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Feature: Managed services matters

It may be the silver lining in an otherwise stormy economy, but that doesn’t mean the managed services game is not without its challenges. TREVOR CLARKE reports.

It may be the silver lining in an otherwise stormy economy, but that doesn’t mean the managed services game is not without its challenges. TREVOR CLARKE reports.

As a result of the global downturn, organisations have shifted away from investing in internal IT infrastructure (CapEx) towards variable costs and increased spending with third-party IT services providers (OpEx).

Domestically, most of the publicly listed integrators have pointed to their managed services as a ray of sunshine in what was a very tough six months to the end of 2008. Data#3, ASG, Oakton, CSG and ComputerCorp are just a few that cited growth in managed services when posting their results. Add in the ambient noise from cloud computing and the fact most vendors are trying to market their offerings as complementary to managed services in one way or another, and it’s clear managed services is the flavour of the times. Yet, in spite of its popularity and potential as a revenue pot during these tough times, a managed services approach does have its challenges.

Step #1 – Assets

According to Gartner service provider analyst, Rolf Jester, the managed services game isn’t for everybody.

“You need to do your thinking fairly hard before you jump into this because superficially it is very attractive to have a stable, predictable revenue flow, multi-year contracts and across the board fairly decent margins,” he said. “The key pitfalls are, first of all it can be an asset-intensive business.”

This means capital, and with the way things are going in the economy with the tight flow of credit, it is not an easy time to raise funds.

“For some people it is, because if all is well for your business this is a great time. But once again, it is not for everybody,” Jester said. “Not all managed services models rely heavily on assets, but at the very least they rely on intellectual property, good methodologies and tools. All of which are investments that are not easy for the typical channel business under a bit of pressure. The time to do this is when you are doing fairly well, not when you are struggling.”

The analyst pointed to maintenance contracts as a good way to stabilise a business and also highlighted network management, datacentre management, LAN/WAN management, desktop, and applications management as options.

“Although they are not necessarily asset intensive, the world is moving in that direction. This is the big challenge really,” Jester said. “Over time but maybe even accelerated by the recession, we are moving towards a more asset-intensive model of IT services where there are big players who can afford to build big datacentres, build big networks, and reap economies of scale – players like EDS, CSC and IBM and even some of the bigger second tier players. They will have an advantage and maybe even exclusivity. It is a huge barrier to entry if you have to build a world class network and datacentre to even just enter the game.”

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Step #2 - People

It’s a given in any industry, but having the right people in a managed services practice is paramount to its success. The work can involve unpredictable hours and requires a broad range of skill sets.

“You need proper operations people who are happy to work odd hours,” Sonnet managing director, Baden Wright, said. “People who are happy to take time out on their weekends to do changes. It is a different beast – it is not for the contractors. It is suited to staff that are committed. Getting them is difficult.”

And when it comes to skills, staff need to be across broad sections of the IT infrastructure and not just the desktop. From virtualised certifications with Citrix and VMware, to networking and unified communications, down to SQL and other database systems and pretty much every other process you can think of, certifications may be required.

“You need really good, talented multi-skilled people to manage a decent flight deck. Not only that, they need to have good networking skills as well,” Wright said.

While this requirement can be mitigated by collaborating with vendors and other providers, those looking to build a new practice must ensure their partners have the right level of skills to support the client. By having the right skills, managed service providers can then work on enabling the consistent, high-quality processes necessary to establishing a successful operation.

“When X happens I do Y. Well I don’t want Y with 10 different outcomes,” Wright said. “I want the same outcome 10 times. In other words, if I say you are going to get a cheeseburger you are going to get a cheeseburger. You are not going to get one with Beetroot in it or some other variation.”

Step #3 - Tools

Having the right tools is another key step, and was top of the list for L7 managed services group general manager, Glenn Mcatee.

Twelve months ago, the L7 managed services group embarked on a fairly significant change to evolve from an organically grown operation into a business unit with a specific goal to grow.

“We have basically turned it upside down and everything from process and new tools and all that sort of stuff we have invoked and rebuilt from the ground up,” Mcatee said. “Whether it is the right order or not, if you poke around the managed services community they will tell you looking for the right tool is not the first thing you do, but it is what we did. We needed to update the way we did things and obviously automation is the key to scaling. We actually spent a fair amount of time, probably the first three or four months, researching what was the best monitoring tool for us and from that process we discerned that there are two separate camps. There is the monitoring tool and then there is the professional services software suite that goes with it.”

For the L7 team, it is important to understand the difference between them and find one that works. In the end, they settled on N-able for monitoring and ConnectWise for professional services.

