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The Managed Services
Starter Kit for OEMs
Starter Kit Content
Research Publication
By George Humphrey, Vice President, Research, Managed Services, TSIA
Managed Services
Dening Managed Services
©2018 Technolo gy Services Industry Association | 1706 5 Camino San Bernard o, Ste. 200 | San Die go, CA 92127 | Tel. 1.858.674.5491
George Humphrey, Vice President Research, Managed Services
Jeff Connolly, Senior Director Research, Managed Services
The State of
Managed Services
Research Publication
The State of Managed
Services 2018
Chapter 9
The Case for Managed Services
The Case for
Managed Services
A Managed Services
Success Story
Research Publication
By George Humphrey, Vice President, Research, Managed Services, TSIA
Managed Services
©2017 Technology Services Industry Association | 17065 Camino San Bernardo, Ste. 200 | San Diego, CA 92127 | Tel. 1.858.674.5491
Defining Managed
by George Humphrey
Executive Overview
High-Level Definition of Managed Services
In the technology industry, the outsourcing of day-to-day infrastructure and application management is
becoming more and more popular for a number of reasons. Companies are looking for help for many
strategic reasons. This may include cost reduction, risk aversion, transition from CapEx procurements
to OpEx, or accelerated return on technology investment. In the world of IT, companies are moving
from being IT operators to being IT integrators. In other words, they’re looking to combine the best-in-
breed providers of technology services to improve their operations.
Expansion of Definition
To more deeply define what types of services would fall under technology managed services, it’s im-
portant to understand the life cycle of operating technology solutions. It’s also important to understand
the line of delineation between support services and managed services. Support services are about
helping a customer resolve an issue when something has gone wrong. Managed services are about
preventing bad things from happing through a more proactive, predictive, and preventive approach.
Let’s face it though, things do go wrong with technology, even when it is covered by a managed ser-
vices contract. Restoral of service is also a crucial aspect of managed services. However, the core
ownership of resolution, restoral, and future prevention of incidents lies with the managed services
provider (MSP). Simply stated, there is a shift in responsibility for the health of the infrastructure and/or
application under management from the customer to the managed services provider.
Service Insight
February 28, 2017
MANAGED SERVICES | Research Publication
©2017 Technology Services Industry Association | 17065 Camino San Bernardo, Ste. 200 | San Diego, CA 92127 | Tel. 1.858.674.5491
The image in Figure 1 captures multiple service offerings that can fall under the umbrella of the TSIA
definition of managed services. Each of the service types in the diagram will be dissected for further
Figure 1: “Umbrella” of Managed Services Offerings
Monitor/Notification Services
With the rise in software centricity in today’s applications and infrastructure, more and more solutions
are becoming “self aware.” This means that they usually know when there is a problem occurring and
will broadcast a notification of that event (a.k.a. event notification). Most of these notifications occur
through either proprietary- or standards-based management notification protocols such as SNMP
(Simple Network Management Protocol). Many IT organizations either have aging tools to monitor
SNMP alarms or lack the engineering skills necessary to decipher the thousands of SNMP messages
broadcast by dozens of vendors’ solutions on hundreds of products in their technology deployments.
There are scores of advanced and automated solutions that allow managed services providers to
monitor these messages on behalf of the customer. In addition to SNMP monitoring and notification,
many applications may simply fail to start, stop working, or become so dysfunctional that they are no
longer broadcasting health information. In this case, additional monitoring capabilities are available
such as ICMP (Internet Control Message Protocol) monitoring that essentially identifies devices or ap-
plications that may be unresponsive. Think of it as a way for a monitoring tool to say, “Hey, Router R2-
D2, are you still there?” If R2-D2 doesn’t respond, the monitoring tool logs an outage event and noti-
fies the network administrator.
In many cases, a managed services provider may also monitor the network surrounding core applica-
tion and infrastructure operation. There was a great slogan used by Verizon several years ago. It went
©2017 Technology Services Industry Association | 17065 Camino San Bernardo, Ste. 200 | San Diego, CA 92127 | Tel. 1.858.674.5491
like this: “A call is only as good as the network it’s on.” Basically, what that means is that your core ap-
plication or device may be functioning properly. However, most of today’s applications and devices
communicate to other applications or devices over a network.
Monitor and notification services are a way for a managed services provider to add incremental value
to a support services contract and to assist customers with the operation of their own environment. A
word of caution, though: Monitor and notification services can give a false sense of security to your
customer. Chances are if they don’t have the tools or skills to monitor issues themselves, there’s a
pretty good chance they’re also lacking the tools and/or expertise to resolve any issues you may make
them aware of.
Operate Services
In “Framing Managed Services,”
Lah identified one of the key managed services offer categories as
“Paid to Operate.” What this means is that the customer has decided to transfer the responsibility of
the day-to-day operation and management of their technology to a managed services provider. This
truly is the heart of managed services. There is an increasing trend in the industry to tie contracted
performance objectives, known as SLAs (service level agreements), to managed services agreements
when the MSP is performing operate-level services.
One of the best ways to obtain a strong understanding of what is included in an operate service is to
understand what ITIL v3 says about technology operation.
According to, the Information Technology Infrastructure Library (ITIL) is con-
sisted of policies and concepts that are very useful for managing operations and development of IT
infrastructure.” It goes on to say “the library is very important to describe practices as well as proce-
dures and tasks that an information technology organization should enforce or implement to attain its
needs. For the convenience of IT associations and organizations, ITIL was published in a book series
with the help from the British Office of Government Commerce.”
The processes and practices described in ITIL are essentially the functions a company is transferring
to a managed services provider (whether they realize it or not) when they are purchasing an operate-
level managed service.
Per the ITIL v3 framework, service operation includes many of the key functions, processes, and activ-
ities outlined in this section.
Configuration Management Database (CMDB)
The heart of any managed service is a configuration management database. This is the tool, applica-
tion, or platform that keeps detailed records of the customer’s operating environment. It includes as
©2017 Technology Services Industry Association | 17065 Camino San Bernardo, Ste. 200 | San Diego, CA 92127 | Tel. 1.858.674.5491
many details as possible about the infrastructure and applications under management as well as any-
thing that could affect them. It should also include details of the business supported by the managed
services contract.
Fred Smith, CEO of FedEx, essentially captured the importance of a CMDB when he said, “information
about a package is as important as the package itself.”
The CMDB interfaces with all other management tools to gain and retain critical information. These
tools include, but are not limited to, ticketing systems, monitoring and notification systems, device and
application provisioning tools, reporting tools, etc.
Service Desk
In an IT organization within a company, the IT organization often provides a help-desk function to sup-
port end users. They may take calls or receive emails and manage trouble tickets. This is very similar
to the service-desk function of a managed services provider. Typically (but not always), an MSP ser-
vice desk interfaces with the help desk of their customer’s IT organization. This is, effectively, a triage
methodology to prevent the MSP from being inundated and overwhelmed with trivial issues that can
be managed directly by the IT organization.
The core functional responsibilities of the service desk include:
Logging incidents and requests.
Level 1 issue identification and resolution.
Managing and escalating incidents and problems (also known as trouble tickets).
Informing clients of the status of incidents, problems, and change requests.
Technical Management (also known as Service Delivery Management)
A technical manager or service delivery manager aids in the planning, implementation, and ongoing
support of a stable operating environment. Essentially, they are a trusted advisor to the customer at
the technical level. They are often the first point of contact in major issues or problems and are fre-
quently viewed as an extension of the customer’s IT staff.
The core functional responsibilities of the technical management team include:
Core understanding of the client’s technical and operational environment.
Core understanding of the contractual obligation of the managed services provider.
Assistance in the design of the managed services contract from an operational perspective.
Assistance with the day-to-day operational execution of the managed services agreement.
Point of escalation and governance of service operation provided by the MSP.
Assistance with third-party vendor management required for successful execution of the
managed services agreement.
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At the end of the day, the technical manager is usually the “face” of the service. Weak or even per-
ceived weakness in technical management can cause the demise of a managed services contract.
They are often the “one throat to choke” in the customer’s mind. Customers need to feel that the tech-
nical manager has a strong handle on what is critical, what isn’t and, ultimately, what customers need
in order to feel they are getting what they are paying for.
Application and Operations Management
NOTE: Some ITIL reference documents have these identified as two discrete functions. However, it is
rare (almost nonexistent) that today’s applications and infrastructure can be operated in isolation. One
of the ways companies are doing this is via the identification of key stakeholders, critical success fac-
tors (CSFs), and key performance indicators (KPIs) that are in combination so that collaboration may
be fostered. Because most companies combine application and operations management, they are ad-
dressed in a single section for the purpose of this document.
Application and operations managers are the people actually performing the day-to-day operation of
the customer’s environment. They can be local resources, in a remote network operation center
(NOC), or a combination of both. The expectation is that they are highly skilled in the solutions being
supported. They likely use a combination of service automation and service management tools and/or
platforms to provide the ongoing support and maintenance of a customer’s solution set. They are also
sometimes known as Level 2/Level 3 engineers (or Tier 2/Tier 3 engineers).
The core functional responsibilities of the application and operations management team include:
Operational onboarding of the client into the MSP’s network operations center.
Operation and upkeep of the solution under contract.
Monitoring of events (critical and noncritical).
Resolution of incidents and/or problems.
Implementation of any change requests.
SLA management.
