There is no denying IT and communications technologies are evolving at a head-spinning rate, requiring continued investments in infrastructure refresh, staff training and organizational restructuring. Managed and hosted services can help relief the burden on overwhelmed IT staff and provide access to superior expertise at predictable monthly costs. But are businesses seriously considering managed services?
Frost & Sullivan’s 2010 communications & collaboration technologies end-user survey, which targeted 200 North American C-level executives, reveals that 62% of respondents’ organizations currently use managed services. Of those current users, 63% plan to increase usage over the next 12 months, and an impressive 42% of non-users intend to implement managed services within the near term. The main reason (stated by 36% of respondents) why businesses choose to pursue managed services is the need to consolidate multi-vendor relationships and solutions management, followed by limited expertise in new/specific products and technologies (34% of respondents).
Here is how respondents ranked the drivers for using managed services:
Businesses can use managed services from a variety of market participants, including vendors, VARs, systems integrators and telcos. The following chart shows that most of our respondents choose to outsource managed services from their vendors:
No surprise there – no one know Avaya better than Avaya, and no one knows Siemens better than Siemens. Also, most vendors are better equipped with remote technologies and NOC facilities to provide QoS and performance management than their smaller resellers.
But almost a quarter (23%) of respondents indicate they use several different managed services providers. While this scenario presents the advantages mentioned above, it is not very cost-effective. Frequently, each vendor relationship is managed by a separate group of people adding a significant overhead. Each contract needs to be negotiated separately and it’s hard to leverage any significant discounts or economies of scale. Businesses find themselves in this situation because they typically manage disparate, multi-vendor infrastructures as a result of M&A or due to varying technology requirements by site or remote location.
As businesses look to consolidate their infrastructure and develop a more coherent roadmap for the evolution of their IT environment, a strategic partnership with a single managed services provider can offer the greatest benefits in the long term.
A recent announcement by Siemens Enterprise Communications about enhancements to its OpenScale services portfolio point to vendor efforts in the following key areas:
- Portfolio standardization and simplification (3 standard options based on degree of support required)
- Flexibility for potential customization (site-selectable SLAs, custom reports, ability to add modular components to the main package – e.g. MACs, proactive software updates)
- Channel benefits (active monitoring exclusive for channel partners, possibility for e-bonding with partner billing and management systems; sell-through and sell-to options available)
- Multi-vendor managed services (across Siemens and non-Siemens data networking and call control platforms and applications)
- Comprehensive package of application, server and network management
- Global delivery
Other communications vendors, VARs and systems integrators are ramping up their managed services capabilities as well. I put together a table comparing the different types of managed services providers based on a set of criteria, which I believe are important for end users looking to select a managed services partner:
Each customer case is different, but a systematic approach to selecting a managed services provider could ensure that all enterprise requirements are properly addressed in the contract:
We recently completed our Frost & Sullivan 2010 North American Enterprise Telephony Equipment and Implementation and Management Services Markets update. The study found out that, in 2009, that market generated about $4.35 Billion in revenues from the delivery of telephony customer premises equipment (CPE) services, which represented a decline of about 10.7% from 2008. The global recession was the single most powerful factor causing the revenue decline.
While implementation services, closely correlated with telephony equipment shipments, were severely impacted by CAPEX reduction policies, budget constraints were, in fact, one of factors driving demand for managed services. Alaa Saayed, the lead analyst on this project, observed: “Some of the main drivers for managed CPE services adoption include the ability to select the management of specific ongoing administrative tasks (modularity) rather than outsourcing the entire operation, the advantage of cost savings and profitability because of performance optimization, the benefits of problem prevention through the use of proactive remote management tools, and the ability to monitor and manage different systems and networks throughout a multi-vendor, multi-site environment.”
An increasing number of enterprises report utilization of managed services. A 2009 Frost & Sullivan survey, that interviewed 102 U.S. C-Level executives, revealed that companies had either maintained or increased their use of managed services within the previous 12 months.
The same survey reported that only 7 percent of the respondents were planning to decrease the usage of managed services within the following 12 months. Overall, C-Level executives were planning to continue their current use of hosted or managed services, or even increase their utilization within the next 12 months. This is not too surprising since managed services play an important role in addressing the IT and telecom management needs of an organization in the time of a recession. As organizations cut costs to stay afloat or improve their competitive positioning, they typically seek to compensate for reduced internal resources and improve network and overall organizational efficiency by partnering with an experienced managed services provider.
Demand for managed services varies by the size and type of business. Small enterprises are more likely to utilize contractual maintenance, hosted solutions or economical managed CPE alternatives. Medium enterprises, on the other hand, are more likely to employ a piecemeal approach to network management outsourcing, whereby large companies may either opt to manage their telecom and IT infrastructure in-house, or outsource management to ensure a more uniform approach to their multi-vendor, multi-sited environment.
Similar factors seem to trigger the acquisition of managed services across different company sizes and verticals. As managed services are primarily adopted by those looking to reduce labor costs, customers tend to first resort to the lowest-common-denominator package – some remote monitoring and alarms, backup & restore, limited help desk, basic software updates (no major upgrades), a package of MACs, and so on. They could, eventually, move up the ladder based on their individual needs and demands.
