HOW TO HARNESS MANAGED SERVICES

Service providers have invested billions in managed service offerings. These portfolios of outsourced services, which enable businesses to hand over security, performance and monitoring functions of their networks to knowledgeable service providers, have grown in popularity. But in order to avoid the fate of high-profile failures such as Web host Exodus Communications, providers must aggressively develop managed services--and educate customers.

In the middle of last year's dotcom fallout, Exodus Communications retooled its business plan. No longer would it focus on basic Web hosting, it would turn its attention to managed services.

Because it owned more than 40 data centers, Exodus chose to concentrate on managed Web hosting, in which it offered to oversee the security, performance monitoring and content distribution functions for its corporate customers and their Web sites.

But the idea came too late for a company bogged down with debt and a deteriorating customer base, and Exodus filed for bankruptcy in late September (Telephony, Oct.1).

Exodus' experience may make some providers think twice about offering outsourced services. However, despite such high-profile failures, the market for managed services is steadily growing. According to projections from The Yankee Group, U.S. revenues from managed network services (excluding transport) will experience annual growth of between 22% and 31% from 2000 to 2004, topping out at $7.14 billion.

And the argument for offering managed services still is compelling: Service providers already sell basic services such as connectivity and Web hosting. With employee bases well versed in managing networks and running data centers, it's a short jump to overseeing corporate network elements such as security, data backup, disaster recovery and transport.

But this doesn't mean that providers can market managed services such as simple value-adds. In order to avoid Exodus' fate, providers must take definitive action to make the most of the growth in managed services — chiefly, educating potential customers.

The pitch for managed services, as for all outsourcing models, is that they can save business customers money by reducing the amount of in-house technical support while allowing employees to focus on the company's core business.

According to Thomas Dalrymple, director of managed data services for Verizon Enterprise Solutions, by taking control of mundane networking activities, managed service providers allow customers to “focus on the higher-value activities that they can build.”

However, service providers must first stress the direct financial benefits of managed services, said John Gonsalves, a vice president for consulting firm Adventis. Many potential customers, he said, might instinctively focus on the overall bill for managed services. It is the service provider's job to remind them of the money they can save by reducing internal responsibilities such as IT support.

Beyond cost savings, providers must convince customers that managed services — which in their more complex form are still a relatively new offering — actually work and that customers are satisfied with the results.

According to Craig Grills, vice president of managed data services for AT&T, most customers are open to outsourcing as long as they believe they'll get what they're promised. “The fact that you can prove that you provide a level of reliability and performance [helps] customers understand that [managed services] are accessible to their environment,” he said.

Dana Tardelli, research analyst for Aberdeen Group, agreed. “The best thing you can do is use success-based marketing,” she said. “Tell the world you made a customer happy. Customer testimonials are proof you built trust.”

Of course, when trying to win the confidence of a potential managed services customer, the task is made much easier when the provider has an existing relationship with that business. “It's always easier to upsell to an existing customer than to a new one. If you've built a good relationship based on connectivity, just grow that,” Tardelli said.

That strategy may make sense for larger carriers with significant customer bases such as AT&T and Verizon, but for smaller carriers with a more limited pool of customers the task of selling managed services is more difficult.

For example, a competitive carrier trying to sell managed services to a company with which it does not already have a relationship must rely on raw salesmanship, touting better prices and service than the traditional telco can offer, Tardelli said.

Simply marketing managed services is only one hurdle service providers face, though. Because managing the operation and performance of a corporate network is critical, many companies are very particular regarding what they expect from a managed service provider.

“Managed networks can mean a lot of things to a lot of people,” Tardelli said. “Where the end points of responsibility and accountability lie are different for every customer, and what customers are willing to have an outsourcer control is different.” Attempting to cater to these differences, then, makes it harder for carriers to scale their offerings, thereby affecting profitability.

According to analysts, the challenge for providers is the construction of more efficient and robust platforms upon which to offer managed services.

In fact, many service providers have or are constructing managed services offerings that approach each individual managed service as a stand-alone offering designed for simple management that can be easily packaged with other services.

For example, Hosting.com, Allegiance Telecom's hosting and managed services arm, designed its managed services as modular units. “They can either work separately or together with other services,” said Al DeLeo, product manager with Hosting.com. “It's all very automated in the sense that there literally are no difficulties in monitoring one or another.” By doing so, carriers can create the scale needed to drive down the cost of managed services, making them more attractive for customers while also making them more profitable.

Of course, even if a carrier constructs a suitable platform, the long-term health of the managed services sector will rely upon fulfilling promises of high functionality and reliability outlined in service level agreements as well as the development of new offerings.

“There's a continual investment being made,” Dalrymple said. “You can't offer just the fundamental things and expect your customer to be happy with that.”