Market Opportunity
Over the past few years IT service delivery has began to evolve — slowly but surely. In 2000, N-able pioneered the concept of providing the channel with the tools to deliver higher-value managed services to the small- and medium-sized business (SMB) market — companies with less then 1000 employees. Our thought at the time was that IT service and support needed to change, particularly in terms of how the channel serviced their customers. An important piece to this equation was that despite being the key influencer and provider of IT services to the SMB market, service providers by-and-large had unpredictable, unscalable and unprofitable businesses worth little.
To many industry leaders, managed services represent an important change to how technology is delivered and consumed. The managed services market has expanded rapidly over the past several years, particularly in the under-served SMB market. According to Gartner, the SMB IT services market was estimated to be worth $220 billion (U.S.) in 2003 and is expected to grow at a compound annual growth rate (CAGR) of 7.6% from 2004 to 2008. Remote monitoring and management (RMM) is the hottest growing segment expected to grow at 36% CAGR though to 2008 in North America. A recent study by Forrester cited the SMB market at 48% of the overall U.S. IT spending, stating that it will surpass enterprise IT spending by 2007. It is a well-known fact that the channel influences over 90% of IT purchasing decisions in the SMB market, which totals $374 billion.
Figure 1: SMB vs. Enterprise Market
The overall market for managed services has grown considerably, as well, from $7.9 billion in 2003 to an expected $31.4 billion in 2006 for CAGR of 33%. In terms of MSPs, Gartner states the number of service providers in North America increased from 200 in 2001 to 450 in 2004. N-able estimates that there are approximately 1,000 MSPs in the North American market today.
The Impacts to the IT Value Chain
When we entered the new millennium back in 2000 the collapse of the technology industry changed the course for all members of the technology value chain — manufacturers (vendors), distributors and service providers. While this has been well-documented and litigated, another undercurrent that has increased over time is the fact consumers of IT have become increasingly more demanding, sophisticated and, most of all, reliant on technology. Along with these trends came an increasing change in the way end-users and their companies wanted to consume technology, that being more utility-based approaches.
Figure 2: IT Value Chain Pendulum Swing
Today, there are endless discussions on the effects of managed services on the IT industry and in particular on the value chain. One of the better ways to look at the "managed services factor" on the market is that it greatly shifts the approach away from technology and vendors and much more to the users (consumers) and service providers (Figure 2). Realistically and practically speaking, today's consumers of IT are similar to consumers of automobiles — they have a (monthly) budget for both the purchase and maintenance and demand quality for their money. Beyond that, the consumer doesn't know or care what kind of carburetor is in the car anymore than what brand of router or firewall they have in their network. You could say that today's consumers of technology have taken a "just make IT work" approach.
Our view is that managed services represent a disruptive technology model that will drastically change the IT value chain as we know it today. Over the next few years, managed services will form the gateway to true utility computing, where technology hardware, software and support are delivered and bundled as a service. The big question is, "Where and how does the traditional distribution channel fit into the new IT value chain?"
As previously discussed, managed services has moved beyond being a trend. Most of the large distributors and vendors have made volleys into the managed services arena, but with little success. Software-as-a-Service (SaaS) has greatly impacted the market with the success of companies like Salesforce®. Managed services proposes to make a similar impact to a much larger market — the broader IT services market as a whole.
Vendors
Large technology vendors (and their technology) have dominated the IT sector for as long as anyone can remember. The success stories of Silicon Valley and a certain company in Redmond, Washington are legendary and have defined the industry as we know it today. Three key trends are emerging that have the potential to re-define the business models of the "gorilla vendors" — the growth of the SMB market, commercial open source and SaaS. Both of these trends challenge the conventional business models (and public market capitalization) based on the traditional enterprise software model, which has been slowly eroding over time. One could say that software is currently going through a similar evolution that impacted the hardware business several years ago through the innovation of vendors such as Dell®.
Going forward, it is clear that vendors need to pay more attention to their channel programs to ensure that they enable service providers to deliver some form of annuity-based services, as the MSP channel will always favor those vendors that understand and support their business model. As well, management software vendors will increasingly require their technology to be MSP-enabled and interoperable through Web services standards — basically taking a managed services approach rather then the typical "stove-pipe" enterprise approach.
Distributors
Traditionally the distribution industry was built on the premise of connecting vendor technology and programs to the channel through enhanced marketing, volume discounts, financing and more scalable supply chain management. Over time these attributes or "value-add" have become increasingly more difficult to measure in terms of the ultimate value distribution actually delivers. The fact that a large percentage of today's software (with hardware also moving towards this model) is available via the Web creates an additional challenge for the distribution industry.
Managed services further complicates matters for distribution, in that it deals with the delivery of people and process and takes a service-centric approach to technology — something distribution lacks in terms of core competency. As such, distribution has thus far not impacted or influenced the rise of managed services in any tangible way. That said the larger distributors could play a significant role in defining the Managed Service Ecosystem of interoperable, MSP-enabled tools, delivered via a Web portal, including hosting, content management, provisioning and e-commerce to drive down the operating costs for MSPs.
VARs and System Integrators
Unlike most industry trends, managed services have actually grown at a "grassroots" level through the channel of VARs and system integrators that service the SMB market. Today, these service providers are motivated to adopt the managed services model for primarily business rather then technology reasons. In fact, most service providers today understand that they must evolve to a service-centric model in order to survive and prosper in the future.
Managed services has evolved the leading MSPs into the most influential and important member of the new IT value chain, because they support the customer in terms of "the critical business services that IT supports". It is this lens into the customer that will dramatically change the landscape for services, software and hardware in the future.
Telecommunication and Internet Service Providers
2006 will see two new market entrants in the SMB managed services space — telecommunication (telco) and Internet service providers. Their focus will be primarily in three areas: managed network, security and Voice over IP. These service organizations pose a significant threat to the IT channel in terms of managed services due to their market reach and bring fear of commoditization to the market place. N-able sees their participation mainly focused on more product-centric SaaS initiatives through the customer service portals they already have in place.
