, security, and integration services will experience the greatest boon due to the rise of Web operations. But, from a usage perspective, network and Web monitoring services will experience the most dramatic increase of adoption due to the rise in Web operations.

Phase 3—MSP flourishes (2006 and onwards)
e-Business penetration will continue to be pervasive and the means by which the majority of enterprises conduct operations. As e-Business functionality spreads itself into smaller sized companies, the MSP market will continue to grow steadily.

Concurrently, early adoption of new technologies such as wireless and satellite networks and emerging forms of digital media will begin to occur on a global basis. This development will once again spur demand for a new type of managed services organization that can handle the nuances and challenges of these new technologies—much like the rise of Web operations drove development of the MSP in the early stages of the forecast period.

— End

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