Event Management
Event management goes one step beyond monitoring and notification. It involves cataloging when
things “happen” when monitoring a network, application, or device. The event may be benign, such as
a user login event, a transactional event, activation of a device or application, or even the completion
of a health check. It could also be the capturing of an outage of a device or segment of the network.
Events can also be correlated with outages that may not appear to be related. Advanced correlation
can often identify trends that could lead to outages or failures, thereby reinforcing the “proactive and
predictive” nature of the managed service.
©2017 Technology Services Industry Association | 17065 Camino San Bernardo, Ste. 200 | San Diego, CA 92127 | Tel. 1.858.674.5491
Incident Management
Incidents typically are bad things that happen. Managing incidents in a timely and, ideally, automated
fashion is a critical element of managed services. Incident management involves ensuring that every-
thing under the managed services contract is performing as intended. Should an issue (or “incident”)
arise, the goal of incident management is to restore service as quickly as possible. Incidents can be
detected either by proactive monitoring or when issues are reported into the help/service desk. Many
standard maintenance and support service offerings deal with incident management as well, since the
primary objective is to restore service as quickly as possible.
Problem Management
Problems are repeating, or chronic, incidents. On occasion, the cause of incidents or outages may not
be easy to identify. This is where the managed services delivery team performs a root-cause analysis.
Problem management not only includes the rectification of the issue, it also includes the documenta-
tion of the steps taken to resolve the issue for the inclusion in a knowledge management system. It
may also include the documentation of any workarounds and change requests.
There are seven key steps to providing best-in-class problem management:
1. Problem Detection
2. Problem Logging
3. Categorization
4. Prioritization
5. Investigation/Root-Cause Analysis
6. Solution Implementation (and Solution Documentation).
7. Closure
Change Management
One of the biggest contributing factors to failed managed services contracts is a change management
process that is not thoroughly adhered to. One thing for certain is that customers will need to make
changes to their environment, their applications, their infrastructure, their business priorities, their tech-
nical road map, and more. Simply put, an inability to aptly govern these requests can turn a highly
profitable managed services engagement into an unprofitable contract. Change management ensures
there is a documented process to implement, notify, and, if appropriate, charge the client. All changes
must be documented and captured with a configuration management database (CMDB). In the world
of IT, change management may also be known as MACD (moves, adds, changes, deletes). Even
changes perceived to be simple or benign could wreak havoc on today’s software-centric, network-
intensive environments. When something goes wrong, and it will on occasion, lack of documented
changes can mean the difference between a small impact to operations and a catastrophic outage.
Here’s a real-world example: A customer’s engineer in a major national Internet service provider inno-
cently upgraded a firmware release of a router. That router had not been tested with the customer’s
©2017 Technology Services Industry Association | 17065 Camino San Bernardo, Ste. 200 | San Diego, CA 92127 | Tel. 1.858.674.5491
contact center application. Coincidently, that firmware release impacted the DHCP registration process
with the contact center agents’ phones. As a result, all agent phones lost connectivity to the network.
Calls coming in to the contact center had no phones available. Of course this happened during a peak
seasonal period, so the massive amount of calls with nowhere to go crushed the capacity thresholds
of the contact center application and the whole thing came to a screeching halt. The end result was
estimated at a $32 million negative impact to customer operations. Ouch!
Though service in this scenario was resolved in less than 30 minutes, you can see the simple change
had a massively negative affect. The lack of notification and process management of this simple
change turned something bad into something terrible.
Optimize Services
Operate services ensure the technology is up and running. Optimize services are designed to make
sure the technology is being consumed in a way that maximizes the return on investment. This is an
area of technology management that is most frequently neglected by the customer’s IT organization.
Because of the rapid introduction of new technologies into the IT domain and the criticality of the
cross-application and infrastructure dependency of so many of today’s technologies, these environ-
ments are in a state of constant change and evolution. To maximize return on investment, customers
should be taking advantage of feature and performance improvements that are relevant to their envi-
Release Management
Release management is closely related to change management. The same processes captured in
change management must govern the modification of a software, hardware, or firmware release. The
managed services provider must identify if a new release is appropriate: Has the customer identified a
key business requirement for implementing the new release? Has the new release been tested within
the current client environment? Is the upgrade planned for a time that will cause as little disruption as
possible? Are all affected parties engaged and do they understand the rollout plan? If things go wrong
with the upgrade, is there a back-out plan to quickly restore service using the prior release? Is there a
root-cause analysis plan in place should the upgrade not go well? Is there a post-implementation re-
view plan?
The key process elements of release management are:
Change management governance.
Identification of requirement for release change.
Defined rollout plan.
Back-out plan including remediation and root-cause analysis.
Notification of plan to all effected parties.
Post-release change review.
©2017 Technology Services Industry Association | 17065 Camino San Bernardo, Ste. 200 | San Diego, CA 92127 | Tel. 1.858.674.5491
Capacity Management
Although capacity management has been included under the optimize services category, proper ca-
pacity management begins during the service design stage and encompasses more than just the tech-
nology under management. Not only does an IT organization have to understand at what capacity lev-
els their systems operate (e.g., server capacity, license management, etc.), they also need to
understand their engineer capacity levels, their local resource capacities, their help-desk resource ca-
pacities, and more. The same planning is required of the managed services provider when aligning
their resources with the customer requirements. This must be a careful balance of both the customer’s
business requirements and technical requirements.
Historically, capacity management was typically reactive in nature. For example, if a customer is
reaching 80% capacity of their messaging platform, additional licenses must be implemented and ad-
ditional servers need to be fired up. This may put additional strain on the network infrastructure, so
more switched Ethernet ports may be needed, and so on. However, in today’s living, breathing, and
constantly evolving network and application environments, business drivers must be constantly evalu-
ated and their impact on capacity must be considered.
This requires a capacity management plan that will be part of the CMDB record of the customer under
Key capacity management activities include:
Defining an overall capacity management process and plan for the client.
Managing demand for application and infrastructure resources.
Constant monitoring, assessing, and fine-tuning of human resource utilization.
Cataloguing capacity management info in the CMDB.
Identifying client-by-client growth plans on an annual basis.
Modeling a simulated implementation of the customer deployment plan.
Initial and ongoing stress testing of the implementation and modification of the above steps, as
Availability Management
To state it simply, availability management is service-level objective and agreement management.
When taking over part (or all) of a customer’s operations environment, the managed services provider
and the customer must agree to certain performance levels often backed by penalties and/or financial
remediation. The customer must have some level of confidence that the managed services provider
can meet or exceed their expectations.
The objectives are often outlined in the terms and conditions of the contract. They typically include
things such as application uptime, time to resolve issues, hardware availability, etc. Once objectives
©2017 Technology Services Industry Association | 17065 Camino San Bernardo, Ste. 200 | San Diego, CA 92127 | Tel. 1.858.674.5491
are outlined, the design of a high-availability environmentincluding server and application redun-
dancy, elimination of single point of failures in the network environment, additional engineering staff at
key locations or at key times, high security DMZ implementationsmay be required.
Key activities under availability management are:
Review of and cataloging of business and technical requirements.
Real-time service performance monitoring of system, application, and operations environment.
Real-time and historical reporting of performance aligned with documented SLOs and SLAs.
Identification of service degradation or service interruption causes.
Prevention of service disruption.
Service Continuity Management
Service continuity management is tied tightly to business continuity management. Let’s face it, some-
times bad things happen. Really bad things. Just to conjure up some scenarios: An explosion in the
lab of a pharmaceutical company can cause massive network disruption impacting corporate-wide
communications. A DOS (denial of service) attack on a specific IP address within a network can clog
all network-based communication in and out of a company. An earthquake in a city where a company
operates their contact center can cause millions of dollars in lost customer opportunity and significantly
impact customer satisfaction. A managed services provider operating these solutions on behalf of a
customer will be expected to remediate outages as quickly as possible by any means necessary.
All that being said, managed services providers typically can’t resolve these and many other types of
issues by themselves. Service continuity management requires alignment with a company’s business
continuity plan (a.k.a. disaster recovery plan) and the availability management plan.
Key activities under service continuity management are:
Assessment, categorization, and documentation of risks.
Identification of risk mitigation plan including costs to mitigate risks.
Modeling of continuity plans.
Translation of risk mitigation plan into infrastructure and application requirements.
Prioritization of application and infrastructure recovery.
Continued review and refinement of mitigation plan.
Managed XaaS
This, like managed services, has many different names and many different meanings to different peo-
ple. Some refer to it as managed SaaS, PaaS, IaaS, private cloud, or just plain cloud services.
©2017 Technology Services Industry Association | 17065 Camino San Bernardo, Ste. 200 | San Diego, CA 92127 | Tel. 1.858.674.5491
Here is the TSIA definition of managed XaaS:
A solution comprised of product (hardware and/or software), professional services,
support, and operations elements bundled into a single per unit per month price gov-
erned by a managed services agreement.
Services are delivered from a remote network operations center. Delivery resources
are typically shared across multiple clients. Product elements may be hosted and/or
on premises. Product may be single tenant or multi-tenant.
There are several key characteristics of managed XaaS:
The technology under management is owned and operated by the managed services provider.
The technology under management may, or may not, reside on the customer’s premises.
o The technology may be hosted from the managed services provider’s operation
o The technology may be hosted from a collocation facilitytypically a Tier 3 or Tier 4
co-location facility due to the following types of requirements:
§ Network resiliency and redundancy.
§ Power conditioning and redundancy.
§ Fortified building infrastructure.
§ On-net access to ISPs and communications carriers.
