The Pros and Cons of Managed Services Providers

This article is an in-depth review of Managed Service Providers, the pros and the cons and how you can better manage them. The article covers the following:

1.     What services are most commonly used?

2.     What are MSPs used for?

3.     How do MSPs work?

4.     What are the types of MSPs?

5.     What are the challenges of managed service providers?

6.     “We do your mess for less.” Managed Services provider.

7.     Contract Management and usual problems

8.     Assess Your Own Position

9.     How to turn things around

10.  Best Practice Contract Management

A managed service provider (MSP) is a third-party company that remotely manages a customer's information technology infrastructure and end-user systems.

In a managed service arrangement, the managed service provider retains responsibility for the functionality of the IT service and equipment, and the customer typically pays a monthly fee for receipt of the service. There are many different types of managed IT service offerings, but the idea behind all of them is to transfer the burden of maintaining IT from the customer to a service provider. In an effective managed services relationship, a customer benefits from predictable pricing and the ability to focus on core business concerns rather than IT management chores.

Small and medium-sized businesses, non-profits and government agencies hire MSPs to perform a defined set of day-to-day management services. These services may include network and infrastructure management, security, and monitoring.

MSPs often handle management services on a daily basis so customer organizations can focus on improving their services without worrying about extended system downtimes or service interruptions.

While some MSPs may specialize in specific segments of IT, such as data storage, others focus on specific vertical markets, such as legal, financial services, healthcare, or manufacturing. Managed security service providers, for instance, offer specialized types of services, such as remote firewall administration and other security-as-a-service offerings. Managed print service providers maintain printers and supply consumables. Often, MSPs perform their tasks remotely over the internet.

The evolution of MSPs began in the 1990s with the emergence of application service providers (ASPs), which offered a level of service for remote application hosting. ASPs helped pave the way for cloud computing and companies that would provide remote support for customers' IT infrastructure. MSPs initially focused on the remote monitoring and management (RMM) of servers and networks. Over time, they have expanded the scope of their services as a way to differentiate themselves from other providers.

What services are most commonly used?

The remote monitoring and management of servers, desktops and mobile devices is a common type of managed IT service. Remote monitoring and management is often a basic, foundational service for a managed services provider. And since many managed services provider firms offer this service, there's heavy competition and pressure on profit margins.

The commoditization of basic managed services has compelled managed services providers to differentiate their offerings. One popular direction is managed security services. Customers increasingly demand IT security assistance from their service providers. Accordingly, services providers are developing managed security services practices or partnering with security vendors to provide cybersecurity services.

With the advent of cloud computing, managed IT services have also evolved to include cloud services. Service providers, for example, may focus on infrastructure as a service (IaaS), providing managed public cloud services in conjunction with cloud providers such as Amazon Web Services (AWS), Google and Microsoft. Service providers may also market managed platform as a service (PaaS) offerings or partner with software as a service (SaaS) vendors such as Salesforce in the CRM space and ServiceNow in the service management market.

What are MSPs used for?

Hiring a managed service provider can help an organization improve its operations.

SMBs are typical MSP customers. Many smaller companies have limited in-house IT capabilities, so they may view an MSP's service offering as a way to obtain IT expertise. But larger enterprises may also contract with MSPs. For example, government agencies facing budget pressures and hiring limitations may contract with an MSP to supplement their in-house IT staff.

MSPs handle the complex, consuming or repetitive work involved in the management of IT infrastructure or end-user systems. MSPs typically do the following:

1.     Handle the management of IT infrastructure.

2.     Offer technical support to staff.

3.     Add cybersecurity software to IT.

4.     Manage user access accounts.

5.     Handle contract management.

6.     Offer compliance and risk management; and

7.     Provide payroll services.

How do MSPs work?

When a managed service provider is requested to meet the business objectives of an organization, it is often expected to fill in some gap or role in an IT system or staff. Communication between the MSP and the organization typically begins with an assessment that determines the organization's current environment. This assessment may point out potential room for improvement and how to properly support business goals.

There is not one specific setup for every organization, so an MSP may provide many different service options. Two examples of MSP offerings are technical support fix services and subscription services.

