December 01, 2004, 4:45 PM — It wasn't long ago that application and managed service providers (xSPs) were considered roadkill of the dotcom demise. Although the premise of out-tasking specific IT functions to a service provider on a pay-as-you-go basis made perfect theoretical sense, finding more than a handful of enterprises willing to contract with relatively untested xSPs proved almost impossible.
As a consequence, nearly every xSP founded during the dotcom boom has since disappeared. Most buckled under the weight of the overhead costs associated with their Field of Dreams strategies, strategies based on the hope that if "you build it, they will come." The xSPs built elaborate management systems and showcase operation centers and waited for customers who never arrived.
The few xSPs that have survived are now seeing an uptick in interest for their services. This interest is coming not only from prospective customers, but perhaps more importantly, from potential acquirers. A flurry of recent xSP acquisitions is proof positive that the market for application and managed services is finally heating up.
The first such acquisition was Cisco Systems' September purchase of NetSolve, a provider of managed network services. Cisco plans to use NetSolve's systems and staff to support a new set of managed infrastructure services for its channel partners to sell to their end users.
In November SunGard acquired Inflow, a managed application hosting company. SunGard is adding Inflow's managed application hosting capabilities to its Availability Services operating group, which provides disaster recovery and business continuity services.
And, most recently, Sun Microsystems acquired SevenSpace, a survivor of the first wave of managed IT and application services companies. Sun intends to use SevenSpace's managed service operations to support a new level of advanced services focused on application-level support, storage, mail messaging, and asset, configuration, change and patch management.
Any one of these acquisitions would have been a significant endorsement of the growing market acceptance and demand for an expanding array of application and managed services. The three transactions combined suggest that these services are on the cusp of becoming mainstream in 2005.
It is a safe bet that in the coming months more independent xSPs will be acquired by hardware and software vendors, as well as by major resellers and integrators.
But buyer be warned... acquiring an xSP's management systems, operations centers and staff doesn't guarantee success. At least two of the three recently acquired companies were struggling to survive. They all had succeeded in building infrastructures and processes to manage their operations, but they were all equally challenged in building an effective channel to market their services.
Cisco, Sun and SunGard are betting that they can drive their new application and managed services into their installed base of customers either through their direct sales forces or resellers. This may be harder than they think.
I can tell you from firsthand experience that acquiring and integrating a service business into a product-oriented, technology-centric organization is seldom successful.
The first challenge for Cisco, Sun and SunGard will be properly positioning these services within existing product portfolios. Specifically, they will need to determine whether the services should be sold as standalone solutions or integrated into their existing set of support services.
The next challenge will be packaging and pricing the services to effectively differentiate them from a growing array of competitors. With most service providers focusing on the cost savings rather than the business benefits of their offerings, price competition has become prevalent in the market. Promoting the value of the services will be essential to avoid cutthroat discounting.
The final, and often overlooked challenge, will be teaching sales teams and channel partners how to sell the services. Selling the benefits of managed services is different from selling product features. It often requires a more consultative sales technique and longer sales cycles. Vendor and channel salespeople tend to be transaction-oriented; unless they are given the right incentives, they won't be convinced that selling managed services is in their best interest.