§ High-security facilities and highly secure network environments.
o The solution may leverage cloud infrastructure such as AWS or Microsoft Azure.
o The solution may be a hybrid of customer premises and cloud/hosted infrastructure
and applications
Although many SaaS, PaaS, IaaS, and XaaS solutions are managed by the provider, some are not.
Therefore, it is important to call out this distinction. There are many applications, often multi-tenanted
solutions, where the end user must still manage the application. They need to implement features,
make user changes, configure third-party application integration, and so forth. Therefore, these solu-
tions are not considered “managed” services offerings.
A managed XaaS solution typically includes all monitor and notify, and operate and optimize service
elements. Since the managed services provider is offering the technology through a service consump-
tion model, it greatly benefits the managed services provider to keep the software releases up to date;
to keep capacity management of technology and operations in line; to monitor the applications, infra-
structure, and network; and to provide a highly secure, resilient, and optimized operations environ-
The managed XaaS offering, in many cases, is the most attractive solution to modern customers, as it
removes major risk (both technical and financial) from the consumer and transfers the majority of the
©2017 Technology Services Industry Association | 17065 Camino San Bernardo, Ste. 200 | San Diego, CA 92127 | Tel. 1.858.674.5491
risk to the managed services provider. It allows the customer to pay for what they’re using while rely-
ing on the managed services provider to ensure it is always in optimal condition. These models are
traditionally full OpEx solutions so the customer simply pays for the solution “by the drink” (per li-
censed user per month, per agent per month, etc.). Managed XaaS solutions are also commonly used
in managed transformation scenarios. The existing technology may be in the customer’s data center
and the new solution may be in the cloud- or a hybrid of both. The managed services provider then
typically manages the migration of the customer to the new solution over a period of time that makes
the most sense for the customer’s needs.
Infrastructure and Operations Transformation Services
Today’s technology market growth is a challenge for many companies. Since 2011, most technology
providers have experienced significant erosion in both hardware and software revenues. The TSIA
Technology & Services 50 (T&S 50) study has illustrated this year over year. For example, product
revenues for the T&S 50 in 2011 were $572 billion. In 2016, the T&S 50 companies only generated
$349 billion. Conversely, and for these same companies, services have been growing. Figure 2 shows
how every year since has played out since 2011.
Figure 2: T&S 50 Product versus Services Revenue 2011 through 2016
So how does a company stem the erosion of overall hardware and software revenues? How do they
push new technology sales when people aren’t buying tech? The answer is quite simple: Understand
customers’ reasons for not buying and remove those obstacles. It’s not that customers wouldn’t like to
implement new technology. It’s often that they have too many challenges—for example, restricted
CapEx budgets, no training budget, engineers on new technologies, no budget for next-generation IT
management tools to keep up with the accelerated evolution of technical complexity, aversion to the
risk of implementing new technology, or fear of drawn-out realization of return on investment on new
technologies. And the list can go on and on.
©2017 Technology Services Industry Association | 17065 Camino San Bernardo, Ste. 200 | San Diego, CA 92127 | Tel. 1.858.674.5491
Many managed services providers have found that offering technology through a managed services
model removes most, and in some cases all, of these barriers. A managed services provider can take
over the operation of existing technology while migrating to the next-generation solution at a pace that
makes the most sense for the customer. The customer transfers most of the risks associated with im-
plementing new technologies to the managed services provider through a consumption model.
A managed transformation model for most technology companies can offer the truest form of a solu-
tion for their customers. What we mean by “solution” is that it incorporates more than just a product or
service offering into a single packaged offering which, in many cases, can be custom-tailored to a spe-
cific client’s needs. This is where managed services starts to consume a company’s entire portfolio.
Typical elements of a managed transformation include (but are not limited to):
Consultation services:
o Understanding the customer’s business requirements, technology desires,
engineering capabilities, management tools, financial requirements, and long-term
strategic corporate goals.
Design services:
o Taking all consultation elements into consideration, the managed services provider
designs the right technical solution backed by the right service level agreements, the
proper continuity plans, and appropriate configuration and capacity plans.
Implementation services:
o Installation of the new technical solution.
o Integration of the new solution into the existing environment.
o Program management of the end-to-end deployment.
o Onboarding of the entire solution into the managed services provider’s network
management system (NMS) or managed services platform.
Operate and optimize services:
o Full operation of the end-to-end environment.
o Governance of the entire solution and third-party vendor management, if necessary.
Transition users from old technology to new solution:
o Supported by a plan that minimizes impact and reduces risk.
A managed transformation may or may not be a full OpEx model where the managed services
provider owns the new technology.
Managed XaaS.
Managed services have a long history as a member of the technology services segment of the tech-
nology market. Some cite the birth of managed services as far back as the early to mid-1980s. Since
then there have been dozens of names and definitions for managed services: remote infrastructure
services, remote operations, outsourcing, hosted, the cloud, and so on. One thing is clear, the demand
©2017 Technology Services Industry Association | 17065 Camino San Bernardo, Ste. 200 | San Diego, CA 92127 | Tel. 1.858.674.5491
in the market for these types of services continues to increase with most of the companies surveyed in
a recent study citing managed services as their fastest growing line of business, outpacing hardware,
software, professional services, support services, and even cloud solutions.
As many companies are seeking to stake their claim in the success of this growth segment, they are
also seeking to better understand these serviceswhat they are, what their value is to their clients,
and how they can give their P&L a boost by offering them. “Defining Managed Services” is the first
step in helping to bring clarity to technology services companies.
Lah, Thomas. July 2012. “Framing Managed Services.” TSIA.
© Technology Services Industry Association | 17065 Camino San Bernardo, Ste. 200 | San Diego, CA 92127 |
©2018 Technology Services Industry Association | 17065 Camino San Bernardo, Ste. 200 | San Diego, CA 92127 | Tel. 1.858.674.5491
George Humphrey, Vice President Research, Managed Services
Jeff Connolly, Senior Director Research, Managed Services
The State of
Managed Services
Research Publication
©2018 Technology Services Industry Association | 17065 Camino San Bernardo, Ste. 200 | San Diego, CA 92127 | Tel. 1.858.674.5491
The State of Managed
Services 2018
By George Humphrey and Jeff Connolly
Executive Overview
In our annual “State of” papers, we identify major trends in each service discipline, analyzing the evo-
lution of key metrics and the development of key service capabilities. As we look at the end of 2017
and the beginning of 2018, one thing is abundantly clear: managed services continues to be one of the
fastest growing segments of the entire technology industry. More and more manufacturers are ex-
panding their service offers to include managed services. Many are beginning to understand the im-
portance of the intersection of managed services, technology as a service, and the cloud. In fact, for
many TSIA Managed Services members, managed services are a natural extension of their cloud so-
lutions, and vice versa.
Market Performance
First, let’s look at some of the key financial metrics for managed services, shown in Figure 1. The av-
erage net-new revenue growth rate for managed services remains at a healthy 27%, versus the Tech-
nology and Services 50 (T&S 50) overall growth rate (all products and services) of 1% and the Cloud
40 growth rate of 20%! Not only that, but also when we look at the bottom-line operating income for
these three industry segments, managed services outperforms both the Technology and Services 50
and the Cloud 40. Another way of interpreting these results is that managed services is a key engine
for driving profitable growth in the entire technology industry.
Executive Insight
January 23, 2018
MANAGED SERVICES | Research Publication
©2017 Technology Services Industry Association | 17065 Camino San Bernardo, Ste. 200 | San Diego, CA 92127 | Tel. 1.858.674.5491
Figure 1: Key Financial Metrics for Managed Services
When looking at growth rates for managed services, it is important to look at all aspects of revenue
growth. In a product-centric financial model, you’re primarily concerned with growing new product
revenues. “Aftermarket” product revenues are key as well. As more companies warm up to the “as a
service” model, many are realizing that it’s not just about winning a customer sale; it’s about keeping
that revenue and growing it as much as posible. To seasoned managed services executives, this is
nothing new. This is why TSIA recommends looking at, at a minimum, the four growth rate metrics
seen in Table 1.
Table 1: Managed Services Growth Rate Metrics
How to Calculate
Top-Line (Net-New)
Recurring Revenue
Growth Rate
This metric looks only at net-new revenue. How to calculate: Most current
full-year new revenue minus previous year new revenue. Divide the
difference by the previous year’s net-new revenue. Convert to percentage.
Total Recurring
Revenue Growth
This metric looks at all recurring MS revenue, including net-new, base
revenue and base revenue growth. This revenue includes all base revenue
and new revenue from both new and existing clients. How to calculate:
Total current year’s recurring MS revenue minus previous year’s total
recurring MS revenue. Divide the difference by the previous year’s total
recurring MS revenue. Convert to percentage
Total Bookings
Revenue Growth
(a.k.a. Total Contract
Value Growth)
This metric looks at the value of all contracts, including recognized
revenue and revenue still to be recognized over the duration of the
contracts. How to calculate: Total value of existing contracts minus the
total value of previous year’s contracts. Divide the difference by the
previous year’s total contract value. Convert to percentage
Total Base Revenue
This metric looks at the growth of base customers only. How to calculate:
Most current full-year revenue from existing customers (excluding revenue
from new customers) minus previous year’s base revenue. Divide the
difference by the previous year’s base revenue. Convert to percentage.
©2018 Technology Services Industry Association | 17065 Camino San Bernardo, Ste. 200 | San Diego, CA 92127 | Tel. 1.858.674.5491
Figure 2 indicates the current actual median performance of TSIA benchmarked managed services
providers, as of the time of the publishing of this paper.
