I.T. OUTSOURCING – Management Service Providers Say They’ll Do It All for You

A management service provider (MSP) is a vendor that remotely manages and monitors enterprise applications?anything from ERP, CRM or firewalls to proprietary e-business applications?or network infrastructure. These vendors make their money by charging businesses on a subscription basis?per device, servers, PCs and so on.

MSPs claim to be an improvement over the ASP model because they permit companies to outsource the maintenance of their applications?making sure they’re up and running, providing fixes when they’re not?without outsourcing the applications themselves, thus providing a relatively cheap, easy and unobtrusive way for a company to prevent outages and malfunctions. Meanwhile, because MSPs provide 24/7 monitoring, companies don’t have to worry about staffing up to handle that nonrevenue-producing task. And if the MSP suddenly shuts its doors, as has happened all too often in the ASP world (and recently in the MSP world too), the business can continue because it still has its applications.

“MSPs are a little easier to stomach [than ASPs],” says Corey Ferengul, an analyst who covers IT services outsourcing for Meta Group in Stamford, Conn. “You can tell yourself, ’Oh, I’m just having someone monitor my applications.’ That’s not nearly as intrusive to an organization as having someone take over your applications.”

That sounds good, but if you’re thinking about using an MSP to take some of the load off IT, you should be aware of some potential problems.

First, many MSPs are no more stable than the ASPs were (see “Boy, That Was Fast,” Nov. 15, 2000), and that’s saying something. According to Giga Information Group ASP Analyst David Friedlander, a year ago there were an estimated 300 ASPs. Today, about 50 of them have gone out of business and another 100 have changed their business models so radically that they can no longer be considered ASPs. By comparison, there are an estimated 200-odd MSPs right now, and according to Ferengul there are simply not enough customers to keep them all afloat. In fact, several?including i-Sharp, ManageIT and Intira?have already folded.

Also, not all MSPs are alike. Some aren’t as scalable as others, which at a critical time might leave a company waiting in line for service as the MSP takes on new customers. And certain MSPs are limited in the platforms they support, which means that if a shop runs a variety of platforms and technologies, it may have to contract with a number of MSPs to meet its various needs.

Finally, the MSP market is in its very early stages, which means that pricing could be unstable during the next year or two as the market matures.

But all this shouldn’t necessarily stop you from considering the MSP option, especially given the current economy. As Stan Schatt, a vice president in charge of the networking and communications group at Cambridge, Mass.-based Giga Information Group, points out, a lot of companies are in hiring freezes right now. In this climate, outsourcing IT monitoring and management can be a good solution, at least for the short term.

Voices of Experience

The MSP name describes several kinds of players, including pure play?what analysts call the most basic MSP model. It manages and monitors its customers’ applications and networks, and that’s all.

Other types of MSPs include Santa Clara, Calif.-based Exodus and Beltsville, Md.-based Digex, both large colocation and hosting companies. As opposed to pure plays, which offer monitoring as their core product, companies such as Exodus and Digex specialize in providing the space and hardware needed to physically house and power infrastructures?offering monitoring and management as a secondary product.

Management service providers offering those types of services have been facing falling revenues because of the dotcom crash and the consequent softening of the colocation and hosting markets, and are adding management services such as application and network monitoring to try to expand their businesses. Some of these companies don’t have in-house MSP expertise; instead they’re partnering with pure plays, such as Rancho Santa Margarita, Calif.-based SiteLite and Chantilly, Va.-based SevenSpace, and rebranding these services to their customers as add-ons to what they already provide. Meanwhile, some MSPs?such as San Francisco-based Totality and Bedford, Mass.-based InteQ?are closer to pure plays, but they can also rent infrastructures such as servers, networks and hosting services.

But all management service providers, no matter what their model, make the same sales pitch: They can do a critical job better and more cheaply than you can. Totality customer Tim Britt, CTO of OurHouse.com in Evanston, Ill., ACE Hardware’s exclusive Internet distribution channel, seconds that notion. Until last April, Britt managed and monitored the company’s applications in-house. “In order for things to work smoothly, we needed people to be on call 24 hours a day,” Britt says, pointing out that one experienced database administrator was getting called about three nights a week to deal with outages.

Now that Totality monitors and manages the site’s applications, Britt says the night calls have ceased. “Now [our internal IT staff] can focus on things that enable development of new features and allow us to improve our business.”

