IT outsourcing prices to fall, but not managed services

A recent Gartner analyst predicted IT outsourcing prices would fall between 5-20% in the next 2 years. While I certainly respect the opinion of others I would like to clarify those opinions which might potentially impact the managed services market. We in the managed services profession went through a similar situation many years ago when the generic "outsourcing" industry came under fire by US politicians for sending jobs to overseas firms. The problem was this generic debate around "outsourcing" caused quite a bit of confusion by dragging the managed services profession into the conversation.

The managed services profession successfully avoided being associated with the "outsourcing" debate years ago and I would hope that today is no different. The problem with proclaiming that IT outsourcing prices are likely to fall in the next two years is that some people may assume that managed IT services prices will also fall. It is important to understand that there is nothing to support such a conclusion or inference!

Managed services pricing has remained stable, if not increased slightly, for the last 5 years. The reason for this is the increasing popularity of the profession as it continues to recruit new members around the world. Now, you may be asking why would a major research firm issue such a prediction. That is a very good question and I have an answer. The reason is the same reason why these same research firms misunderstood the "outsourcing" debate 8 years ago. Outsourcing is not the same as managed services. Any attempt to equate the two as similar would be to cheapen managed services by simplifying what is a very complex and quick moving industry. The reason so many IT firms have been moving rapidly towards managed services is precisely because it has maintained its margins better than any other IT services offering in the last 2 decades.

Some of you may be wondering if managed services prices will begin to fall as a result of the large number of new MSP's. Simply economics can answer this question. The sheer demand for managed IT services, combined with a very low end-user adoption rate (as of today it is roughly 10%), and the low number of firms doing managed services correctly should indicate that prices and margins will remain strong for the next 5-10 years. What is falling rapidly are product margins and commodtized services that are increasingly being delivered through Software as a Service (aka, cloud computing, aka Application Service Providers).

Since the birth of managed services there have always been services that become common and naturally decrease in price. This happens with every profession. What makes professions last is the fact that they always replace those commodtized services with high value and high margin services. This is the cycle of IT services that will always exist. 

What is your Managed Services Firm Worth?

What is my managed services practice worth? I'm sure a lot of you have been asking yourselves this question recently. Most of you who have been involved in building a managed services business have at least contemplated the day when you can divest yourself of a precious and valuable company. However, in order to get to that happy day, you have to be willing to invest in your company. No, I'm not talking only about money; i'm talking about time and other resources that can have a very big impact on how your company operates and on how people view your company.

There are some very simple things you can do to help increase the value of your company and prepare for the day when you want to sell. On a side note, if you are buyer looking for MSP's these items also apply to you.

Keep Good Records
IT providers are very adept at solving technology problems but not all IT providers are good at keeping financial records. No, I"I'm not talking about just having a copy of QuickBooks on your PC. Companies, even MSP's, have to have good financial records for a number of reasons. First, keeping good financials will help you make better decisions about your company. Any well run MSP has access to solid financial data so they can understand exactly how their organization is operating. Equally as important is the ability to sell or merge your company. If you are planning on going through a merger or acquisition (or even a funding round) you will need to have your financial records in good order. That means having an accountant review your financials and keep them organized on a regular basis. 

Service Level Agreements
It is funny how some MSP's will invest a lot of money in their technology and then pay little attention to their service level documentation. SLA's aren't just for binding clients to multi year contracts; they are useful and necessary tools for setting client expectations and defining obligations. Perhaps most importantly though, having revenue that is tied to a contract will significantly enhance your company's value. Even your product and non-recurring revenue will be enhanced if it flows from a service agreement. Having a properly drafted and reviewed service contract can not only help protect your company but it will make your company more appealing to buyers.

Service Delivery Consolidation
Many young MSP's start off by partnering with other MSP's. This is an excellent and highly advantageous model, especially if you intend to broaden your service capabilities without wanting to take risks. There is a time, however, when a MSP needs to evaluate the services it delivers to clients and whether those services should properly be delivered internally or through an external partnership. For MSP's who are considering a sale or merger, the more services you deliver through external partnerships the less valuable your company is. Now, if you have the customer relationship that is a good thing. Owning the customer relationship is the most important thing. But, if you can deliver a majority of the services internally a MSP will likely maximize its customer satisfaction as well as its corporate valuation.

Doing these simple things can have a dramatic impact on how your company delivers managed services and on how others value your organization. In the end, having happy clients is probably the best indicator of a valuable company. If your clients are happy, chances are you have many, if not all, of these best practices in place.

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Pretend Managed Service Providers

We live in a time where truth and fiction can sometimes become so blurred that we do not know which is which. This is no less true than in the managed services profession. As many young companies enter the managed services industry, the standards and guidelines which have served our profession for many years are being tested. So, it becomes important for all professionals in the managed services industry to be aware of the ways in which your profession is being attacked and how you can protect against such attacks. One such attack comes in the form of risk avoidance.

Risk avoidance can mean a lot of things but in this case I mean tech companies avoiding risk by pushing it back onto the client. Young IT solution providers tend to view the world as a very threatening place. Clients, in particular, pose great threats to such companies and are typically treated with caution. It is because of this view that many such IT solution providers have service contracts that shift all or a majority of the risk onto the client.  Through agreements that limit liability and force clients to turn over control of their IT assets and have little to no recourse other than the cancellation of a contract these IT providers are putting the managed IT services industry in a very bad light.

Consider the following issues:

1) Clients are giving you (the MSP) an incredible amount of trust and control over their IT infrastructure.

2) That trust is given primarily because they perceive you as being a professional with certain experience and judgment.

3) Clients, when dealing with other professionals, usually do not have to absorb a majority of the risk arising out of the relationship. Doctors, lawyers, and accountants all carry professional liability insurance (i.e., malpractice insurance) to protect clients.

4) MSPs, if they want to be considered true professionals, should start to discourage behavior that punishes the client for trusting in a MSP.

At some point, the MSPAlliance cannot do this all by itself. MSPs need to start educating clients on the proper way to engage in a managed services relationship. Preferably, that relationship will not punish the client for taking a chance on a MSP!

69% of MSP's are positive about 2009

In a recent webinar, "The MSP's Guide to Thriving in this Economy", a panel of MSP executives were sharing their views today's curious economic times. Not that I was surprised by their perspectives but they all seemed universally positive about 2009. Just to make sure I wasn't imagining things, during one of the polling questions 69% of the IT solution providers attending were positive about their managed services practices in 2009.

Increase in Marketing
The MSP's on yesterday's webinar, while optimistic, were not foolishly optimistic. A clear majority were planning on increasing their marketing efforts in order to improve their sales pipelines, indicating that existing business is out there but must be cultivated.

What is the real threat to today's MSP?
When asked about what, if any, threats are confronting them today the panelists all said that larger vendors and telecommunications companies represented the largest threat to their managed services businesses. The panelists also appeared unified in their statements that smaller IT solution providers and break/fix companies represented little to no threat.

I will never get sick of saying this but it is important to report and emphasize good news during difficult times. So, here is my contribution to spreading the good news!