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What are Managed Service Providers Worth to Global IT Shops?

There is nothing new about big business and government outsourcing non-core segments of their operations to service providers. In the relatively recent past, we have crossed the threshold where it is now “technically and economically feasible” for any organization to transfer all their technology needs to managed service providers (MSPs). What then does global IT look like if the vast majority of corporate IT is shifted off-premise and run by an MSP? Nearshore Americas talked with top consultant, author, and general industry heavyweight, Jon Parkinson (former chief technologist at Capgemini among other roles), to find out.

“I did a consulting project for one of the big global tech firms looking at what the macro-economic impact on the industry would be if the majority of what is currently on-premise IT were provided as managed services. How many people does it take to run global IT if it is provided the same way as a phone service or electricity – a managed service – by some number of peer service providers and you don’t have all the people in-house you have today? What does the industry look like, how big does it have to be, and what skills do you have to have to make that work?  The headline is that you only need about 40 percent as many people,” stated Parkinson, who currently operates Parkwood Advisors.

Parkinson went on to explain how inefficient it is for small and medium sized enterprises to have a few IT workers looking after infrastructure for example. Now that most hardware is off-premise and software also hosted remotely it begs the question of how many IT staff does it take to support 100 users.

“Today it might take 30 because the 100 users are in 10 different companies, tomorrow it will take 10 because it doesn’t matter where they are…basically you create a user-cloud, and yes, you have to build in privacy, security, and some multi-tenant type handling capabilities, but if you presume you can solve those problems, which we can or are close too, then you are a much more efficient user of human capital in technology, which is good because there isn’t enough of it,” remarked Parkinson.

“You have to move away from a purely horizontal focus on a category of service, an activity like storage, computing capacity…even things like security or identity management” 

No More Money thrown at Tech Assets

One of the primary activities of Parkinson’s company is working with private equity capital pools helping them find early stage companies spanning several areas. “The PE guys won’t give money to these companies to buy technology anymore; they just don’t want money tied up in technical assets,” said Parkinson. Private Equity, often on the forefront of shifts in business paradigms, sees operating budgets dedicated to on-premise IT as a red flag. Parkinson stated that their mentality is “just go find a partner to help you with that because you will never be any good at it.” This goes hand-in-hand with a finding in a recent research report by ParkWookd Advisors that only Fortune 1000 companies have the scale to continue with on-premise IT if they desire.

Parkinson says established companies taking note of the economic benefits of doing business this way and sees the wholesale shift to managed services as happening at an accelerating trend. “It is not going to happen tomorrow, it is not going to happen in a year, it will take five, eight, or 10 years, but it will happen because that is what capital will demand,” added Parkinson.

Services Providers not Ready

“Unfortunately…and why it is kind of tough today is because the services providers are not ready for it,” estimated Parkinson. He explained that traditional and entrenched fee-for-service models that have dominated over the last 15 or so years are almost like bad habits that will slow the shift down initially; there is much work to be done for traditional fee-for-service companies to make the transition to advanced managed service providers. With the saturation of commodity-like IT services, MSPs have to look up one level to create the next offering of more advanced services.

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“You have to move away from a purely horizontal focus on a category of service, an activity like storage, computing capacity…even things like security or identity management. Now you have to start thinking about what is the domain expertise that is required to move to the next level.  In some areas application software-as-a-service was a step in this direction, not a big step…although technically it’s quite challenging, it not a really big step, it is just hosted applications. That’s not what customers want, customers want a business outcome delivered as a service,” emphasized Parkinson.

He went on to reiterate that currently company’s pay for services not business outcomes and that it takes a lot more domain expertise to be able to design a service so that the service produces a certain outcome.  Additionally, service providers will have to restructure their business models so that they will charge based on the outcome instead of being paid for the service.

Jon Tonti

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