Davids Join the Party

The managed services provider space in India is witnessing a
revolution of sorts. While a recent news article in a leading English daily
named IBM as the biggest outsourcing vendor in the domestic market, the
limelight has now also started shifting to the tier-II MSP players. This segment
includes those channel partners who have, over a period of time, moved on from
being simply channel partners to also offering their services (as a managed
services player) to various clients.

The segment has truly evolved over the years. Earlier, managed
services were bundled with network integration. However, over the years, pure
MSP companies have evolved and are now mushrooming every day. These though are
primarily spin-offs of established network integration companies-hived off as
separate business entities as revenues from this business grew. The players
predict a growth in excess of 35-40% annually and will continue to grow at a
steady clip. As complete outsourcing is a new trend, it will take some time for
the segment to hit maturity.

The tier-II MSP space is now moving from simply being contract
services (also known as body shopping or facility management) to SLA-based
managed services over the last few years. As the segment is still evolving,
outsourcing is a very small fraction of the total IT services utilized by
organizations. The segment also has multiple service providers working at
different maturity levels, with various business models and cost structures.

Skeptics, however, point out that it is too early to talk about
evolution as the segment has been there for only a brief period of time.
Nonetheless, it is evolving fast, driven by changing user needs and market
shifts.

Who is an MSP?

Standard business terminology defines a Managed Service Provider, also known
as a Management Service Provider, as a company that manages information
technology services for other companies via the Internet. Some of the common
services provided by MSPs include remote network, desktop and security
monitoring, patch management and remote data back-up, as well as technical
assistance. Most MSPs provide these services on a monthly basis.

But the MSP players define themselves as "ones who
typically provide end-to-end network integration and management services to
their clients. It is a more evolved form of a traditional network integrator who
has been assigned, or has taken upon himself, a greater responsibility.
Logically, it is the next step in his learning, business ability and evolution
process," says Balwinder Singh, director, Targus Technologies.

Ranjan Chopra, chairman and managing director of Team Computers
has a more elaborate definition of MSPs: "Increasing reliance on IT and
focus on uptime of IT assets has led to the growth of businesses which are
focused on uptime assurance. The organizations that provide uptime assurance for
a wide range of IT services have come to be known as managed service providers.
MSPs take care of IT infrastructure, applications, and database networks, and
assume overall ownership to ensure availability."

Managed service providers essentially sell managed services and
offer several different price structures. The most commonly used model is a
per-month fee, but MSPs can also charge a time and material model as well as
price per desktop, server, or network device. They promise to monitor their
client's IT infrastructure and resolve any issues that arise within it. This
provides comfort of mind to the client, as well as predictable recurring
revenues for the MSP. Managed services give small and medium sized businesses an
option to have their IT needs taken care of instead of paying an on-site staff.

The New Image

A few years back 'channels' was something that was used by hardware
vendors for box pushing. It would have been something unimaginable for a channel
player to do network integration or provide managed services.

But, after a certain time, the channels started facing a
completely different set of demands from their own customers who grew big in
terms of IT implementation owing to organic growth over the years. This made the
channel realize the opportunity and the fact that they would miss the bus if
they did not turn into value added sellers. They wanted to encash the
relationship that they had built with the customers all along.

Some of them got into product implementation or system
integration and managed services offerings as well. On the other hand, there
were pure system integrators, also clubbed in with the channel player category
in the past, who realized the business opportunity in offering managed services
every time they implemented a turnkey solution.

The earlier business model behind managed services was developed
as the traditional computer VAR model, continually providing lower profit
margins. With the passage of time, lower margins on hardware/software reselling,
competition from big direct PC vendors as well as the unpredictable revenues
from a reactive, break-fix method of technical support led to the need for a new
model.

Teevra Bose, chief operating officer, Celerity Networks (a
yet-to-be launched MSP) agrees that "the traditional business model is now
no longer lucrative and since IT managed services is still a niche market, one,
predictably, does well since there are lesser number of players operating."
Agrees Singh of Targus Technologies: "The shrinking margins in the
distribution space is a major trigger to the evolution of the channel players
into managed service providers in recent times."

