The Economic Reality of Managed Services: Good for MSPs, Limited for RMM Vendors
Dell’s discontinuation of its PacketTrap RMM and PSA tools, along with the recent consolidation among the remote monitoring and management vendors, says a lot about the realities of managed services economics: The model benefits MSPs, but not the vendors.
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Dell Corp.’s shelving of its PacketTrap RMM and PSA tools is the latest event to rattle the managed services segment, which has seen a number of disruptions and changes in recent months. While never a major player in this market, the PacketTrap shuttering and recent vendor consolidations say a lot about managed services economics: They mostly favor the vendors.
Since buying Quest Software, which included PacketTrap’s remote monitoring and management and professional services automation assets, Dell has been looking to capitalize on the managed services segment. Simultaneously, Dell spent more than $5 billion in acquisitions to build out its enterprise software capabilities. The stated goal of Dell Software is to generate more than $5 billion in incremental revenue.
Speculation is Dell didn’t see the value in continuing to support PacketTrap’s managed services tools as they would not amount to a substantial standalone revenue generator or significantly contribute to Dell Software’s revenue targets.
“After much thought and consideration, Dell Software will not make additional investment for continued upgrades or future development of PacketTrap MSP and PacketTrap PSA. That said, we remain fully committed to our existing customers and will continue to provide to PacketTrap customers technical support, including patches/bug fixes for the duration of their entire support contract,” wrote Steve Rosenberg, vice president and general manager of Performance Monitoring at Dell Software, in a statement to Channelnomics.
The speculation matches Dell’s actions, especially when seen through the lens of recent movement in the management services software segment.
In May, automation software vendor SolarWinds acquired RMM vendor N-able Technologies for approximately $120 million. Two weeks later, RMM vendor Level Platforms sold to AVG Technologies for a reported $24 million, of which as much as $19 million went to retiring debt. And a week after that, automation and RMM vendor Kaseya was acquired by venture capital firm Insight Venture Partners for an undisclosed amount and since has been pivoting toward an enterprise automation strategy.
While N-able and Level Platforms were widely considered market leaders, they had relatively low sale prices and valuations for companies that essentially built the channel’s managed services segments. And that reflects the economic issue facing RMM vendors: Their products produce profitable service providers without producing a tremendous return to them.
The magic of managed services was always to the advantage of the RMM software consumer -- the managed service provider. Through RMM tools, MSPs could amplify their service capacity by eliminating on-site calls with remote technical support. Moreover, they amplified their value to customers through active monitoring that identified problems as they happen. The result: increased reliability of IT systems without exorbitant costs.
MSPs' predictable revenue and profitability came from scale. As more customers and devices came under management, they would collect recurring service fees without incurring more costs. And, if the model is executed efficiently and effectively, even costs to expand service delivery capacity would never exceed revenue.
And that is and was the problem for RMM vendors. Their viability and success was always predicated on the growth of their customers, the MSPs. The trouble is MSPs' growth does not directly correlate to the consumption of RMM tools. Moreover, RMM vendors had to price their products at levels that MSPs could afford, which limits their revenue capacity.
RMM vendors looked for growth three ways: expanding the number of MSPs in their network; enabling the growth of their MSPs through marketing, business development and training programs that would lead to capacity expansion; and adding new functionality and technology partnerships, such as mobile device management, backup integration and security applications, that expand their tools capabilities for a price.
If these are the three axis through which RMM were to grow, the low valuation of N-able and Level Platforms and Dell’s discontinuation of PacketTrap are easy to explain. While more than 60 percent of solution providers -- roughly 50,000 companies -- say they deliver some form of managed services, the total number of MSPs using N-able, Level Platforms, PacketTrap, Kaseya and others is less than 15,000. These companies were always on the prowl for new MSPs because their bases weren’t sufficient enough to expand their feature creep.
The exception to this conundrum may be Continuum, the hosted managed services company built on the assets formerly developed by Zenith Infotech. The company is expanding rapidly as it brings more MSPs into its network to use its hosted infrastructure and support. Continuum is different because it sells managed services support to MSPs on a recurring model, not a license model. This means it's scaling revenue and capacity with each new purchase.
Managed services providers are not captive to such limitations. According to research by The 2112 Group, solution providers earn 60 percent or better margins from managed services. Amplifying that profitability is the ability of solution providers to leverage managed services for horizontal sales of hardware, software and professional services. In other words, MSPs revenue (real and potential) is more diverse than their RMM vendors, and it’s no surprise to see RMM vendors get subsumed into larger organizations that can extend their reach and revenue potential.