MSP technical support fix services focus on remotely fixing or sending technicians to a business's location to resolve any issues. MSPs that provide this option charge the company for the time spent troubleshooting and for any parts used to repair the problem. MSPs that offer a subscription service model work on the quality of service of an organization's network and usually bill customers monthly. If an issue arises, the MSP will fix the problem as part of the agreement between the organization and the MSP. Payment through the subscription model is based on defined rates per computer or equipment. Maintenance, security, monitoring, reporting, and other services are defined using an SLA that documents what the organization can expect from the MSP. Response times, performance and security specifications are also included in the service agreement. MSPs may deliver their own native services, other providers' services, or an integrated mix of the two. Pure-play MSPs specifically focus on one vendor or technology and more commonly offer their own native services.

RMM software enables off-site technicians to maintain IT systems, such as networks, servers, desktops, and mobile devices. These tools also enable MSPs to apply patches and other system updates.

PSA tools enable an MSP to manage an organization's projects, billing, assets, and inventory.

Five C-level executives weigh in on the value of MSPs to their businesses. A managed service provider often provides its service offering under an SLA -- a contractual arrangement between the MSP and its customer. The SLA spells out the performance and quality metrics that govern the relationship. Organizations need to be precise when agreeing on the commitments they make in SLA contracts.

An SLA may be linked to an MSP's pricing formula. For example, an MSP may offer a range of SLAs to customers, with the customer paying a higher fee for higher levels of service in a tiered pricing structure.

What are the types of MSPs?

The types of managed service providers can differ depending on the criteria chosen to categorize them. For example, if a business chooses to organize MSPs by the size of their target customers and how much responsibility they take on, MSPs can be organized in the following way:

Pure-play MSPs. These tend to be smaller providers that focus on monitoring networks and application performance. They offer their own native services that focus mainly on reporting and alerts.

Staffing legacy MSPs. These MSPs generally target midlevel organizations and Fortune 500 companies and often offer a wide range of services, including monitoring, reporting, and software installation and upgrades.

High-level MSPs. These consist of small and large providers that enable their clients to outsource as much of their IT processes as needed. Typically, high-level MSPs offer a wide range of services.

MSPs can also be categorized by the type of services they offer:

1.     Monitoring. These MSPs offer real-time monitoring software for different applications, network devices, servers, or websites.

2.     Remote support. These MSPs offer cloud-based software, support remote devices, and remotely troubleshoot technical issues.

3.     Proactive support. These MSPs perform preventative maintenance to stay ahead of any device or network issues that could arise.

4.     Centralized management. These MSPs provide a management console for complex networks, remote monitoring, patch management and security software.

5.     Scheduled maintenance. These MSPs offer organizations regularly scheduled network maintenance.

6.     Simplified billing. These MSPs handle invoicing, payments, and budgeting via a billing management system.

7.     What are the benefits of managed service providers?

8.     Benefits of managed service providers include the following:

9.     Help an organization fill staff shortages. If an organization lacks workers, it can outsource some of its tasks to the MSP.

10.  Provide expertise. Hiring a reputable MSP provides an organization with access to expert resources.

11.  Provide business continuity. An SLA documents the MSP's obligations to the business to prepare for or recover from a disaster.

12.  Provide constant network monitoring. Many MSPs offer 24/7 monitoring services using network monitoring tools that offer system visibility and cloud management.

13.  Improve security. Some MSPs provide security software and awareness training.

14.  Improve cost efficiency. If numerous unplanned repairs are needed, paying a fixed monthly charge can be more cost-effective than paying hourly. While the MSP handles the day-to-day management services, customer organizations can focus on improving their services.

What are the challenges of managed service providers?

Despite their advantages, managed service providers may also come with challenges, for example:

1.     Not all MSPs offer security measures. Many MSPs do not have a major focus on cybersecurity.

2.     Dependent on third-party organizations. Organizations that depend on an MSP to handle daily tasks may form a reliance on them. If the MSP fails to follow through on the SLA, the organization could experience system downtime.

3.     Waiting on a response. It may take time for an MSP to respond to an issue.

4.     Potential upselling. An MSP may try and upsell an organization on technology or services they do not need.

5.     Inaccessible information. An organization's information may not be freely accessible if the MSP is using a proprietary tool to manage and monitor its infrastructure.

6.     What is the pricing model for managed service providers?

Managed service providers typically use one of the following pricing models:

1.     Per-device pricing. The MSP charges the customer a flat fee for each device it manages.

2.     Per-user pricing. The MSP charges a flat fee for each user, accommodating users who use multiple devices.

3.     All-inclusive pricing. Also referred to as the all-you-can-eat model, the MSP charges a flat fee for its IT infrastructure support and management services.

