How the Cloud is Changing the Small Business Market for IT Services

Jeff Chandler, President and CEO, American Technology Services, Inc.
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Jeff Chandler, President and CEO, American Technology Services, Inc.

The world of IT support services has dramatically changed in the last five years as a result of the cloud, and is expected to change even more in the next five.  For the typical small business, IT services are outsourced to some extent and even for larger businesses, some level of outsourcing is typical. But the nature of outsourcing is shifting rapidly as the cloud changes the need for service providers.

The ubiquity of cloud services has on some level put the traditional IT support company out of business. Those who have not already adjusted are on their way out. Those who have moved to become pure play “Managed Services Providers” (MSPs) have turned themselves into commodity operations, not that different from gas station operators. The challenge for the IT service provider in today’s changing environment is to re-establish their value to a client.

Let’s review what is happening:

1. Essentially all the servers in office buildings are going away if they haven’t already. Servers are moving to a cloud-based infrastructure and the need for a server in an office is drastically reduced. This means far fewer computer dollars for resale revenue, where many IT service providers made their money ten years ago. But it also means there is a lot less to do in maintenance and support.

2. It seems like Microsoft has just about cornered the market for cloud-based email services with Office365, eliminating the single biggest demand for tech support for most IT services companies serving small business—the Exchange Server running on-site. The biggest single source of critical maintenance work for IT services companies is now gone.

3. Managed services, already becoming a commodity service, shifts away from servers like Exchange Servers over to desktop remote management since the servers are in the cloud now. Help desk services over the phone and via email with very little need for end-user support breaks the personal connection to a client, further challenging the support business to stay relevant and differentiated. For those MSPs who outsource the actual work being done behind the scenes for their clients to the national services companies, they become much like a franchisee for those larger NOC and Help Desk service providers who have the economies of scale to service thousands of MSPs. But the MSP on the front lines with a client can easily be swapped out, making the market for generic MSP services more and more price sensitive. Only those MSPs who build their own NOCs and Help Desk services can expect to hold any advantage over the generic franchisee style of MSP.

4. Network devices remain critical, specifically WiFi, firewalls, routers and switches. Cabling and Internet connectivity become more important, and speed and redundancy move up in value, as prices continue to drop. But there is simultaneously a shift towards more remote work, as the cloud makes it possible to work from anywhere. The demand for network devices is starting to erode, much like servers.

5. Security now becomes super critical, but it is more than just having a good firewall in the office. Now a company (or its IT service provider) has to think about and manage security across multiple dimensions. The cloud, the employees’ home networks, the SaaS applications everyone is using, and any other applications software the company has are all points of entry for malware or potential storehouses of juicy data just waiting to be stolen. For the typical IT service provider, this is a daunting problem. The problem becomes a software integration problem in handing off credentials across platforms and across different clouds. For the typical IT service provider who has no software capability, they can’t keep up and have no expertise in managing applications. PCI compliance is rarely enough to prevent real attacks.

So we see that holistic IT management is the key for both—the clients of MSPs and the MSPs themselves.  In thinking about managing IT in the years ahead, the IT services company that has a broad vision of technology stands to win. MSPs that are single-minded will continue to further commoditize themselves. We already see a strong trend for private equity to buy these companies and roll them up into bigger and bigger players. The mom-and-pop IT company has a very limited future.

The nature of outsourcing is shifting rapidly as the cloud changes the need for service providers 

The long term winner will be the service providers who understand the big picture and have a broad view of technology. Those are the IT services companies that will still have strong value to clients.

From a financial perspective, business owners have to think about the impact on taxes because the cloud shifts capital expenses to operating expenses. Most small businesses making the decision about cloud do not think about this fact. It is a fact that most small businesses are not thinking about cloud costs versus traditional costs, and fail to realize that X dollars per month forever is often more expensive than a one-time capital investment and small annual support costs. Yet the move to the cloud is not just a financial decision.

Let’s face it. The cloud changes the economics for both the business and the IT services provider. The business owner replaces capital expenses with operating expenses. The IT services company trades one time resale revenue and margin for a much smaller monthly stream of revenue that might last forever. This shift is a tricky one for many small IT services companies to make.

For the typical small business, all of this really means that you have far more competition for your business and many options for identical service at lower cost, but only if you choose to use the franchisee style MSP that delivers commodity style of services. What it really means is that the generic franchise type of MSP is actually providing less value for lower cost. That lower cost isn’t actually giving you better advice, it is just more standardized services. Looking beyond the generic MSP service for the more sophisticated IT services provider can pay off in terms of better advice for technology for the business and a better technology partner for the business.

What the market will be like in five or ten years is anybody’s guess. But chances are that the market for MSPs is going to continue to see consolidations. The survivors are the ones who adapt and find ways to create values for their services beyond the commodity services.

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