Figure 2: Managed Services Growth Rates
Net-new revenue growth is a key indicator for how your sales team is performing. This metric only
looks at new, recurring managed services revenue that is generated within the year. It does not in-
clude one-time transactional revenues such as professional services, on-boarding fees, one-time
move/add/change activities, etc. While it is important to track the revenue for those transactional activi-
ties, they can cause a misinterpretation of the current year’s revenue generation. For example, a mas-
sive, one-time project can artificially inflate the view a senior executive may have on setting next year’s
annual revenue targets for the business. Project-based revenues should always be a separate reve-
nue line item in a P&L.
Total Recurring MS Revenue Growth
Total recurring MS revenue is a combination of net-new recurring revenue and recurring base revenue
growth, minus any erosion. This metric shows the overall recurring revenue contribution to the busi-
Total MS Bookings Growth
Bookings growth focuses on the total contract value of recurring revenues. This includes revenue not
yet recognized. This metric is especially important for OEMs with a managed services business. Too
often, they only look at recognized revenue. Because bookings include contracted recurring revenue,
they represent the future value that the MS organization is bringing to the overall corporate valuation.
Base Revenue Growth Rate
Last, but not least, is the base revenue growth rate. One of the primary benefits of a managed ser-
vices business is that it is “the gift that keeps on giving.” Not only are you generating net-new recurring
©2017 Technology Services Industry Association | 17065 Camino San Bernardo, Ste. 200 | San Diego, CA 92127 | Tel. 1.858.674.5491
revenue, but you should also have a customer success team generating new growth from your exist-
ing base customers. This creates a compounding growth effect for the business that few other product
or service lines can.
To recap, net-new shows how your current sales team is performing, base revenue growth shows how
your customer success teams are performing, total MS recurring revenue shows overall current health
of the business, and bookings is the best future health predictor for the business. Measuring all four
during a monthly business review (MBR) is absolutely critical. Demonstrating the performance of
these metrics at a senior leadership quarterly business review is equally important.
The Managed Services Offer
In 2017, we relaunched the “Defining Managed Services” whitepaper in a 2017 edition with an extra
focus on “managed XaaS. Make no mistake, the industry shift toward technology as a service is the
single most disruptive force since the inception of information technology. In managed services, we’ve
seen a steady rise in the amount of managed services revenue generated from managed XaaS.
The following is TSIA’s definition of managed XaaS:
A solution comprised of product (hardware and/or software), professional services,
support, and operations elements bundled into a single per-unit-per-month price gov-
erned by a managed services agreement.
Services are delivered from a remote network operations center. Delivery resources
are typically shared across multiple clients. Product elements may be hosted and/or
on premises. Product may be single tenant or multi-tenant.
We’ve seen a steady increase in managed XaaS revenues since TSIA began managed services
benchmarking in 2013. In fact, in the past year alone, managed XaaS revenue has grown from 26% of
managed services revenue to 29% (Figure 3).
Figure 3: Managed XaaS Revenue Growth
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TSIA’s assertion is that the growth in managed XaaS is being driven by the customer’s desire to shift
toward an outsourced consumption model. Basically, this means the customer wants to subscribe to
the technology and have their supplier be responsible for the operation and upkeep of that technology.
It’s no surprise that software companies are embracing the evolution toward managed XaaS more so
than other companies, as software companies have been leading the change to subscription models
and, subsequently, to cloud delivery of their applications. For software companies with a managed ser-
vices practice, 41% of their revenue is coming from managed XaaS. Hardware companies have the
second highest percentage of revenue coming from managed XaaS, at 24%. Surprisingly, the non-
manufacturers are lagging, with only 21% of their managed services revenue coming from managed
XaaS. Non-manufacturers, a.k.a. non-OEMs, include service providers, system integrators, IT out-
sourcers, and value-added resellers (Figure 4).
Figure 4: Percentage of MS Revenue from Managed XaaS
Major Trends in Managed Services
Trend #1 Standardization of Managed Services
In last year’s state of the industry presentation, we discussed the trend toward standard managed ser-
vices and standard service catalogs. This trend continues into 2018, with 68% of managed services
providers offering standard managed services. That’s almost twice as many as just two years ago, as
seen in Figure 5.
©2017 Technology Services Industry Association | 17065 Camino San Bernardo, Ste. 200 | San Diego, CA 92127 | Tel. 1.858.674.5491
Figure 5: MSPs Offering Standard Managed Service Offerings
There are many TSIA OPIs (observed performance improvements) that show this is absolutely the
right thing to do for the business. Figure 6 illustrates several.
Figure 6: Managed Services Observed Performance Improvements
Trend #2 Establishing a Customer Success Function for Managed Services
One of our foundational assertions about managed services is that this business is different from every
other product and service line in a company’s portfolio of solutions. The customer isn’t just buying
technology, they’re buying the operation of technology. They’re not just buying a solution, they’re buy-
ing “peace of mind.” The customer needs to trust in the managed service provider’s abilities. They
need to know that their MSP understands their business—not just their tech. General account/sales
©2018 Technology Services Industry Association | 17065 Camino San Bernardo, Ste. 200 | San Diego, CA 92127 | Tel. 1.858.674.5491
reps are great at selling technology, and pretty good at selling solutions. They’re not very good at un-
derstanding the customer’s day-to-day issues, their long-term strategic objectives, or their financial
challenges. A managed services customer success manager understands not just the underlying tech-
nology being operated, but all the other items mentioned above, as well. They’re the strategic, trusted
advisor to the customer. They not only run the renewal play, but they also identify upsell and cross-sell
opportunities. In many cases, the customer success team is the face of the service to the customer.
As a result, we’re seeing more and more companies invest in dedicated customer success roles for
managed services. This number rose from 42% in 2015 to 59% in 2017, as shown in Figure 7.
Figure 7: MSPs with a Dedicated MS Customer Success Function
With so much focus on customer success, TSIA has identified, through observed performance im-
provements (OPIs), that having a dedicated customer success function for managed services not only
ensures higher contract renewal rates, but it also positively impacts recurring revenue retention, as
seen in Figure 8.
Figure 8: Impact of a Dedicated Customer Success Function
©2017 Technology Services Industry Association | 17065 Camino San Bernardo, Ste. 200 | San Diego, CA 92127 | Tel. 1.858.674.5491
Trend #3 Evolving and Scaling MS Delivery
One of the most common topics of inquiry to TSIA’s Managed Services practice is “getting delivery
right.” The delivery organization is the head of the managed services organization. It is the product.
The organizational capabilities in delivery will either make or break the business. Lacking standard,
scalable, and repeatable processes will tank profitability and scalability. If delivery is the heart of the
MS organization, then the delivery platform (tools and technologies used to deliver the service) is the
heart of delivery. That being the case, we’ve identified several key practices in managed services de-
livery that have evolved quite a bit over the last few years.
If you wind the clock back a bit, prior to 2010, most managed services were custom in nature and de-
livered through on-site, staff-augmentation models. Believe it or not, there are many companies still
employing the on-site model for a significant portion of their MS revenue. However, we’re seeing a
steady increase in the amount of remote management of customers’ technologies. In 2017, the
amount of service operations performed remote, as opposed to on site, has risen to 83% (Figure 9).
Figure 9: Managed Services Remote Delivery
TSIA has also observed an intense focus on the time it takes to onboard a client. The reason this met-
ric is important to track is that the time of service activation typically represents the commencement of
billing for the managed service. Longer onboarding times directly delay revenue recognition. Not only
that, but most customers solidify their perception of their managed service provider’s performance in
the first 90 days post-contract signature. Onboarding delays and complications can cause negative
first impressions that can be difficult to overcome.
Another major trend is the continued evolution of the managed services platform (tools and technolo-
gies used to deliver the managed services offer). Historically, many managed service providers felt the
need to develop their own service management tools, feeling that commercial off-the-shelf tools didn’t
provide the capabilities they required. That is rapidly changing as proactive monitoring, automated
event correlation, and intelligent remediation through machine learning gains momentum. The number
©2018 Technology Services Industry Association | 17065 Camino San Bernardo, Ste. 200 | San Diego, CA 92127 | Tel. 1.858.674.5491
of managed service providers using commercial off-the-shelf tools has increased 17% from 2015,
seen in Figure 10.
Figure 10: MS Providers Using Off-the-Shelf Tools
Evolving in a similar fashion is the move toward a dedicated service management platform. Compa-
nies with multiple service lines (professional, support, managed, etc.) often use many of the same
tools (CRM, ticketing, etc.) for those different service lines. Today’s managed service providers are
learning that delivering managed services is a different practice altogether, requiring a much more so-
phisticated and broader set of proactive, predictive, and preventive technologies. By the second half of
2017, 89% of managed service providers had deployed a platform and set of tools dedicated the man-
aged services business (Figure 11).
Figure 11: MSPs Use of a Dedicated Managed Services Platform
With the rapid growth of managed services, many companies are asking themselves questions about
the most optimal way to organize their service delivery resources. Should they build a dedicated deliv-
ery organization, or should they leverage a shared delivery organization that delivers all service lines
©2017 Technology Services Industry Association | 17065 Camino San Bernardo, Ste. 200 | San Diego, CA 92127 | Tel. 1.858.674.5491
(professional, support, managed, etc.)? Today, 54% of companies offering managed services have
opted to invest in a standalone, dedicated managed services delivery organization. TSIA has identified
that this is clearly a key practice in driving bottom-line profitability for the business. Another TSIA OPI
illustrates the benefit of this practice (Figure 12).
