Managed Services Provider Reality Check: You’re a Customer, Not a Partner

Managed services is now the largest source of revenue and profits for solution providers across the channel. But that doesn’t mean MSPs are “partners” in the traditional sense of the channel. If anything, MSPs are customers, and that’s an entirely different dynamic that puts the vendor at a disadvantage.

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A recent Facebook post by Len Srinivasan, a vice president of channel partner development at backup vendor Vembu, pretty much sums up what many people are thinking about managed services: Are MSPs part of the channel or are they customers?

“The market dynamics are changing so much and we see the trend where MSPs are behaving like customers. In a typical channel model, the vendor will have visibility in terms of who their customers are, but when they go through MSPs - that visibility is lost since MSPs are offering the software/application as a service to their customers directly. Please shed some light on this. -- feeling meh,” he wrote.

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Managed services have always been part of the channel. Some solution providers say they’ve offered some form of managed services long before they became vogue. What made managed services popular in the early 2000s was a combination of persistent and affordable Internet connections that made remote monitoring and management practical; as well as the rapid commoditization of staple channel products, such as servers and PCs. Simply put, the average VAR needed a new value-add to sustain revenue and profitability.

But did consuming managed services technology ever make MSPs “partners”?

Managed Services Business Model a Godsend

From a revenue perspective, the managed services model is a godsend. By charging a recurring service fee, MSPs can accurately predict their gross revenue, cash flow and profitability. This is a far cry from product sales, where every quarter is subject to market and customer vagaries that cause sales to rise and fall without reason.

An emerging class of vendors -- including Level Platforms (now owned by AVG Technologies), N-able (now owned by SolarWinds) and Kaseya -- jumped on the opportunity with tools and resources. They provide the software that enables solution providers to easily and effectively deliver remote management of network devices, storage, servers and endpoints.

Larger equipment vendors, such as Cisco Systems Inc., Juniper Networks and Hewlett-Packard Co., jumped on the bandwagon by giving solution providers price protection for their hardware used in managed services infrastructure. Through price protection, MSPs could more easily budget for infrastructure expansion, and it too provided vendors with a semi-predictable source of revenue.

And software vendors, especially security specialists such as Symantec and Sophos, offered consumption-based licensing for their applications. MSPs wouldn’t have to pay hefty upfront licensing fees for unused capacity; they could buy more seats based on their utilization rate. This made software delivered as a managed service more affordable.

All the way, every vendor from RMM to networking hardware called MSPs a “partner.” Level Platforms even formed a community called MSP Partners (now part of CompTIA) that provided solution providers with materials on how to build better, profitable managed services packages. The reality, as Srinivasan points out, is MSPs are and never were partners in the traditional sense of the channel. They are customers.

Think of it this way, a MSP may work with Continuum for hosted managed services or buy software from LabTech Software, but their customer will never know the technology source. The value is in the service delivered by the MSP.

NEXT: Partner vs. Customer Conundrum >>

 

Partner vs. Customer Conundrum

Why do vendors address MSPs as partners? The channel is an easily definable marketplace. As they developed managed services products, VARs and systems integrators were presented as a ready pool of buyers who would continue to consume products. That sounds more like a customer than a partner.

When Microsoft and IBM talk to partners about “mutual customers,” there is a sense of balanced exposure in the eyes of the customer. If a VAR sells Microsoft Dynamics or IBM Series X server, the customer recognizes the purchasing point (the reseller) and the product brand (the vendor). In the managed services model, the vendor brand more than just concealed, it’s irrelevant. The customer’s entire experience is based on the quality and effectiveness of the MSP delivering the service.

The channel dynamic between vendors and solution providers is changing as managed services becomes the predominant business model and revenue source as the partner is actually a customer. Vendors must work harder to earn the initial and repeat business of their managed services customers. And vendors must expand their support efforts to ensure their MSP customers continue to grow; otherwise they run the risk of seeing their hardware and software sales slip or, worse, go to a competitor.

 

Complicated Mutual Dependency

The apron strings between vendors and MSPs aren’t necessarily cut. Most MSPs are small and lack resources. Consequently, they are reliant upon vendors for training, marketing and business development support. Some people may say this is an evolution of the partnership relationship. Perhaps, but it’s more MSPs are finding independence more fruitful than being tied to the hip to their vendors who not just seek but demand loyalty.

Frustrating some vendors is that they recognize the trend that managed services is making many traditional partners more independent. But independence means changing their own strategies and go-to-market strategies in ways that they’re simply inexperienced. Consider this: If a vendor doesn’t support a MSP with marketing and sales support, what will happen to its sales to the MSPs? Another way of looking at this is like saying that Ford will buy more Microsoft software if it sells more cars, so what responsibility does Microsoft have in helping Ford sell cars?

According to research by The 2112 Group, the average solution provider earns less than 10 percent of its profits from hardware sales, and less than 20 percent from software sales. The balance is generated through managed and professional services. While solution providers continue traditional product sales, they are more often loss-leaders or low-value catalysts for their services engagements.

Are managed service providers partners or customers? On paper, they’re customers. In practice, they remain a hybrid of customer and partner. But as the services evolution continues, the dependency on vendors will decrease and the balance of power in the channel will shift in favor of the MSP.

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