The CPE services market is becoming more fragmented over time – with few service providers possessing all the required skills to manage all aspects of a customer’s ICT infrastructure. In fact, Alaa states that there is some confusion about who’s offering what: “Customers are finding it hard to understand where to look for CPE telephony services. They find the relationships among telcos, value-added resellers, system integrators, manufacturers and their channel partners confusing. When searching for managed or professional services, they often run into an overlap of solutions and responsibilities. Single point of contact is becoming key to avoid these multiple and confusing relationships.”
Here is what the competitive structure in this market looks like:
In terms of revenue, traditional equipment manufacturers have the largest market shares with stable or flat growth prospects. Telecom operators and system integrators are experiencing an increasing demand for services as they can offer economies of scale and competitive managed services packages. VARs, on the other hand, seem to serve specific markets where either local presence or some technical specialization is required.
In terms of brand name recognition, the leaders of the pack include established vendors market participants such as Avaya, Cisco, Mitel, NEC and Siemens among telecom equipment manufacturers; Black Box, Shared Technologies and Dimension Data among telecom VARs; major systems integrators such as IBM and HP; and AT&T, Verizon, Bell Canada and Telus among telcos.
While some traditional equipment vendors directly compete with their channel partners, others prefer to delegate most telephony CPE services to channel partners. Channel-centric vendors acknowledge the fact that dealers and other partners are turned off when vendors compete against them and take away the best deals. Therefore, such vendors choose to ensure the support of their channel partners in growing product revenues at the expense of services revenues, which they leave entirely to the partners.
We asked the channel what they expected from their vendors and here is what they told us:
Also, the channel commented on the overall level of support they received from their vendors over the past couple of years:
For businesses looking to outsource SPE services and managed services more specifically, we recommend they select their partners based on:
- Financial viability
- Product and services roadmap (including SIP expertise and ability to support next-gen SIP and SOA-based architectures)
- Multi-vendor technology support capabilities and ability to consolidate multiple vendor relationships through a single contract
- Customer service and attention to specific customer requirements
- Flexibility to provide modular capabilities and price services based on application complexity rather than total number of users
- SLAs covering resolution and not just response times. One of the biggest pitfalls in managed services is the inability of certain vendors to guarantee the latter in spite of their commitments to the former.
- Managed services vendor staff training and experience. Staff turnover is one of the industry’s major challenges and service providers that invest heavily in staff training and job satisfaction can deliver the greatest value to their customers.
- Find your best match! For a global organization, a large, global SI may be best, but for a small business, a local partner is more likely to provide greater attention and a customized approach.
My colleague Alaa Saayed and I have embarked on a new research project studying the market potential for managed telephony/UC services in North America. I also authored a managed services white paper which you can find here. We are defining managed services as managed customer premises equipment and applications and are clearly differentiating those from hosted or cloud services.
Here is a chart that shows what is typically included in managed services offerings:
Most vendors and channel partners reported an uptake in managed services throughout the recession. Workforce reduction led businesses to seek to out-task routine network management activities as a more flexible alternative. In fact, throughout the years, reducing labor costs and/or augmenting internal staff capabilities have represented the primary drivers for managed services. In cases of slow or uncertain growth, more cost-conscious businesses have chosen to maintain a minimal number of IT staff and frequently find themselves unable to handle peaks in activity or properly support the infrastructure when IT staff becomes temporarily unavailable (e.g. during annual vacations).
Furthermore, as the complexity of communications infrastructures increases and businesses look to consolidate not just networks and applications, but also the management of all their hardware, software and vendor relationships, managed services are becoming increasingly popular. Currently, businesses have separate arrangements with multiple vendors – for voice, data and applications. In multi-vendor voice environments, there could be separate contracts for each platform with multiple vendors, VARs and service providers. Managing all these relationships is costly and frequently ineffective in ensuring synchronized infrastructure upgrades and a migration to a more consolidated, tightly integrated communications environment.
Though the benefits of out-tasking infrastructure management to a single party seem obvious, businesses frequently perceive the move to managed services as presenting challenges on several levels. Internal IT and telecom staff fear they may potentially become obsolete as the managed services arrangement evolves and matures. Additionally, a managed services contract commits the business to recurring costs throughout the course of several years, which appears to increase the total cost of ownership (TCO) of the communications infrastructure. Also, for some verticals with dual budgets such as government and education, managed services can also help shift costs from CAPEX to OPEX, thus enabling these organizations to take advantage of certain subsidies and thus lower the TCO.
Nobody is particularly fond of insurance and likes to pay high insurance premiums. Yet, there are multiple occasions when we’ve benefited greatly from the mitigated cost of an unforeseen adverse event. In my mind, managed services provide similar protection with the added benefit of actual cost savings along the way. The frequently overlooked variable in a TCO analysis is the cost of downtime – in terms of lost revenues, customer dissatisfaction, etc. Third-party remote monitoring and proactive performance and QoS management can provide a safety blanket to businesses with round-the-clock customer-facing services such as healthcare, financial services, hospitality, etc.
The chart below identifies some triggers for managed services implementation in the large enterprise and SMB sectors:
Managed services will evolve over the next few years along several dimensions: some vendors will focus on greater SW support, blending maintenance and managed services with software assurance programs; other vendors will sweeten managed services deals with equipment financing and leasing arrangements; yet, others will package managed CPE with hosted/cloud offerings. Pricing will become increasingly more competitive. Customers can take advantage of vendor efforts to secure managed service deals and ask for better SLAs and various incremental benefits (e.g. SW upgrade support, more detailed reporting, etc.)
Any other thoughts on managed services?