Figure 12: Managed Services Operating Income
TSIA 2018 Top Challenges for MSPs
To assist our members with embracing the trends and tackling the challenges ahead in managed ser-
vices, TSIA conducts topical research studies and webinars, and publishes papers based on the top
business challenges identified by the membership community. TSIA identifies these challenges
through a collection of member questionnaires and from the analysis of research inquiries submitted
throughout the year.
Heading into 2018, the following list contains the top 10 challenges facing MSPs as ranked by fre-
quency of occurrence:
1. Identifying and tracking key managed services metrics.
2. Creating an executable and measurable MS strategy that aligns with product strategy.
3. Identifying the most market-relevant MS offers.
4. Building the optimal organization structure for MS.
5. Identifying the key operational processes required to successfully scale the business.
6. Understanding the most common practices for pricing managed services.
7. Identifying technologies companies are using to deliver managed services.
8. Understanding how managed services relates to cloud services.
9. Investing in and establishing the right sales skills and organization model to sell MS.
10. Creating the right customer success model for managed services.
©2018 Technology Services Industry Association | 17065 Camino San Bernardo, Ste. 200 | San Diego, CA 92127 | Tel. 1.858.674.5491
Understanding these challenges allows TSIA to create data-driven research materials that are tar-
geted specifically at helping our members tackle those issues. Based on the top challenges listed
above, TSIA is planning to publish the research documents in 2018 listed in Table 2.
Table 2: TSIA Managed Services Research Papers
Report Title
Publication Date
(Managed) Lip
Service: How to
Recognize It and What
to Do About It
Highlighting the sources of tensions for managed
services providers within original equipment
manufacturers (OEMs), this report expands from a
previous TSIA blog with the same title and offers
additional data-driven insights on how OEM MS
providers can help lead their business.
February 2018
Managed Services in
Non-OEM Services
Organizations: What
the Data Tells Us
Data views from the MS Benchmark showing key
metrics, practices, and correlations from managed
services businesses within non-OEM services
March 2018
Optimizing Managed
Services Delivery:
What the Data Tells Us
Data views and OPIs for managed services
delivery from the MS Benchmark showing key
metrics, practices, and correlations from managed
services businesses.
April 2018
Blending Services and
Sales Motions for
Managed Services
Incorporating the theme for the May 2018 TSW
conference in San Diego, this Service Insight will
detail how sales and support can work together
within a LAER model to help transform managed
services growth.
May 2018
The State of Managed
Services for Non-
OEMs: 2018
The first of what will be an annual report for our
non-OEM services MS members, documenting
major trends/disruptions in managed services over
the past year.
June 2018
Optimizing Managed
Services Offer
Development: What
the Data Tells Us
Data views for managed services offer
development from the MS Benchmark showing
key metrics, practices, and correlations from
managed services businesses.
July 2018
SLAs, SLOs, and KPIs:
How to Leverage
Metrics for Managed
In this Service Insight, we identify managed
services metrics from across the organization, and
discuss how to classify, prioritize, and
communicate internally and to your customers.
August 2018
©2017 Technology Services Industry Association | 17065 Camino San Bernardo, Ste. 200 | San Diego, CA 92127 | Tel. 1.858.674.5491
Report Title
Publication Date
2018 TSIA Managed
Compensation Study
This report focuses on the results of the 2018
Managed Services Sales Compensation Study.
The document summarizes all key findings from
the survey and illustrates correlation to impacts on
KPIs and core business results.
Managed Services and
the Cloud: What’s the
Managed and cloud services are the two fastest
growing areas in technology today. Often,
customers, and even providers, confuse one for
the other. This paper will discuss the lines of
demarcation between the two and how to leverage
both for optimal growth.
September 2018
Optimizing Managed
Services Sales: What
the Data Tells Us
Data views and OPIs (observed performance
improvements) for managed services sales from
the MS Benchmark showing key metrics,
practices, and correlations from managed services
October 2018
How to Structure Your
Managed Services
One of the top challenges facing today’s managed
services providers is the shape and structure of
their managed services organization. Whether
you’re starting or currently operating an MS
business, we provide guidance on ideal MS
organization structure and the functions of each of
the key roles.
November 2018
Managed Services in
Organizations: What
the Data Tells Us
Data views from the MS Benchmark showing key
metrics, practices, and correlations for managed
services businesses within hardware
manufacturing organizations.
December 2018
©2018 Technology Services Industry Association | 17065 Camino San Bernardo, Ste. 200 | San Diego, CA 92127 | Tel. 1.858.674.5491
We saw major growth for managed services in 2017, and 2018 looks to continue to build on the previ-
ous year’s momentum. Most managed service providers are preparing for growth by building standard-
ized, specialized critical functions in offers, sales, delivery, and client management that result in higher
revenue growth, increased operating income, and higher renewal rates.
The top trends in 2018 for managed services will be:
Continued growth in managed XaaS (as well as remote managed services).
Build-out of the priority one managed services service capabilities.
Standardization and scalability of the managed services offer and delivery model.
As more manufacturers continue to pivot toward managed services, especially managed XaaS, many
will be faced with challenges related to channel conflict. MSPs will need to fine-tune their channel
model to align with the corporation’s overall go-to-market strategy.
The top challenges for MSPs will be to measure and continually improve critical KPIs, drive service
automation through tools and technologies, and to work through the complexities of portfolio confu-
TSIA will continue to support members with crucial data and research materials required to success-
fully navigate these challenges.
© Technology Services Industry Association | 17065 Camino San Bernardo, Ste. 200 | San Diego, CA 92127 |
Chapter 9
The Case for Managed Services
Before You Begin
Dear Reader,
The cloud is radically reshaping how technology gets sold and consumed.
Perhaps more importantly, it is shaking up the tech business model.
For all of its many virtues, the cloud business model has yet to emerge as a
reliably protable one. Even pure-play SaaS companies that have been in the
game for a decade or more have yet to consistently deliver GAAP prots. That
slows traditional tech companies from pivoting their business and opens the
door for them to be disrupted by new entrants.
At TSIA, we believe that subscription-based business models like SaaS and
managed services can be very protable. And we think a blueprint for how
to build a sustainably protable technology-as-as-service (XaaS) business
is emerging. And so we have written a new book, Technology-as-a-Service
Playbook: How to Grow a Protable Subscription Business.
This is a chapter from the new book that we think you will nd of interest and
relevance to your company. We know we are treading on some controversial
ground but believe that our industry must move more quickly to marry the
many benets of the cloud to a protable business model. This book oers a
framework and specic plays for how to do that.
We inv it e yo u r c om m en ts a nd re qu e st t h at t h ey b e di r e ct ed t o:
Thank you for taking the time to review this material. We eagerly await your
Best regards,
Thomas Lah, Co-Author
Executive Director, TSIA
J.B. Wood, Co-Author
President & CEO, TSIA
Table of Contents
The Big Picture – helpful reading for everyone
Chapter 1: Disruption Happens
Chapter 2: The 3 X 3 of XaaS
Chapter 3: Digging Economic Moats For Your XaaS Business
Chapter 4: Stressing Traditional Organizational Structures
Chapter 5: Swallowing the Fish
The Tactics – read what you care about
Chapter 6: The Power of XaaS Portfolios
Chapter 7: XaaS Customer Engagement Models
Chapter 8: The Financial Keys of XaaS
Chapter 9: The Case for Managed Services
Chapter 10: Changes in the Channel
The Case for
Managed Services
This book is about conducting successful XaaS oers. For com-
panies that have been selling technology as an asset, the pivot to
selling technology as a service can be overwhelming. The many
things to consider and worry about can make this seem like a
bridge too far. But a rst step that traditional technology com-
panies can take on this journey to help them ease into the XaaS
marketplace is to stand up a managed services capability.
In this chapter, we’ll explore the special case of managed ser-
vices (MS) as entrée into XaaS. For the past several years, we have
been aggressively studying and benchmarking how enterprise tech
companies of all sorts are incubating and growing MS businesses.
So, let’s discuss the pros and woes of how, why, and when to build
your MS oer. Specically, we will cover the following ground:
The explosion of managed service revenues.
Trends dr iving managed ser vices.
The many avors of managed services.
Why product companies fear managed services.
Why companies should embrace managed service opportunities.
Success tactics when incubating managed service capabilities.
The Case for Managed Services 287
By the end of this chapter, management teams should clearly un-
derstand why managed services is the fastest growing service line
in the technology industry and why this opportunity shouldn’t be
The Explosion of Managed Services
We benchmark the overall revenue mix of technology companies
at a level of detail not available in the standard 10-K. One of our
objectives with this data is to clearly understand how the eco-
nomic engines of technology companies are changing over time.
MS revenues have been present in the industry for years. In 2013,
our data showed that 23% of the companies we benchmarked had
some type of MS revenue stream. By the end of 2015, 46% of
companies were reporting an MS revenue stream. That is a dou-
bling of MS oers in just two years.
Not only are more companies jumping into MS, but MS is
also starting to become meaningful revenue. The average revenue
mix for companies that benchmark their managed services busi-
ness with TSIA indicates that MS has blossomed to 12% of total
company revenues, as seen in Figure 9.1.
More importantly, the average annual growth rate of these MS
revenues exceeds 30%. This growth rate is far outpacing the aver-
age growth rate for product revenues we see in the industry today.
