Managed services grow slowly

Managed service providers were supposed to provide businesses with hassle-free maintenance anddelivery of core systems online. Why have so few companies taken the bait?

Analysts predicted co-location services and Web hosts would enjoy huge success, but the recent financial difficulties of service providers such as Exodus and City Reach show the demand has not materialized. However, many commentators believe that the advantages of such services will attract corporates in the long term.

"The current Web hosting business in Europe is looking rather sickly compared with how we predicted it would grow," said James Eibisch, European Web hosting research manager at analyst firm IDC.

In theory, the services are still attractive. Managed service providers (MSPs), such as Web hosting firms, are another form of outsourcing which offers even more advantages during periods of economic uncertainty, according to Per Andersen, managing director for the Nordic region at IDC.

"Outsourcing is perceived as helping to eliminate the risks [associated with] buying expensive infrastructure," he said.

Andy McLeod, chief executive of Web host Integra, said that IT managers currently have problems dealing with complex infrastructures and a lack of in-house expertise, while also facing demands for better security and cost savings. He believes that MSPs could provide a solution. "There's a dichotomy with the desire for control [of infrastructure] internally, and a lack of skills. Firms want to do things in-house, but don't have the skills," said McLeod.

Despite their attractions, MSPs have been finding it hard to win customers. Guardian IT announced last month that it was pulling out of the Web hosting market because of a lack of demand, and other MSPs have struggled: City Reach went into administration, while Exodus, a bellwether for hosting services, lost three board members and its chief executive before filing for Chapter 11 bankruptcy protection.

The slow take-up of managed services may be related to the number of companies entering the market, said Eibisch. "Businesses such as co-location have quickly become commoditized, and many of these firms have sought to move to the more lucrative market for enterprise managed services. But the quality of the management varies greatly, so customers are wary of the offerings," he argued. MSPs need to offer a better level of management, more comprehensive service guarantees, and skills that are not readily available to firms in-house, if they want to convince corporates of their value, he added.

Service level agreements (SLAs) that can clearly demonstrate the impact of service delivery on customers' businesses would persuade more firms to consider outsourcing, said Andersen. Despite the sluggish state of the MSP market at present, analysts remain convinced that demand will increase in the future. Research firm Gartner forecasts a compound annual growth rate of 50 percent.

Eibisch said the increasing importance of IT to the enterprise would play a key role. "IT is becoming fundamentally embedded into business processes. It is no longer simply the case that business is assisted by IT," he said. "As this happens, the infrastructure becomes increasingly complex and critical to the enterprise, and MSPs will become a more attractive proposition."

McCloud predicted that MSPs will develop more compelling services, often involving consultancy provision. In this way, MSPs will help companies to maintain their Web presence and will offer guidance in design and growth, he added.

This article first appeared in the Oct. 8, 2001 issue of IT Week