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It just might be the greatest comeback ever. After the heyday of the application service provider (ASP) model in the 90's, managed services (MS) is reemerging as a top priority for many technology companies. A perfect storm of customer demand, technology and cloud maturity, and increased competitive pressure have put managed services back in the spotlight.

TSIA has confirmed this trend through its recent research. In B4B, the book published in October 2013, authors J.B. Wood, Todd Hewlin, and Thomas Lah assert that technology companies must evolve their offerings to provide Level 3 and Level 4 services, many of which have elements of a managed service. To remain relevant in the marketplace, technology companies must move beyond traditional implementation and support services. 

Making a comeback is not easy, and this is especially true for managed services. Based on Waterstone Management Group’s market observations and recent client experiences, technology companies are repeatedly running into substantial challenges as they design, launch, and scale managed services offerings. What follows is a synopsis of why managed services are relevant now and key considerations for any managed services executive. 

What Are Managed Services?

At the highest level, a managed service is any service where a third party takes over the day-to-day management of a technology on behalf of a customer. Within the tech industry, there are many flavors of managed services and different examples by type of technology managed. For example, a hardware vendor may manage IT infrastructure (e.g., servers, routers) remotely; a B2C software business may provide antivirus protection or cloud backup services for desktops. For many technology vendors, MS can be a stepping stone to the cloud, providing the XaaS value proposition without having to reengineer their core product. Figure 1 illustrates this dynamic in the in the context of enterprise software. 

traditional on premise managed services versus xaas  

(Click image to enlarge.)

Why Managed Services?

Hardware and software companies are continually facing pressure from customers to increase the value their products deliver, and to deliver a quicker return on investment. Offering managed services is one way technology companies can meet these challenges. A well-developed MS offering can provide clear benefit to both the technology vendor and the customer. Figure 2illustrates a few key benefits to each party.

benefits of technology companies offering managed services  

(Click image to enlarge.)

Why Now?

Given the benefits, one might ask, “Why managed services now, as opposed to several years ago?” The answer lies in a unique convergence of market, customer, competitive, and technology trends that are creating a ripe environment today: 

  1. Source of Growth: Technology providers are seeking new revenue sources to offset slowing growth of core products; MS provide a faster-growing revenue stream. In the enterprise software space, for example, IDC predicts that managed services revenues will grow faster (eight percent) than traditional application software (six percent) over the next five years. 

  1. Customer Demand: Customers are increasingly asking for managed and hosted options as they look to accelerate time to value, reduce upfront costs, and shift to an “asset-light” infrastructure. Skilled IT resources are expensive, and difficult to retain in-house. 

  1. XaaS Defense: Cloud alternatives are pressuring incumbents, forcing them to react. Managed services can provide similar value proposition to XaaS, but without the need to completely re-engineer the product. Managed services can provide a starting point for incumbents to move toward a cloud-enabled model and act as a logical step along the cloud continuum. 

  1. Technology Maturity: Technology evolution is enabling a greater set of managed services capabilities in terms of remote connectivity, product serviceability, and associated delivery cost. For example, CIOs have a greater level of comfort in the concept of remote management of applications, and many of the key security implications are now much better understood. 

Key Considerations for Managed Services Executives

While the prospect of new MS offerings has many potential upsides, technology companies must nevertheless exercise caution as they approach the opportunity. MS is a substantially different type of business compared to a traditional product or services business. 

At its heart, it requires a change in orientation from a transactional mindset to one of continuous service delivery. The economics of an MS business are very different, and suitable expectations must be set early on. For example, margins for MS businesses in enterprise software companies typically range 25 to 35 percent, considerably lower from their traditional license, maintenance, and professional services revenue, but provide a new recurring revenue steam and source of growth from existing customers. 

Technology companies should thoughtfully design the key operating model elements of an MS business to successfully run at scale. Our firm has had the opportunity to assist a number of clients through this journey, and we’ve identified four principal operating elements that are critical to launching and running a successful managed services business: 

1. Clearly Defined Offering Portfolio. Managed services offerings need to be well defined and packaged, with a clear entitlement list and pricing basis. 

2. Specialized Go-to-market Model. Selling managed services involves a different sales cycle, different buyers, and more consultative approach than selling tradition product. 

3. Integrated Service Delivery. Delivery requires coordination across a number of internal teams and development of new capabilities (e.g., hosting) in order to ensure an even and integrated customer experience. 

4. Dedicated P&L Business Management. To treat managed services as a significant business in its own right, it should be established as a separate P&L, with an overall owner accountable for financial and operational performance. 

Change Program

In our experience, evolving a business quickly across these four areas can be a considerable challenge. Many of the items outlined on the checklist are cross-functional, will likely be a change to the organization, and will need to be established and/or customized to be specific to the nuances of the MS offerings. 

We recommend that management teams take a programmatic approach to launch, drive action, and track progress when evolving an MS business. While the specific activities will vary based on the maturity of the business, the need for cross-functional coordination and issue resolution will persist. 

In Summary

Managed services present a significant opportunity to technology companies wishing to deepen customer relationships and enhance the perceived customer value; customers are increasingly interested and knowledgeable about managed services, and the concept and technology is mature and well understood. 

As technology executives design and scale any managed services business, they should focus on the following four elements, underpinned with a programmatic approach to manage activity: (1) clear definition of the managed services offerings; (2) development of a specialized go-to-market framework and operation; (3) building an integrated, expert services delivery function; and (4) separate P&L business management. 

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Dhaval Moogimane

About Author Dhaval Moogimane

Dhaval Moogimane is a partner at Waterstone Management Group, with more than 18 years of business management and consulting experience that blends business strategy development, operations, and IT. He specializes in helping technology companies capitalize on emerging trends, drive growth, and transform from a product-led to solutions-centric business.

Neil Jain

About Neil Jain

Neil Jain is a partner at Waterstone Management Group, with more than 15 years of experience formulating growth strategies and improving operations for technology companies. At Waterstone, Neil has successfully led a number of client engagements across the software, hardware, and telecom segments with businesses that range from emerging high-growth companies to the Fortune 100.

Andrew Clark

About Author Andrew Clark

Andrew Clark is manager of Waterstone, with seven years of operations management experience and three years of strategy consulting experience across a range of technology and telecoms clients. At Waterstone, Andrew’s client work has focused on new product development, customer insights, services strategy, and the cloud.