4.     Tiered pricing. Organizations can choose the bundle of services that best fits their needs. This is typically a favoured pricing model for MSPs.

5.     Monitoring-only pricing. MSPs only offer monitoring and alerting services for an organization's IT infrastructure.

In each of these pricing approaches, the customer pays the flat fee on a regularly scheduled basis, often monthly. Such pricing methods let MSPs sell services under a subscription model. This approach provides the MSP with a monthly recurring revenue stream, in contrast to IT projects that tend to be one-time transactions.

MRR differs from other business models, as providers pursuing the break/fix model, for example, usually price their services on a time and materials basis. They generally bill an hourly rate for repairing a customer's IT equipment and charge for parts or replacement.

“We do your mess for less.” Managed Services provider.

High-Performance Health Checks reviews all managed services contracts in terms of their management, effectiveness, cost, and customer satisfaction. Why do you need to review your Managed Services? Because you pay a hefty sum for them and often do not get what you are paying for. Outsourcing your IT is a good solution for controlling costs, but it can be fraught with dangers for the provider and the customer if not properly managed.

Today, rather than being responsible for managing infrastructure, cloud-based solutions have enabled IT departments to dispense with the processes of acquiring, updating, and maintaining software and hardware, leaving these to third-party managed providers. By doing this, organizations can allocate a more significant share of their budget to activities that better contribute to improving business outcomes. Leveraging managed services from a cloud service or hosting provider allows organizations to free up their IT staff to work on more strategic, revenue-generating projects, instead of focusing on operating their own IT.

There are basically three reasons why a company outsources its IT: 1, to save costs and keep them fixed over a longer term. 2, to focus more on its core business and 3, to improve IT service delivery. That’s the theory, and whilst increased focus on core business activities is normally achieved, beyond that is something quite different. Costs are often only marginally reduced but not to the level anticipated or even stated in the contract. Costs may increase due to the dreaded ‘Additional Costs’ contract clause. IT service, project delivery and quality usually remain stubbornly bad. There are three reasons why providers do not deliver in accordance with their contracts. Firstly, the contracts are poorly executed, favouring the provider. Secondly, inexperienced customer contract managers simply lack the experience and skills to manage the contract and thirdly, smart providers who know how to milk their customers contracts meaning they get extra revenues and do not have to deliver on many promises.

I have been an Outsourcing Contract Manager several times. The key lesson I learnt is that unless carefully and skilfully managed, the promised services and improvements are not always forthcoming. This is even though the outsourcing business model is a good one where the provider can make use of an IT shared services solution (requiring fewer resources) to standardise the customers environment, reducing the cost of delivery and making it easier to achieve SLAs. But not all customers are moved under shared services arrangements as this involves up-front costs for the provider; rather the customers services are left as is (no or little change to platforms or software) meaning there are reduced chances of achieving SLAs. This is where the outsourcer saying of “We do your mess for less” comes from.

Customers need to maintain the upper hand when it comes to managing their IT managed services contracts to stop the provider managing the contract exclusively for their own benefit.

The best practice customer approach is to firstly have a detailed contract and then to make sure that contract obligations are being honoured by managing the contract according to the contract Schedules - noting that most providers actively fight this approach as they do not want to be held accountable or be managed in this way.

This is how I managed contracts and it was the basis of the Contract Management Offices I set up, (I even won a Gartner award for that). My customers managed there contracts very successfully in large part because the future customer contract manager was part of the contract negotiations. We negotiated great contracts; we had a good contract management office that was smarter than the average provider and we managed according to the Schedules. Under the contracts I managed, pricing remained fixed, service delivery including projects improved, improvements were delivered, and the customers satisfaction rating went up.

The managed service providers do work hard, too hard in fact, they are generally a case of working harder not smarter - in this respect they are no different to most in-house IT departments. Generally, the providers fall into two categories. The first take your mess and do little to fix it, saving money by having fewer resources working across multiple contracts. (You can’t do that in house as you need dedicated resources.) The second take your mess, move it under a shared services umbrella where they can save money through standardization with the need for even fewer resources.

As for cost savings, if you have a poorly executed contract, the providers are absolute masters at increasing their revenues through the dreaded ‘Additional Services’ clause and Project pricing. Surprisingly, some customer budgets post outsourcings do not take account of this additional (corporate or group) IT cost as it goes under the radar as a separate business unit IT cost.