“I don’t know that there is any way around that other than doing your own due diligence and talking to the various partners that have bought in on it,” Mcatee said. “But I think the path of clarity came through for us when we realised there were two trains of suite – the actual low lying monitoring stuff is one thing, but being able to translate that into business usage is a different suite. When we realised that we were then able to work out who the key players were.”

Sonnet’s Wright also placed a high priority on having the right tools in place.

“It is finding the right tools that without too much difficulty do what they are meant to do,” he said. “In other words, when X happens in the environment, your operational people do Y. A lot of those tools are very hard to set up and tune and get in place – that is a huge challenge.”

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Step #4 - Finding the right market

IDC research shows almost 67 per cent of Australia’s IT spend comes from 0.2 per cent of the market – namely, government and large corporations with more than 500 employees. Getting into this space means coming up against the likes of IBM, EDS and CSC – not an easy task for smaller players just starting out.

“From my perspective, one of the biggest issues for smaller players has been defining an entry strategy with some of the accounts,” IDC program manager IT services and outsourcing, Aprajita Sharma, said. “They will have to be clear on which companies they want to target. But on the upside, there is a big market in Australia and that is the mid-market – the 100-499 segment. That is one place where these players probably would have a better mindshare than the tier ones.”

Sharma also pointed to supplier rationalisation as an increasingly common trend among organisations and said those looking to get into the game need to formulate a sound strategy for targeting a chosen vertical.

“For certain service providers such as Data#3, they have some skills in niche areas. So that is where they have been successful in the past,” she said. “But I think the challenge for them now and in the downturn economy is a lot of organisations are looking to rationalise the number of suppliers they have. We had a lot of fun with the selective outsourcing trend five years ago, but that has actually come at a big governance and procurement cost.

“Now our organisations are saying, ‘I’m not sure if I need five suppliers and whether they are cost competitive or not I don’t know. But I am planning to take them down to two based on the skills and that brings down my overall costs with the skills being delivered’. That is going to be another challenge.”

For Gartner’s Jester, the name of the game was securing multi-year contracts in a niche area.

“It’s like any business with a big scale, like airlines. You are not going to compete with Qantas,” he said. “I’m no airline expert but you know what I mean – there are certain barriers to entry if that is the game you want to play. In the main, you have got to find a niche that suits you. It is very hard to give general advice about that because each player is different. what I would say is people should sit down and look at what their core strengths are. Talk to your customers and extrapolate from there. What are the other ways you can apply those core strengths that let you get some multi-year contracts?”

Furthermore, finding contracts can take time. And in a downturn economy when everybody is squeezed, if you don’t have the cash reserves to support the operation until you break even, things can get messy.

“Until you have enough customers you are being murdered,” Ethan Group managing director, Andrew Rayment, said. “We were lucky because had things lined up to get to break even pretty quickly. Now we have broken through it has been great for us.

“One of the areas that hurts you is when you get it wrong. You can build a managed service for any particular thing, but if you don’t have demand for it you are wasting a lot of dough.

“There are a lot of us that have already done it. Anybody that is playing ‘me too’ now is in for a lot of cash drain and that is going to be difficult for them.”

Step #5 – Mindset

Once the managed services practice is up and running with a solid base of customers, you still need to ensure staff are working with the right mindset, particularly if you have migrated from a different kind of IT business.

“Internally from your own staff’s perspective, you run a business with a certain business model in a certain way. Making a dramatic change to your business model is effectively what managed services does – throwing away what you have done in the past and going down a different path,” Axxis Technology managing director, Mathew Dickerson, said.

“The biggest challenge there is making sure you are confident of the model and that people are convinced of the model internally and don’t fall back into their old ways; it is too easy to fall back into that old style of doing business.

“Be vigilant about that with your staff and make sure everyone understands the concept and believes in it. We spent more time in the beginning making sure our staff were on the same bus and headed in the same direction. Then you don’t need to worry about checking on the tiny little things that are happening, they are going to take care of themselves if the big picture is right.”

A business is a business

Finally, whatever niche you decide to move into with a managed services operation, it is important to remember that business is business and the fundamentals still apply.

“If your current business model is flogging products and you see services as the salvation, well realise that in itself is a big cultural shift for you company and many consequences follow,” Gartner’s Jester said. “The biggest of which is your own gut instinct as the entrepreneur may be wrong when you are shifting from one business model to another. I’ve seen this before, where people have acquired painfully learnt but good lessons that have stood them well through the years selling product, but don’t apply when it comes to selling outsourcing services.

“If you are currently selling mainly, let’s say, maintenance, consulting and implementation services, again managed services is a different animal. Not only financially but also in terms of how you sell it, the sales cycles, and the obstacles that you have to overcome. You can learn, of course, and a good agile business will learn but you have to put some effort at the management level into it and some of the people you have will not necessarily make the transition successfully.”