Management service providers claim that their monitoring tools enable them to detect potential outages long before an internal IT staff could, OurHouse.com, for example, gets a nightly feed from ACE with the SKU numbers of all the ACE products that OurHouse.com is supposed to put up on the site?usually about 30,000 items. The feed contains information about new products and which items are out of stock.

Before Totality began monitoring OurHouse.com, the site failed to accept the feed at least once a week, and Britt wouldn’t know about it until the next morning. This caused huge difficulties. If 100 people ordered a hammer that should have been listed as out of stock, for example, the company would have to call 100 annoyed customers. Now Totality sees that a feed didn’t come through, takes a prescribed set of actions and in most cases gets the process to work without Britt getting involved. “The fact that they can catch it and deal with it before customers place a bunch of orders probably saves us a good 10 hours of dealing with customer-service problems,” says Britt.

Rich Guetzloff, senior director of IT operations at R.R. Donnelly & Sons, a $5 billion Chicago-based printing company, uses MSP Rolling Meadows, Ill.-based Telenisus to monitor his Checkpoint firewall. Before signing on with Telenisus a year ago, Donnelly experienced regular outages, including one that lasted for more than 24 hours. But since Telenisus began monitoring, Donnelly’s longest outage has been four hours. “It would take us at least twice as long as them to figure things out each time,” Guetzloff says. “And I had one guy doing the job. And if he was on vacation, we’d be struggling with the second-most knowledgeable guy trying to figure things out.”

Despite these positive reviews, most customers who spoke with CIO are more comfortable having MSPs manage their networks, not their applications. Craig Allen, CIO of Meritage, an $800 million manufacturing-services company in Santa Fe Springs, Calif., uses NetSolve to manage a WAN that connects all 29 companies under Meritage’s umbrella. He says the Austin, Texas-based NetSolve has been great at detecting and addressing network outages, but that’s as far as he wants to go at this point. Allen feels that applications simply cut too close to the company’s core competencies, and no MSP can understand his business well enough to handle them. “MSPs are fine for networks, but applications are living,” he says. “They change to fit our environment, and we modify them on a day-to-day basis. And the more difficult the application, the tougher it becomes to outsource.”

There are other troubling issues with MSPs. Several pure plays?such as I-Sharp (R.I.P. spring 2001) and ManageIT (also R.I.P. spring 2001)?have already gone out of business. This instability in the MSP space contributes to unstable pricing; the monthly per-server cost of MSP services can fluctuate anywhere from 50 bucks to several hundred dollars a month without any real logic, says Giga’s Schatt. Plus, if it’s your MSP that goes bust, get ready for headaches.

David Cooper, director of field information services and technology for Wickes, a $1 billion Vernon Hills, Ill.-based lumber and building supply retailer, was using Comdisco, an equipment-leasing company that offered MSP services, to monitor the AT&T frame-relay network that connects Wickes’ 115 stores. When Comdisco announced this spring that it was leaving the MSP space (the company subsequently filed for Chapter 11 in July), it gave Cooper about 90 days to find a replacement before it pulled the plug on its monitoring services. And it took Cooper the whole 90 days to research all potential partners. He eventually settled on NetSolve but found the entire experience upsetting. “It’s kind of like getting married and before the honeymoon is over, your spouse says, ’Go find someone else.’”

Nevertheless, Cooper plans to stick with MSPs. Considering the money he’s not spending on staffing for monitoring, plus the money he’s generating by having his staff focus on revenue-generating activities like applications development, he estimates that Wickes is saving $10,000 a month by going with an MSP.

Of course, not all MSPs provide the top-flight service Britt and Guetzloff report. Larry Anderson, director of IS operations and technology for Cost Plus World Market, a specialty retailer in Oakland, Calif., was also using Comdisco to manage his WAN-a frame-relay network connecting approximately 150 retail stores, corporate headquarters and a main distribution center. He says his own IT people would detect problems before his MSP did.

“We’d notice that a circuit wouldn’t be connecting to a particular store, and we’d check the Comdisco logs and see that they hadn’t noticed the problem,” Anderson recalls. “They’d only notice when we contacted them. Obviously, that defeats the purpose of having an MSP.”

How to Make an MSP Work for You

Anytime you’re dealing with a market as new as the MSP, it’s difficult to be sure about what service you’ll end up getting. To protect yourself, there are certain things you should do when vetting candidates.