Contract Management

Before going any further, let’s be clear on how a contract is constructed. It is in two parts, the Terms and Conditions and the Schedules. The Terms and Conditions set out the legalese of the contract, this is where the lawyers do most of their work, post contract execution a customer is or at least should be only interested in a few sections, - Meetings, Financial Obligations and Contract Disputes. The Schedules on the other hand are the guts, the details of the contract, they spell out the Services and Improvements to be delivered along with associated SLAs. (E.g., If a File Server fails it must be recovered within one hour.)

The Schedules are lengthy due to the sheer volume of IT Services that are scoped out which is why when preparing and negotiating the contract, 80% of the time is taken up with the Schedules. The Schedules also spell out improvements to be made to the customer environment such as the rationalization of servers, rollout of a SOE and so on. They also describe methodologies, approaches, and techniques to be used by the provider in the execution of the contract. Therefore, the people who will manage the contract after its execution need to be part of the Schedules construction and negotiation.

Usual Contract Management problems

1.     Unanticipated and additional services costs.

2.     Poor service and project delivery.

3.     Financial disputes.

4.     Lack of a customer contract management office. (Different to supplier management.)

5.     Post execution contract managers not party to the contract negotiation.

6.     Poor contract management practices such as no contract diary or schedule compliance monitoring.

7.     Inexperienced contract manager. (The customer contract manager needs to have a working knowledge of each of the outsourced services (e.g., Development, Infrastructure, Communications).

8.     The IT Architecture function is outsourced. (This must be retained in-house to ensure that the customer controls the IT Strategy to ensure alignment with the Business Strategy.)

9.     The legal department manages the contract. (This is a huge no, no, as the lawyers only understand the terms and conditions and not the schedules which represent the day-to-day work).

10.  Contract management meetings not being held weekly.

11.  Provider not meetings SLAs and other contract obligations.

12.  Issues and disputes are not handled in accordance with the contract terms.

13.  Lack of accurate customer management reporting.

Assess Your Own Position

Take a moment to answer the following questions, it will give you a good perspective on where you are in terms of your managed services relationship and what level of service you are receiving.

Relationship.

1.     How would you describe the outsourcer relationship? (Joint venture, partnership, friendly, contractually based, acrimonious.)

2.     How satisfied are you and your users?

Contract.

1.     Are their separate contracts with separate sets of schedules for each cloud platform?

2.     Are new services negotiations held in good faith?

3.     Are issues and disputes being handled to your advantage?

4.     Are there any current or possible future contract disputes?

5.     Is there a contract diary?

Account Management.

1.     Is the providers contract manager held responsible for your overall satisfaction within the contract performance?

2.     Does the providers contract manager have a detailed knowledge of the account?

3.     Do both parties have a working knowledge of the contract Schedules?

4.     What if any outstanding matters are there?

Costs.

1.     Are you incurring unanticipated or Additional Costs?

2.     What if any, financials are outstanding by both parties?

3.     What financial disputes exist?

Delivery.

1.     How would you rate SLA compliance? (Low, Medium, High)

2.     Are business targets being met?

3.     How would you rate Project Delivery performance? (Low, Medium, High)

4.     How would you rate Service Delivery performance? (Low, Medium, High)

5.     How would you rate the providers Service Desk performance? (Low, Medium, High)

6.     What regular reporting is being received?

Customer IP.

1.     Where is the IT Architecture function located?

2.     Who controls Security Standards?

3.     Who owns Data privacy (For example, does the outsourced data include personal data or competitively sensitive data such as trade secrets)?

4.     Who owns the data and is data encryption implemented?

5.     On termination of the contract, what data formats are available?

6.     Who reviews the providers technology lock-in position (Where the supplier implements a proprietary solution)?

Disaster Recovery.

1.     Have you personally toured the disaster recovery back-up site?

2.     How familiar are you with the DR plan?

3.     Where is the DR plan physically located?

4.     If you share a back-up data centre with other customers, where are you in the recovery queue?

5.     Have your staff been walked through the DR plan as an implementation exercise.

6.     Can you take over management of MSP functions if SLAs and other obligations are not being met?

How To Turn Things Around

If you’re suffering from cost overruns, hidden costs or additional costs and poor service delivery, there is a way to turn this around.

1)    All contracts can be renegotiated, in full or in part, this can happen at any stage, it does not have to wait until contract renewal. Renegotiations are a part of outsourcing, and the providers are used to it, they do not want to lose the business any more than you want to have move elsewhere or come back in-house. It’s generally in both parties’ interests to take a fresh look at the contract after one year’s execution.