In our last T&S 50 snapshot of 2015, product revenues, on average,
were shrinking 8%! (See Figure 9.2.)
Finally, MS revenue streams are proving more and more prof-
itable. The TSIA MS benchmark reports average MS gross mar-
gins greater than 40%. Some MS providers are generating gross
margins just slightly south of 70%. In our annual survey on overall
organizational structure, we ask technology companies to simply
report the general protability prole of every service line they
have, the results of which are seen in Figure 9.3. For the past two
years, MS has been reported as the second most protable service
activity, right after highly lucrative support services.
288 Technology-as-a-Service Playbook
FIGURE 9.1 Revenue Mix for Companies that Benchmark MS
FIGURE 9.2 MS Revenue Annual Growth Rate
The Case for Managed Services 289
So, MS is undoubtedly a rising star in the economic engine of
technology companies. But why?
Trends Driving Managed Services
Multiple trends are driving the demand for managed services.
Many of these trends were heavily discussed in our last two books,
but lets do a quick review:
Reducing Operational Complexity. Customers no longer
want the headaches of running IT operations, especially if
they don’t view this as a core competency of the company.
On-Demand Capacity. Customers don’t want to pay for IT
capacity they don’t need. MS models are much more exible
and allow the customer to buy capacity as required.
Highly Profitable (20% net OI or greater)
(Customer and/or
partner training)
Which best describes the financial
performance of the following service
lines for the most recent fiscal year?
Profitable (5%-19% net OI)
Break-Even (0% net OI, +/-5%)
Unprofitable (-5% net OI or less)
FIGURE 9.3 Protability of Service Lines
290 Technology-as-a-Service Playbook
OpEx versus CapEx. Some customers (clearly not all) have
a preference for spending operating dollars and not capital
dollars when it comes to technology. CapEx leads to having
big, lump-sum payments and then owning assets that must be
depreciated over time. Migrating IT expenses to OpEx typi-
cally leads to smoother, more predictable expenses over time.
Va l u e B e yo n d Te c h n o l o g y. Customers look for technology
providers to apply unique insights to help maximize the busi-
ness impact of technology. One common value proposition is
MS oers that feature accelerated technology adoption versus
do-it-yourself tech.
Economies of Scale. Technology providers can create en-
vironments, tools, and processes that support multiple cus-
tomers. These economies should allow providers to deliver
technology environments more cost eectively than custom-
ers can create as a one-o.
Strategic versus Tactical. CIO magazine published an ar-
ticle citing the growing demand for managed services. The
magazine reported that CIOs are interested in leveraging out-
side vendors to manage day-to-day operations so internal IT
sta can focus on strategic initiatives.
Generically, TSIA sees these trends resulting in ve common MS
oering value propositions, listed below and shown in Figure 9.4.
Monitor. Monitor technology availability and performance
for the customer.
Operate. Operate the technical environment on behalf of
the customer.
Optimize. Work with the customer to optimize technology
costs, improve technology adoption, and maximize the busi-
ness impact of the technology.
Transfor m. Help the customer implement and integrate a
new set of technology capabilities.
The Case for Managed Services 291
Managed XaaS. Te c h n o l o g y m ay b e o n s i t e, h o s t e d , o r a hy -
brid of the two. The solution is typically comprised of product
(hardware and/or software), professional services, support, and
operations elements bundled into a single per-unit, per-month
price governed by a managed services agreement. Hardware
and/or software is owned by the managed service provider.
Importantly, current and future generations of MS don’t look any-
thing like the low-margin outsourcing businesses of the past. Ideally,
services are cloud-enabled, delivered from a remote network oper-
ations center. Delivery resources are typically shared across multiple
clients. The product elements within the MS oer may be hosted
and/or on premises; they may be single tenant or multi-tenant.
In September 2015, Forbes cited a study that more than half
of IT managers expect to use multiple managed service providers
(MSPs) within the next two years; a whopping 85% are at least
somewhat likely to use MSPs.
So, if you have a customer who is demanding one of the MS
value propositions previously cited and you dont have an oer,
you may lose that customer. How many customers can you aord
to lose until you bring an MS oer to market that the market
clearly wants?
Monitor Operate Optimize Transform Managed xaas
Common MS Offering Value Propositions
FIGURE 9.4 Common MS Offering Value Propositions
292 Technology-as-a-Service Playbook
The Many Flavors of Managed Services
Before you decide whether your company should pursue an MS
business, it is important to segment the dierent types of MS
businesses. TSIA segments MS oers based on the following ve
1. Is the oer standard across many customers or unique
for each customer (as dened in Chapter 6 on portfolio
2. Is the value proposition dierentiated (again, referring to
Chapter 6)?
3. Regardless, whether the technology is on site or not, can
the services be delivered o site (virtually)?
4. What are the specic value propositions of the oer as de-
ned by TSIA’s ve classic value propositions for MS oers?
5. Does the MS provider own the technology assets under
management, or does the customer own the assets?
So, let’s map two dierent example oers:
1. O-Site Monitoring. The customer would like you
to monitor technology that’s been purchased from your
company. You have unique capabilities to deliver this
monitoring remotely.
2. On-Site Operation. The customer wants the technol-
ogy to be present on their site, but they don’t want to
manage the environment. You need to provide some on-
site services to manage their environment. Also, they do
not want to own the technology.
Figure 9.5 maps these two oerings on our oering grid.
The grid has been further segmented to show whether an oer
is being delivered on site or o site. A solid line around the oer
means the MSP owns the technology assets. A dotted line around
the oer means the customer owns the technology assets.
The Case for Managed Services 293
The question quickly becomes, “What are the high-growth
and protable MS oers?” This is exactly what we have been
studying since 2013. There is no doubt that standard, o-site of-
fers, where the customer owns the asset, have the greatest poten-
tial to drive the highest MS margins with the least nancial risk
to the provider (Figure 9.6).
FIGURE 9.5 Offering Grid A
FIGURE 9.6 Offering Grid B
294 Technology-as-a-Service Playbook
Breaking our benchmark data down into more detail, here are
the highest-to-lowest margin MS oer types:
Customer premised, customer owned, remotely monitored.
Customer premised, customer owned, remotely operated.
Hosted, customer owned, remotely monitored.
Hosted, customer owned, remotely operated.
Hosted, provider owned and operated.
Also, the data clearly shows that standard oers are more prot-
able than custom oers. On average, there is a nine-point prot
improvement if an MS oer can be standardized across customers.
Unfortunately, we see that customers often start MS conversa-
tions with a host of custom requests. In fact, many of these oers
are actually created “in the eld” to meet the needs of specic
deals. That is not the right way to approach your MS business. In-
stead, it reects a common scenario where headquarters are hesi-
tant about launching an MS business when their customers clearly
want it. So, rather than lose the deal and the customer, sales makes
one up. In some of these early deals, customers are often interested
in the provider owning the assets.
Here’s a better way: To accommodate early customer requests,
successful MSPs are making three moves on the oer chessboard,
listed here and seen in Figure 9.7.
First Move. Work with strategic customers to dene a dif-
ferentiated MS oer. You can lean toward customers owning
the assets, but you may need to be exible. Perhaps you can
arrange for a third party to carry the paper on the assets while
you provide the managed service. Begin signing MS contracts.
Second Move. Begin identifying the common building
blocks of customer needs. Create a standard” set of LEGO
building-block MS capabilities customers can string together
into an oer that meets their needs.
Third Move. Maximize every opportunity to leverage tech-
nology and o-site labor to deliver the oer.
The Case for Managed Services 295
So far, we have talked about the compelling and special case of
MS in the enterprise tech business circa 2016. We have helped
dene the drivers for MS oers. We have also helped dene the
dierent types of MS oers and how technology providers are
successfully maturing their MS oers. Despite this help that we
regularly oer to members, though, we still see many traditional
product companies incredibly resistant to exploring MS conversa-
tions with eager customers. Why?
Why Product-Centric Companies Say No to Managed
George Humphrey vice president of research for the Managed
Services practice at TSIA, refers to this dilemma as “the battle
of the CFOs. In one corner, we have the customer CFO. In
their role, they are keen to acquire some of the benets listed
earlier—reduced operational costs, predictable IT costs, and im-
proved ROI from technology investments. In the other corner
sits the technology provider CFO. Their role is to protect the -
nancial business model. They are extremely reticent to sign o on
any oers that may increase company risk, reduce cash ow, or
Off-site Off-site
On-site On-site
Offering Grid C
FIGURE 9.7 Offering Grid C
296 Technology-as-a-Service Playbook
impact the margin prole of the company. The customer is asking
for managed services, but the CFO and other executives at your
company are quick to raise the following concerns:
We do n t ow n c u s t o m e r a s s e t s . When negotiating MS
deals, customers may not want to purchase the technology
assets being managed. This means the provider has to carry
the cost of these assets on their books. CFOs may be loath to
reect lower retained earnings on the balance sheet as a result
of these added costs.
Delayed revenue recognition. If the customer is not paying
for the assets up front, that means the revenue for this tech-
nology will trickle in as part of a long-term service contract.
Not ideal! We are a product company—we recognize product
revenue, and we recognize it as soon as legally possible!
Service revenue intensive. These MS deals are going to
increase service revenues and decrease product revenues. Our
nancial model indicates how much revenue should be com-
ing from products versus services. We will start looking like a
services company to the street—which is not what we his-
torically said we were.
