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Managed service providers: the conduits for cloud services consumption

This post underwritten by: Sify

Cloud adoption is growing at a compound annual growth rate of about 40 percent per year. Managed service providers (MSPs) are the main avenues to the consumption of cloud services. MSPs that offer cloud-powered pay-per-use services present a very attractive substitute for CIOs to traditional in-house IT. The shortage of technically competent IT personnel and the promise of cost savings are also luring customers to adopt managed cloud services. This growing demand has created a fertile ground for service providers.

Today, MSPs offer a multitude of managed services based on their experience, vertical expertise, and technical competency. MSPs offer more than 65 pay-per-use offerings, and the list keeps growing from Desktop as a Service (DaaS) and Virtual Desktop Infrastructure (VDI) to Hadoop and OpenStack services to Identity and Access Management (IAM) and Mobile Backend as a Service (MBaaS).

There are more than 5,000 MSPs in North America and over 10,000 worldwide. The abundance of vendors has made managed services more competitive and has led to commoditization. Although MSPs provide a personalized service experience and better SLAs than Infrastructure as a Service (IaaS) players like Amazon, Google, or Microsoft, they are constantly faced with the challenge of competing against the pricing offered and the “noise” created by IaaS players.

An evolving market

MSPs fall at the most custom end of the spectrum of outsourcing enterprise infrastructure. While some companies collocate their own hardware with a service provider or opt for simple hosting services, an increasing number are looking to cloud service providers (CSPs) for general-purpose services like infrastructure and compute or MSPs for purpose-built cloud services.

Service providers can range from national and international behemoths to regional players to even smaller startups. Customers have a choice between enterprise-class and consumer-grade offerings. The enterprise-class offerings are delivered by MSPs, which provide high-quality services at a premium price with guaranteed SLAs, Recovery Point Objectives (RPOs) and Recovery Time Objectives (RTOs). The consumer grade offerings offer “best effort” service quality offered by service providers that often compete on price.

Lately, CSPs have been encroaching into the MSP territory by offering managed services. CSPs focus on packaging and bundling multiple cloud services for an integrated experience. They offer self-service and faster deployment of services, geographic diversity, improved performance and availability, and lower latency to distinguish themselves from the competition

MSPs typically offer “white glove” premium services and often proactively monitor their customers’ data for anomalies, irregularities, and inconsistencies, and take appropriate action without customer involvement. Some MSPs can also offer expertise and services tailored to specific industries

Businesses with no in-house technical expertise tend to choose premium services and don’t mind paying for proactive monitoring of their environments. However, for businesses with IT expertise, the packages from CSPs can be compelling.

Public and private clouds

When it comes to infrastructure choices, private cloud offers greater control, ownership, and programmability while the public cloud provides flexibility and simplicity. In the future most enterprises will use public clouds, but certain workloads will forever remain behind the firewall on private clouds due to specific performance, security, or compliance requirements. Thus, the hybrid cloud is here to stay. Companies will seek the control, protection and performance of a private cloud with the economies and elasticity of the public cloud.

This phenomenon requires seamless integration of the public and private cloud applications and workloads. During this infrastructure methodology transition, MSPs that will rise above are the ones that don’t compete on price but rather the digital business value they deliver.

The opportunity for MSPs

Cloud is an unchartered territory for many enterprises. Moving enterprise applications and workloads comes with its own set of challenges. Successful service providers and MSPs will offer specific vertical expertise, experience with the specific customer workloads, expertise in regulatory compliance mandates, integrations with customer’s on-premises applications, and the “dirty work” that includes provisioning, plumbing, and upgrading to solve business problems as their core differentiators and value propositions.

This is evident in the increasing number of customers that want their service provider to be a strategic partner to help them through their cloud journey by being adaptable and flexible to their IT needs. CIOs are looking for service providers with experience to handle complex custom problems. They want to partner with a provider that does not require them to change their business processes and does not require forklift upgrades while gradually migrating them to best of breed technologies.

MSP challenges

Increasing customer count and increasing recurring revenues from current customers are critical to MSP business success. Amid data growth of 40% or more per year, customers often question the ever-increasing bill from their service provider. MSPs are frequently asked to justify what they charge. Additionally, MSP success is highly dependent upon increased margins by virtue of reduced operating expenditures. An IT specialist full time equivalent (FTE) costs $150K/year, on average, while an IT generalist costs $75K/year, on average. IT specialists typically focus on enterprise applications or specific workloads, but in an effort to reduce opex, some MSPs are migrating from IT specialists to IT generalists, which can result in poor customer satisfaction.

The multiple disparate tools available in the market being used by MSPs today can also be incredibly complex and cumbersome to manage, which leads to ballooning opex and reduced profit margins.

Customer turnover in the MSP business is also relatively high. Cost cutting, competitive forces, and customer experience are contributing factors to poor customer retention. Hence, farming recurring revenues from existing customers is a key success criterion. This entails implementing and improving on product stickiness strategies and programs.

Despite all these challenges, MSPs with the most progressive business strategy and the right offerings are poised to capitalize on the opportunity and momentum of the cloud. They need to elevate themselves to become the trusted strategic advisers to their enterprise customers, providing them with timely products and services that can help their customers focus and excel, rather than get caught in a pricing race to the bottom with major CSPs.