2)    Failing this, putting in place a stronger contract management function goes a long way to getting what you need and what you are paying for. It is a case of the squeaky wheel gets the oil. Manage the contract strictly in accordance with the schedules and any special terms and conditions. Do not let the provider take any advantage of you, be spartan in your management approach.

3)    Do not be afraid to withhold payments for full or partial non-delivery of service or failing to meet some other contractual obligation. This more than anything else will get the providers attention and if necessary, get your lawyers involved to lay out to the provider what a legal case could look like to justify withholding payments.

4)    At weekly contract, service delivery meetings - take the provider through the sections of the contract that you are not happy with, be detailed, record everything (the lawyers may want those notes later) and insist on the provider taking down Actions to address each failure. Then manage the provider according to the Actions and insist on detailed written explanations of their responses to each action and every delivery failure.

5)    Make changes to your contract management by establishing a contract management office.

Best Practice Contract Management

High-Performance IT implements a Contract Management Office for the exclusive management of managed services contracts. (I received a Gartner award for world’s best practice for establishing such an office.) The set-up of a customer contract management office looks like this.

1.     A customer contract manager role or position is created depending on the scope and scale of the contract(s). The contract manager should ideally have been party to the contract negotiations otherwise they need to be extremely well versed in the contract(s).

2.     An IT management role or position as a SME for each of the major services the contract covers. For example, if Infrastructure including Network and Communications has been outsourced then an Infrastructure Manager is required.

3.     A Service Delivery Manager position is required to counterbalance the providers Service Desk and Service Delivery functions. This is a position and therefore is a full-time position.

4.     The IT Architecture function is to remain in-house to ensure that the customer retains control over their technology destiny and to ensure alignment of IT and Business strategies. As such an IT Architecture role or position is required.

5.     Creation of a Contract Diary that includes all events and obligations for both parties, such as regular meetings and contract annual reviews.

6.     Weekly Service Delivery meetings to review as a minimum all service delivery activities, Service Desk performance, SLA performance, Project performance, Improvements, Financials, Reporting, Customer satisfaction levels and Disputes. The providers Service Desk should also table two reports 1) Top ten Problems report and 2) Top ten Recurring Problems report.

Best Practice Outcomes

1.     The squeaky wheel gets the oil.

2.     Reduced or Fixed costs.

3.     Cheaper Additional Services costs.

4.     Improved Service Desk.

5.     Improved Service Delivery and Project Performance.

6.     Both parties have a detailed knowledge of the contract schedules and obligations.

7.     Customer can maintain constant vigilance over service delivery, contract obligations and financials.

8.     The managed service providers performance improves.

9.     Should the providers performance fail to meet contractual obligations, the customer has a recorded history of events that can be used for legal action or for the withholding of payments.

10.  Contract management practices such as a weekly review meeting and a contract diary keeps the customer in the driver’s seat.

11.  The provider’s contract manager can be evaluated and held accountable for contract performance.

Outsourcing models

·      Software as a Service (SaaS) is access to applications, hosted by an outsourcer that are accessible via the internet.

·      Platform as a Service (PaaS) is an outsourced platform hosted by an outsourcer that facilitates the development, test, and management of web applications.

·      Infrastructure as a Service (IaaS) is the provision of outsourced resources (servers, storage, networking) via the internet on a user pays basis.

·      Desktop as a Service (DaaS) is the provision of virtual desktops, accessed over the internet and hosted by an outsourcer.

Cloud platforms

Managed cloud hosting is a process in which organizations share and access resources, including databases, hardware, and software tools, across a remote network via multiple servers in another location. However, before considering costs, the critical focus of managed cloud hosting is on security and consistent availability. Cloud computing is a user pays service that facilitates network access to shared resources (networks, applications, servers, storage) accessed via the internet.

·      Private cloud. The private cloud infrastructure provides a dedicated network and equipment that are operated solely for the customer’s business.

·      Public cloud. The public cloud is made available to the public by a supplier who owns, operates, and hosts the cloud infrastructure and offers access to users over the Internet.

·      Community cloud. The community cloud infrastructure is a multi-tenant cloud service model that is shared among several organizations and is governed, managed, and secured commonly by all the participating organizations or a third-party managed service supplier.

·      Hybrid cloud. The hybrid cloud is composed of two or more clouds (private, public, and/or community clouds) that remain separate but are bound together, offering the advantages of multiple deployment models.