Increased risk. When we sell technology assets, the customer
is ultimately responsible for achieving their target business re-
sults. With these MS contracts, we are taking on increased re-
sponsibilities. We are introducing new risks to the business. We
may fail to meet contract SLAs and pay penalty clauses. The
customer may be dissatised and cancel halfway through the
contract. We might make an error in the customer environ-
ment and be sued.
Channel conict. Other executives beyond the CFO and
CEO will start chiming in with their concerns. The execu-
tive who owns channel partners will be concerned that new
MS oers conict with partner oers. “We are stealing the
bread from our partners’ mouths. They will jump to selling
the product of our competitors.
The Case for Managed Services 297
Complex sales cycle. The sales executive may have con-
cerns about the ability of sales reps to sell these complex MS
oers. Also, by introducing an MS option, the customer selling
cycle will most likely elongate—which is death to a sales force
driven to close deals as quickly as possible and collect the cash.
Smells like outsourcing. In the end, isn’t MS really just
another word for outsourcing? And isn’t outsourcing one of
the lowest-margin businesses in the technology industry?
The concerns and objections mount among executives, so there
may be many reasons not to pursue this business. Yet, our point
of view is that product companies should absolutely be pursuing
MS opportunities when strategic customers begin knocking on
the door for these services.
Just Say Yes
Despite the concerns listed here, we believe product companies
should aggressively assess their opportunity to provide managed
services for the following ve reasons:
1. There is a compelling market opportunity for managed
2. Managed services is not IT outsourcing.
3. Managed services is an eective short-term defense against
new XaaS competitors.
4. MS oers force the creation of new capabilities required
to compete in the XaaS economy.
5. Yo u c o u l d l o s e c u s t o m e r , a f t e r c u s t o m e r , a f t e r c u s t o m e r .
As cited previously in this book, market research rm Gartner
signaled that worldwide IT spending was actually shrinking by
5.5% in 2015.
This opinion correlates with what we see in our
T&S 50 data as we track the largest providers of technology solu-
tions on the planet. Yet, the managed services market opportunity
298 Technology-as-a-Service Playbook
is exploding. Research rm MarketsandMarkets forecasts that the
managed services market will grow from $107.17 billion in 2014
to $193.34 billion by 2019, at a compound annual growth rate of
For technology companies looking for growth, managed
services becomes a compelling market opportunity.
To d a y s M S o e r s a r e n o t l i k e y e s t e r d a y ’s o u t s o u r c i n g o e r s .
The traditional value proposition of IT outsourcing was simple:
your mess for less. Outsourcers focused on cost reduction. As out-
sourcing became more competitive, margins for outsource pro-
viders eroded. But today’s MS oers from product companies are
anchored on unique capabilities designed to unlock the full po-
tential of a technology solution. Benets go beyond cost reduction
into other areas, such as revenue growth and risk reduction. Also,
MS oers can be much more targeted to specic technologies or
problem sets. Product companies are not asking to take over the
entire IT operation for a customer. We are seeing an explosion of
product companies wrapping a managed XaaS oer around their
core products. This oer is creating dierentiation in the mar-
ketplace when contrasted with product companies that are only
interested in selling a product to the customer and then leaving.
With your MS oer, you create value far beyond commoditized
technical features by reducing total operational complexity.
When it comes to nancial concerns about asset risk and
revenue recognition, many manufacturers successfully use third-
party nancing to give customers more of the OpEx price model
they crave without all the negative baggage. It helps them:
1. Minimize the nancial risk of carrying infrastructure costs
on their books. This tends to aect valuation for tradi-
tional companies.
2. Get immediate revenue recognition on the product por-
tion of the deal.
Be aware, though, that many nancial auditing rms will tell you
that you still have to recognize the revenue on the product over
The Case for Managed Services 299
the duration of the service contract because the “value” of the
product is directly linked to and inseparable from the value of
the service. Service providers, VARs, and system integrators don’t
want the nancial risk and burden of carrying all those assets on
their books.
Cloud providers are somewhat exempt from all of this be-
cause, from day one, they embrace this business model. They
know all revenue is recognized over the duration of the contract.
They know there are inevitable costs of service that are asset and
infrastructure based. Cloud investors also understand this. Manu-
facturer investors dont.
In the book Zone to Win,
our friend Georey Moore discusses
the importance of playing defense during signicant market trans-
formations. When entrenched market leaders are threatened by
new oer types that disrupt the status quo, the recommendation
is to respond with oers that slow competitive disruption. These
“neutralization” oers don’t have to go toe-to-toe against the new
competitors. These defensive oers simply need to provide some
new options to existing customers that may delay their choice to
jump to the competitive oers. MS oers for entrenched product
companies are a classic example of a neutralization oer. A large
and strategic customer that previously purchased technology assets
from you is now asking for a XaaS option. You meet them halfway
with a special MS oer. The MS contract keeps the customer on
your books and creates runway for you to develop a XaaS oer.
Finally, establishing MS oers is a forcing function for de-
veloping new organizational capabilities that will be required to
compete in the XaaS economy. In our work at TSIA, we dene
and track “organizational capabilities. We dene organizational
capabilities as “the ability to perform actions that achieve de-
sired results. We organize the capabilities into the nine categories
shown in Figure 9.8.
In each of these categories, there are capabilities that organiza-
tions must master in order to scale and optimize their MS business.
300 Technology-as-a-Service Playbook
As previously mentioned, taking on MS deals typically requires
product companies to develop new organizational capabilities. As
an example, sales and nance must collaborate on new pricing,
revenue recognition, and compensation models. Delivering MS
oers will require the services organization to build capabilities
related to monitoring customer environments, driving adoption,
and helping customers optimize costs. Overall, we have identied
more than 100 capabilities required to master a managed services
business but are relatively immature in most product companies.
Figure 9.9 provides a sampling of these emerging capabilities.
Ideally, you would build out all the capabilities in our ca-
pabilities inventory before you take on your rst MS customer.
Strategy and Planning
Annual business planning, aligning product and service strategies,
stakeholder engagement and alignment.
Segmentation model, customer model, market requirements,
competitive analysis.
Defining target revenue mix, margin profiles, investment profiles,
and profit profiles for offer types.
Offers Specific offer definition, offer development life cycle,
offer management, bundling, SLA definitions, licensing and
entitlement methods, pricing strategy.
Financial Model
Go to Market (GTM) Defining alternate direct/indirect go-to-market models by offer
type including application ecosystems.
Development capabilities, technology capabilities, tools and
applications required to deliver offers.
Sales and Marketing
Automation platform, services delivery resource optimization,
support channel optimization, workforce planning.
Direct sales structure, automation platform, sales metrics,
sales methodologies, marketing programs.
Partner Management
Partner selection, partner enablement,
outsourcing management.
Example Capabilities
Organizational Capabilities Categories
FIGURE 9.8 Organizational Capabilities Categories
The Case for Managed Services 301
But more typically, by piloting new MS oers, product compa-
nies begin the journey of developing these new capabilities. All of
these emerging capabilities will serve a product company well as
customers pull them into the new XaaS economy.
Picking the Right Customers
Although we are encouraging product companies to aggressively
pursue emerging MS opportunities, we do not believe all oppor-
tunities are created equally. One of the signicant concerns execu-
tives have regarding the additional risk being assumed in MS deals
can be summarized in one sentence: “What if the customer doesn’t do
what they need to do to achieve the target outcomes of the MS contract?”
This is a real concern and a healthy question to ask. The intu-
ition is to solve this challenge contractually—to design contracts
that hold customers accountable to deliver their end of the deal.
When you look into the technology industry today, you’ll nd
two common types of service contracts: (1) contracts crafted by
technology providers that are centered on meeting service level
agreements, and (2) contracts crafted by system integrators that
In-Use Assistance
Customers can open service requests directly from within
our products.
We have developed and apply a business value-mapping
framework to new service offering design in order to anticipate
how we will help customers improve their business performance.
We have developed models for charging customers based on
what they specifically consume.
Business Value
Automated License/
Feature Enablement
Our product has the ability to remotely turn on unused
licenses and features without the manual involvement of a
sales resource.
Pricing Models
Converging Service
We successfully share billable and non-billable resources
across existing service organizations.
We have implemented an effective organizational structure
for selling managed service offerings.
Managed Service Sales
Team Org Structure
Service Capability Description
Emerging Capabilities for Managed Services
FIGURE 9.9 Example Emerging Capabilities Required for MS
302 Technology-as-a-Service Playbook
cover large, complex technology implementations. Figure 9.10
captures these two contract examples.
Common Service Contract Types
System availability
Dispatch response time
First-time repair rate
Case resolution time
Network performance
Customer responsibilities:
Specific role/skills
customer will provide
FIGURE 9.10 Common Service Contract Types
FIGURE 9.11 Missing Outcome-Based Contracts
The purposes of these two contract types are dierent. SLA-
based contracts are designed to meet customer expectations re-
garding technology availability. From the provider’s perspective,
these contracts minimize risk when technology goes down if the
provider has been meeting all of their SLAs. Product companies
are very familiar and comfortable with these types of contracts. SI
contracts centered on detailed terms and conditions are designed
to minimize risk if an implementation project fails. As shown in
Figure 9.11, neither of these contract types really t the bill for
The Case for Managed Services 303
creating a contract that is designed to create an MS partnership
with the customer to achieve targeted business outcomes.