But while Teevra and Singh may agree with the concept of
shrinking margins prompting channel players to venture into this space, a
majority of tier MSPs refuse to agree with him. P Rangarajan, CEO, Vitage
Technologies says, "The trend towards being a managed service solution
provider is not necessitated by shrinking margins in the distribution space.
Instead it is driven by the tremendous opportunity presented by managed services-both
in the domestic as well as the international market. The last is a key factor
since in the distribution business, getting global might not be an easy
task."

NCI India, a wannabe entrant in the MSP space, has for long been
specializing in the IT and telecom infrastructure building using both wireless
and wired media. "I see this as a natural evolution of players like it has
happened in so many other technology segments so far. To us, as our
relationships evolve and our expertise grows, getting into the managed services
space will automatically happen, though one cannot specify the timeframe,"
says Tarun Panda, founder and CEO, NCI. The same holds true for Frontier
Business Systems as well, as AS Prasad, business head, Information Security
Consulting, Frontier Business Systems, says, "It has been a strategic move
to get a larger share of the customer spends on IT and IT Services. Also owing
to our positioning in the market, it has been but obvious to offer a single
window to the complete set of IT infrastructure solutions and services needed by
enterprise customers."

Why MSPs?

Having outsourced their business processes successfully, enterprises are now
outsourcing their network management functions as well. CIO/CTOs are now
responsible for ensuring good returns on investment, and also need to manage
risk. Also, outsourcing the network management services to MSPs results in huge
savings in terms of bandwidth costs, manpower costs etc.

For organizations that depend heavily on business applications
that run on networks, such as the airlines reservation system, online
transactions on a B2C portal, fund transfers amidst banks etc, network outages
can be fatal and, therefore, an effective network management needs to be in
place. "There is need for real time monitoring and alerting for possible
network failures," says Singh of Targus. There is increasing pressure on
the network as the number of locations and users is growing by the day, and
asset and configuration management have become critical.

"Most importantly, most organizations wish to circumvent
issues like technical manpower retention, capacity management, etc and
concentrate on their core business activity. Therefore, they are going in for
managed service providers," says Singh.

Powering Businesses

Clients are increasingly demanding a partner who can offer end-to-end
services-from consulting, project management, and integration to offering
managed services. Therefore, it is not simply the case of uptime SLAs anymore.
The clients now want the managed service provider to do disaster management,
bandwidth management, application response time management and coordination with
telcos for availability of lines and security implementation as well. The entire
accountability lies with the managed services provider and, therefore, unified
SLAs have become more popular in the recent past.

The most widely offered services from quite a few players are
onsite infrastructure managed services (also referred to as Facility Management
by some) wherein the customer outsources its IT management to third party
vendors with multi party skill-sets, says Bimal Raj of Allied Digital. The
remote infrastructure management model is one in which remote network
application management and server management is done by the vendor, albeit
remotely from a centralized location, adds he. Although the latter is being
offered by some, it's still not widely adopted in India as compared to onsite

services.

Generically, the offering looks the same from every vendor, but
the actual delivery, and quality processes to back the delivery vary widely
between service providers. Frontier Business Systems, for example, has a
structured delivery process and follows ITIL-based practices in its IMS service
delivery to customers. It has a robust process-based back office with a wide set
of skill-sets to monitor and manage service delivery, handle escalations and
minimize infrastructure downtime.

And like all new market places, the space today has mostly MSPs
who offer varied flavors of the generic network and server monitoring services.
"As technology infrastructure becomes more and more critical to business,
the space will witness a shift to a more value-based and domain centric offering
which encompasses the entire IT stack-servers, networks storage, applications
and desktops," Rangarajan believes. Vitage is keen to pioneer this shift
and as a step in this direction is marketing itself as a provider of Business
Service Management which bridges the gap between business processes and
technology by using technology based on business process demands.

Closer Look

The trend is towards more and more organizations looking at outsourcing IT
to managed service providers. The extent of outsourcing varies between
organizations but the market players predict a large scale outsourcing happening
over the next five years. Raj of Allied Digital believes that there is huge
amount of growth in the large customers consolidating their network space.