• Negotiate an exit strategy. If your MSP goes bust, it can be a headache to find a replacement because you’re not only losing time and labor, you’re losing people who know your network and your apps. Those can’t be replaced; they have to be rebuilt. “You have people familiar with the care, feeding and idiosyncrasies of your applications and how to fix them,” says Russ Lewis, executive vice president and CIO of GFInet, the online arm of New York City-based financial services company GFI. Lewis is concerned about avoiding that particular pain. Lewis uses White Plains, N.Y.-based Metromedia Fiber Network (MFN) to manage his ERP system and Web applications. He says employing MFN saves his company $1.6 million a year. The worst-case scenario, he says, occurs if the MSP is also providing hosting or colocation services?as it does for GFInet. In that case, “[the MSP people] shut their doors, you can’t get at your hardware, and your customers are connected to them via their network,” he says. “You’d have to reroute your traffic, take out your applications, put them on new hardware, and get it all up and running.”

  Consequently, when Lewis evaluates an MSP, he’s as interested in how it will transition his company away from its services as to its services. He looks to see that the MSP will document the services it has performed so that he has something to give either the new MSP or people he has assigned internally to monitor his apps. Lewis also wants to be sure that it keeps a full inventory of hardware and routers so that those successors know what they’re working with. And to help move his business to a new MSP, he demands an articulated process with provisions for a gap analysis?in which the MSP examines the differences between its own monitoring tools and those of its successor.

• Get references. There’s no better indicator of how an MSP will handle your business than how it handles others’. But different customers have different views on what to look for. Guetzloff of R.R. Donnelly looks for big Fortune 500 customers because, he figures, if the MSP can handle those companies’ monitoring, they can certainly handle his. “I especially look for telecommunications companies because telecom is highly regulated and [they] can face penalties” from the FCC for failing to provide certain levels of service, he says.

  But Dennis Upton, CIO of business-equipment manufacturer Brother International in Bridgewater, N.J., looks for recommendations from midsize customers, where the MSP is likely to be the sole provider of services. Upton, who uses Alpharetta, Ga.-based SeventhWave Technology to monitor his SAP system, believes that a recommendation from a customer dependent on the MSP is more significant than one from “the GMs and the Citibanks; they probably have 50 firms working there in one way or another.”

• Look for standardized processes. A lot of MSPs are very new and immature, and you want to make sure they’ve really established how they operate, says Meta Group’s Ferengul. For example, if you ask what they do for server maintenance or what they do when you need a patch applied, and they respond, “What do you want us to do?” it means they don’t have standard operating processes and you can’t be sure what you’ll get out of them. Giga’s Schatt adds that these processes should be automated. Without automation, the MSP won’t be able to scale up and your company will be doomed to service problems down the road as the MSP takes on more and more customers.
• Sign on short term. MSPs bill at a per-device fee on a monthly basis, and service contracts are generally for one, two or three years. But given the volatility of the MSP space, it’s wise to get the shortest contract you can, says Schatt. He adds that MSPs will likely not agree to contracts shorter than one year, as it takes them almost that long to recoup their setup costs.
• Shop around. As prices vary widely from MSP to MSP, it’s quite possible to play them off against each other to get yourself the best deal possible.

Looking Ahead

Observers of the MSP space predict a huge shakeout during the next year?a shakeout that’s already begun as Comdisco and others have fallen by the wayside.

Ferengul points out that right now MSPs are servicing only about 3 percent to 5 percent of their potential marketplace. At the same time, more than 200 vendors are trying to establish themselves. This means that a lot of management service providers are going to go out of business in the near future, and analysts predict that the pure plays?which just monitor applications and networks?are likely to be the first to go. Those that survive will be the ones that form alliances with huge colocators or hosting companies, such as Digex, Exodus and Verio, rebrand the MSP services and sell them as their own. Meanwhile, traditional outsourcers such as Accenture and Perot Systems appear to be making a move toward the same market, offering MSP-type services in an MSP manner, says Schatt.

Ultimately, management service providers will be seeking midsize customers as their target base because larger companies have the resources to handle their monitoring and management in-house, Schatt says. And traditional outsourcers, such as Accenture, CSC, IBM Global Services and Perot Systems, that want to take advantage of the MSP market will have to devise a new business model that’s more friendly to midmarket enterprise.

So what does all this mean to the user? It means a lot of pricing instability in the future. So go on and consider the MSP?it can save you a lot of money.

But keep the Dramamine handy. The coming year promises a bumpy ride.