When rst exploring MS contracts that are designed to
achieve specic business outcomes, we believe that attempting to
craft a detailed contract that will drive customers to execute their
side of the activities is not time well spent. Successful managed service
relationships are not achieved through contracts. Initial MS success will
be achieved by working with the right customers.
The recommended tactic when incubating MS is to identify
the attributes required in a customer to make them a viable can-
didate for an MS oer. There are at least four attributes we believe
a provider should test for before attempting an MS relationship
with a customer:
1. Do senior customer executives view you as a stra-
tegic provider? If you spend your time with procure-
ment or mid-level IT managers, it is not likely you will
be able to inuence the customer to execute the practices
required to achieve a target outcome. Even worse, great
progress and measurable results may not lead to increased
customer spending.
2. Does the customer have a history of listening to
your recommendations? If not, an MS relationship is
high risk. Why will they start listening now?
3. Has the customer demonstrated reasonable project
management and IT governance capabilities? If not,
this customer will struggle to work with you to imple-
ment the technology and practices required to achieve
targeted outcomes.
4. Do you have the ability to benchmark the custom-
er’s current performance on targeted KPIs? If the
customer refuses to share data or does not have the ability
to generate the data, this is a signicant red ag. How can
you improve performance KPIs if you do not know the
current starting point?
304 Technology-as-a-Service Playbook
This list is just a starting point. Technology providers should
build on it to create a comprehensive set of customer attributes
that should exist before engaging in an MS relationship. This ap-
proach will minimize the risk that a customer will not do what
they need to do. It is worth mentioning that proling your MS
customers is an ongoing eort. Well-structured deals that look
protable when being assembled may take a turn for the worse
during the life of the contract. Continually measuring MS per-
formance is crucial.
For decades, customers have qualied suppliers to ensure
a good t. When it comes to taking on more responsibility in
achieving customer outcomes, suppliers need to qualify custom-
ers. Ongoing, focused client management allows you to re” (not
renew) non-protable deals and to double down on customers
that are protable and growing. This new approach will not come
naturally to many sales reps that historically viewed any customer
with a budget as an eligible prospect. If you are simply selling a
technology asset to a customer who then assumes responsibility
for getting benet from it, that tactic is ne. But if you are relying
on customers to successfully adopt or attain specic business out-
comes from your technology in order to achieve your revenue or
margin goals, you must qualify their willingness and readiness to
take the necessary actions. No contract, no matter how detailed,
will replace the need for applying a solid customer prole tactic.
Incubating Managed Services: Key Success Tactics
When incubating an MS business, the rst three questions that
must be answered are the same as those for any other XaaS oer:
1. What is the oer portfolio and pricing model, and who
are we selling it to?
2. What is the customer engagement model that we will use
to sell and deliver this oer?
3. What are the nancial keys that will allow us to make
money with this oer?
The Case for Managed Services 305
The TSIA Managed Services discipline engages with product
companies to help them establish or optimize their MS businesses.
Through that work, we have identied a set of success tactics to
consider as you explore MS opportunities with your customers:
Make nance your friend. If your nance group is not on
board with pursuing MS oers, there is a high probability that
the MS business will quickly atrophy from a lack of approved
contracts. Finance needs to believe in this business, and they
need to understand the nancial models of MS.
Understand the net-new capabilities that will be re-
quired to successfully deliver an MS oer. MS oers do
require you to be intimately involved in IT operational prac-
tices. Common customer handshakes that must be mastered
include applications management, capacity management, in-
formation security management, and release management.
Mastering these processes will most likely require new orga-
nizational capabilities for your company.
Understand the new sales skills that will be required to
land MS oers. Our benchmark data is clear on this point.
The existing product sales force will struggle with this oer.
Yet, we know from our data that the most common approach
is to attempt to sell new MS oers through the existing sales
force. Our recommendation is to incubate a dedicated sales
capability that specializes in selling MS oers. In TSIA bench-
mark data, we see that companies relying on their existing
sales force to sell MS are seeing annual MS growth rates of 5%.
Companies that invest in a dedicated MS sales force are seeing
annual MS revenues grow an average of 39%. Also, dedicated
MS sales reps secure deals that are almost 20% more protable
than the deals being sold by generalist sales reps.
Establish key performance indicators and measure
them regularly. One of the surprising facts we discovered
is how many product companies have established MS oers
with no clear denition of the KPIs that should be used to
understand the health of an MS oer. If they did have KPIs,
306 Technology-as-a-Service Playbook
they often had no idea what “good” should look like for that
KPI. This is not untrodden ground. The technology indus-
try understands what metrics to measure related to MS. In
addition, we have specic benchmarks on what pacesetting
companies achieve on these metrics. Figure 9.12 provides a
sampling of the KPIs we recommend MS organizations track.
Total Recurring
Revenue Growth Rate
Total current year recurring MS revenue minus previous year
total recurring MS revenue. Divide the difference by the previous
year total recurring MS revenue. Convert to percentage.
Most current full year new revenue minus previous year new
revenue. Divide the difference by the previous year net-new
revenue. Convert to percentage.
Total value of existing contracts minus the total value of
previous year contracts. Divide the difference by the
previous year total contract value. Convert to percentage.
Top-Line (Cap Net-New)
Recurring Revenue
Growth Rate
Total Base Revenue
Most current full year revenue from existing customers
(excluding revenue from new customers) minus previous year
base revenue. Divide the difference by the previous year base
revenue. Convert to percentage.
Total Bookings
Revenue Growth
(a.k.a. total contract
value growth)
Total Customer
Growth Rate
Most current full year number of customers under contract
minus previous year number of customers under contract.
Divide the difference by the previous year number of
customers under contract. Convert to percentage.
Subtract all direct costs from the total managed services
revenue. Divide that number by the total managed services
revenue. Convert to percentage.
Gross Margin
Net Profit (Net OI)
Revenue Renewal Rate
Subtract the total direct and indirect costs from the managed
services revenue. Divide that number by the total managed
services revenue. Convert to percentage.
Total current year MS revenue minus previous year total
contract value. Divide that number by the previous year total
contract value. Convert to percentage.
Contract Renewal Rate
Number of contracts up for renewal minus the number of
customers that do not renew their contracts. Divide that
number by the number of contracts. Convert to percentage.
Client Satisfaction Rate Simple 1:5 scale provides enough insight into client-by-client
performance. Customer success/client management team
should engage in ongoing review of simple scoring of client
satisfaction during regular contract performance reviews.
How to Calculate
Top 10 Metrics MSPs Should Be Tracking
FIGURE 9.12 Top 1 0 Me t ri c s MS P s S ho ul d B e Tra ck i ng
The Case for Managed Services 307
Pilot, pilot, pilot. A s p rev io us ly m e n t i o n e d , i t i s ve r y i mp or -
tant to identify the right customers for your MS oers. Not
all customers are good candidates for this type of relationship.
Once you start identifying customers, the initial MS engage-
ments should be approached as pilots designed to help you
mature the oer. It is unlikely your rst MS oer will spring
from the heads of your oer designers fully formed. Early
customers should understand you are partnering with them
to help dene the best oer possible for both sides.
Invest in automation early. The most protable MS organi-
zations we benchmark have implemented commercial, o-the-
shelf tools and platforms to help automate aspects of their MS
operations. Key tools can be seen in Figure 9.13 on the next page.
Don’t ignore the channel. There is no doubt that when a
product company decides to work with customers directly as
a provider of managed services, channel partners get nervous.
However, our point of view is that MS oers actually unlock
an entirely new class of service opportunities for your partners
as well. We will discuss this more in Chapter 10.
Summary Comments
Product companies, historically, have resisted building service ca-
pabilities that are not directly related to installing and supporting
their own products. However, we are at an interesting juncture
in the history of the technology industry. We sit at an inection
point where old business models collapse and new business mod-
els emerge. Managed services represents a unique opportunity
for product companies to start navigating through this inection
point. There is clearly a market appetite for these services. There
is solid evidence product companies can be very successful with
these services. If you are not currently investigating MS oers, we
strongly recommend you revisit that decision.
308 Technology-as-a-Service Playbook
FIGURE 9.13 Components of a Managed Services Delivery Platform
The Case for Managed Services 309
Playbook Summary
Tw o p l a y s a r e i d e n t i e d i n t h i s c h a p t e r :
Play: Saying “YES” to MS
Objective: Determine whether the company should explore
MS oers.
Itemizes the industry trends driving the explosion of MS
Itemizes key success tactics the company will follow to mini-
mize risk when incubating MS.
Players (who runs this play?): Core player s: CEO, CFO,
head of marketing, head of services, head of product development.
Play: MS Opportunity Map
Objective: Identify potential opportunities the company has
for MS oers.
Creates a common taxonomy for the types of MS oers the
company could pursue.
Creates an understanding of what types of MS oers are the
most protable.
Players (who runs this play?): Core player s: product de-
velopment, product marketing, services marketing. Review team:
CEO, CFO, sales and services leadership.
310 Technology-as-a-Service Playbook
The Technology Services Industry Association (TSIA)
helps technology and services organizations both large
and small grow and advance by providing world-class
business frameworks, best practices based on real-
world results, detailed performance benchmarking,
exceptional peer networking opportunities, and high-
prole certication and awards programs.
A Managed Services
Success Story
In this brief video, you’ll hear Digital Hands’ CEO
Charlotte Baker talk about the instrumental role TSIA
plays in the education of her team around KPIs,
industry trends, and services convergence.
Find out how TSIA can help
you grow and scale your
managed services business.
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