"The big outsourcing deals that have hitherto been limited
to the big players will now spread to medium sized players as well with the size
of deals continuing to be significant," forecasts Rangarajan. There will
also be some movement towards open source based tools, adds he.

Chopra of Team Computers predicts that Remote Infrastructure
Management is one of the key offerings that is quite new. While most large
companies use very expensive software, Team, on the other hand, has invested in
building its own platform over a period of two years for ensuring flexibility,
cost effectiveness and value to the end customer.

Most players agree that any segment that is totally commoditized
will become a volume game or a size driven market-the MSP business is still
not there. Service deliverables and responsiveness backed by a decent ability to
react and handle problems for customers will be the prime reason behind the
relatively smaller players beating the larger ones.

However, organizations now have more stringent quality
parameters and are looking at SLA-based contracts and compensation. Customers
are also more discerning about quality and do differentiate between service
providers based on multiple performance parameters.

While the business is expanding, existing players are improving
their efficiencies and the market is quite competitive and margins can get
squeezed. "On the flip side is the fact that selling and marketing costs of
business acquisition or customer retention are lower, especially when one is
dealing with the same customer for several other IT requirements," says
Prasad. Bimal Raj, however, feels that the tier-II portfolio includes plain
vanilla services like facility management and AMC, which some players are trying
to include in managed services.

Most of the existing players do not host applications since most
customers are reluctant and have issues in hosting their applications on MSP
servers. But a small number of players have started hosting simple applications
that help do their jobs better. For instance, while Vitage has started messaging
applications and plans to add other business application in due course, Targus
uses PatchEasy which helps in patch management and mass deployment of patches
across an enterprise, and a Service desk which manages service calls (request
for service from end users) and helps them manage the SLAs signed. Allied
Digital too does not host applications and instead provides consultancy services
to clients. Team Computers, on the other hand, apart from ofering the usual IT
services that range from desktop support, network support, data centre support,
application support, etc, also offers a web-based service monitoring dashboard
which allows key personnel of the customer to slice and dice service delivery
information on a real time basis.

Service deliverables and responsiveness backed by an ability to react and handle problems for customers are the prime reason behind the relatively smaller players beating the larger ones

On the margins front, Chopra says that these are decided
depending upon the deal size, duration of the contract and deliverables.
However, it is safe to say that margins are between 20-25%, he adds.

Is the Market Big Enough?

One of the key developments has been the realization that larger brands may
not always be the best bet for managed services. This is because the flexibility
that businesses expect IT to have is not easily deliverable when larger players
are involved. So CIOs have started looking at companies that follow processes as
the enabler and not as a limiter.

With the market itself growing and no single player poised to
address, individually or together, the entire market segment, there is a fairly
large market segment open to these tier-II MSPs to tap into.

While the big players have the advantage of several years of
market presence in the services segment, the tier-II players have a single point
of management and accountability. They also have good technical and management
skills and service delivery capabilities are at par. The in-depth information
about local requirements is another advantage that these smaller players have.
"The tier-II MSPs have knowledge of the local requirement in terms of local
language, each vertical having its own share of problems and cost
advantage," says Raj.

Singh of Targus Technologies says that one of the sure shot ways
of competing with the bigger players is to offer value additions, keeping the
customers satisfied by not just honoring the SLAs but also exceeding them and
being more flexible. This is an industry where referral checks work and the MSP
has to build its reputation over the years.

Another way of growing in the cut-throat market is by focussing
on specific vertical domain segments where these small players can deliver
significant value through their technology and domain competency. "We can
also register growth by focusing and building on the BSM methodology and
application management," says Rangarajan.

As the needs of the organizations continously change, it is
always a challenge for the MSPs to ensure that their offerings are in tune with
the consistently fluid technology space. This segment too has not been spared
and has its own unique set of problems. One of the major being availability of
skilled and trained manpower although most players are trying to mitigate the
problem by introducing trainee programs, proactive recruitment and deployment of
bench strength into the system integration support process.

These problems, however, pale when one considers the quantum of
growth this market is seeing. The players agree that the tier-II MSP market
offers tremendous opportunity. And, most importantly, with no single big player
poised to address, individually or together, the entire market segment there is
room for everyone.

Stuti Das

stutid@cybermedia.co.in