Editor's note: As service providers look to expand their revenue-generating services, many are looking more closely at a new generation of managed services, as well as offerings and cloud-based services offerings -- markets they have as yet not looked to enter. Why might managed services work this time? As the hiring and retention of highly trained networking professionals proves more cost-prohibitive, more enterprises are looking seriously at outsourcinge their network services -- often, in this case, to service providers. This gives alert service providers an enormous opportunity to develop new and lasting revenue. CIMI Corp. president Tom Nolle looks at the pros and cons of in-house and managed services, the benefits of outsourcing network services to service providers, and how economies of scale can tip the balance in the direction of the service provider.
Today, operators can often manage services for only about 40% more than basic service costs, a difference that translates into compelling savings.
As basic transport and connection services come under increased cost pressure, particularly in the area of enterprise and small and medium-sized business (SMB) services, service providers have looked at "climbing the OSI stack" to higher levels to increase their profits. At the same time, providers have recognized that their economies of scale for providing support could make managed network services another strong profit source. Today, the two concepts are being combined in a new managed service model that promises the first major source of new revenue since data services began.
Managed services are a relatively recent success in the U.S., but they've been popular in the rest of the world for more than a decade. The basic concept of managed services is that the resources needed to operate an enterprise network are expensive and hard for an enterprise to utilize efficiently. Service providers, with strong network expertise and a larger pool of skilled personnel, have a better economy of scale for support tasks. Mirroring this economy of scale could allow service providers to sell users a wide-area network (WAN) service that includes support for routers, switches and other devices at a lower price than the user could achieve, but one that would still earn the provider a profit.
Managed services vs. in-house services staff
While the basic concept of managed services is that of economy of scale, multiple factors influence just how valuable managed services might be to a user:
- Skilled support personnel in the local labor pool. The larger the available labor pool, the lower the likely cost of acquiring skilled personnel. In a small labor pool, it's difficult to retain personnel, and in-house support is always a risk.
- Efficient support for the user compared with having in-house staff. Businesses can approach service providers for support in terms of economy of scale.
- The pace of technology changes and network complexity. The more specialized the resources needed, the lower the chance users can attract, afford and retain the personnel they need in-house.
In the last 10 years, momentum in all of these areas has been shifting toward managed services, but not always in the obvious ways.
Networking growth, new services drive managed service adoption
More skilled network professionals than ever may be in the job market, but the number needed is far outstripping the number available. Networking was once the province of large companies, but now even small businesses use it. In 1990, the number of skilled support organizations was approximately the same as the number of companies with private networks.
Today, the number of skilled support organizations has grown by 300%, but the number of private networks is 20 times higher, and that's almost entirely because the need for networking has spread into the SMB market. Smaller organizations have neither the ability to attract and retain skilled network support personnel nor the size to utilize them efficiently. If a router expert costs $100,000 a year in salary and benefits, a company with 100 routers in its network can justify the cost, but not a company with two or three.
Improved operations tools are also increasing the economies of service providers in supporting users through managed services. For more than a decade, the rule of thumb was that the cost to an enterprise of supporting a network was approximately equal to the capital cost of equipment and the monthly cost of WAN service -- the so-called "two-x" rule. In the last decade, service providers could rarely hope to offer a managed service for less than about 85% more than their basic WAN service costs, so the difference wasn't compelling to users. Today, operators can often manage services for only about 40% more than basic service costs, a difference that translates into compelling savings for users, especially since user operations costs relative to basic service costs have actually increased.
But the most significant change in the managed services market is the increased importance of "higher-layer" services like application networking, security, and applications like cloud computing. These new services introduce a new set of technology issues, and because they are linked with normal network support issues, they radically increase the difficulty businesses face in getting in-house resources for their operations. The "two-x" rule doesn't apply to these services either; security and application services capital costs are about a quarter of total cost of ownership, and yet these services can be offered on a hosted basis very efficiently, creating a win-win.
WAN-enhancing offers favor providers' managed services portfolio
Managed security is objectively the best opportunity to come along for managed services adoption. Businesses have long found maintaining antivirus and firewall software on a per-desktop basis to be unwieldy and expensive, and users often disable the software accidentally or because it's inconvenient. Intrusion detection and prevention is most easily provided by the network, making it a natural extension of WAN services already sold.
Application networking -- the ability to provide priority handling on a per-application basis -- is a similarly strong opportunity. Businesses have used WAN acceleration for years, and recently products have been offering application-based acceleration to provide further performance tuning. The same types of appliances used on user sites can instead be used on the edge of the provider network, where they can also be linked to class-of-service handling in the network to further improve performance management at the application level.
IT services like cloud computing, software as a service (SaaS) and "help-as-a-service" are the current frontier of managed services for both users and providers. As services expand to include more IT resources as well as network devices, service providers are building a skill base in supporting computers and software. At the same time, more and more devices are including a remote management port. This combination encourages providers to offer computer support, local network support and computing services not only to businesses but to consumers.
Economies of scale: Secret to success in offering managed services
Much of the focus of "managed services," including cloud computing, has been on enterprises, but the basic value proposition for the new generation of managed services is the same as the old -- economies of scale. Thus, SMB and consumer opportunities for managed services are probably much larger than those of enterprises. In addition, the managed services market is easier to defend against new competitors if the market is made up of millions of buyers rather than just the Fortune 500. Only service providers have the market credibility and operations scale to handle mass-market opportunities.
Today, managed services probably account for less than 15% of provider business revenues worldwide. It's reasonable to project that they could add 40% or more to business services revenue, and an even greater percentage to profits, if managed services were priced and marketed effectively.
About the author: Tom Nolle is president of CIMI
Corporation, a strategic consulting firm specializing in telecommunications and data
communications since 1982. He is a member of the IEEE, ACM, TMF and IPsphere Forum, and the
publisher of Netwatcher, a journal in advanced telecommunications strategy issues. Check out
his SearchTelecom.com networking blog Uncommon Wisdom.
This was first published in July 2009