Fueled by a global economic recession and rapidly evolving technologies, the market for IT managed services is poised to explode during the next 24 to 30 months, according to a new report from Forrester Research Inc.
Companies perennially express interest in using managed services providers to tend and mitigate the risks associated with technology decisions. But the reality is that only 10% of companies buy managed services and another 30% express interest, according to the Cambridge, Mass.-based firm. The percentages are higher for certain segments of IT. Enterprises use managed service providers for telecom. Small and medium-sized businesses turn to managed services for security and storage.
"Is this the destiny for the industry? No. While user data does not bear this out yet, Forrester believes that a prefect storm is brewing -- technological change, the technology investment cycle and difficult economies are combining forces to push some types of managed services over the chasm," the report states.
Analyst Henry Dewing, lead author on the Forrester report, tempered his forecast in an interview yesterday. Certainly IT has been hit by bad economies before, Dewing said. Managed services have been out there then and didn't take off. But he said he remains convinced current conditions presage a break in tradition.
"Sitting on the fence as firmly as I can, what I can say is that if managed services are going to make it, it will be in the next two years," Dewing said.
First, users and buyers are facing a "blizzard of new technologies and capabilities," he said. In the telecom space alone, that includes telepresence, Web conferencing and metro Ethernet services.
Companies faced with investing in the equipment and manpower to use these technologies must factor in the value of that investment, given their rapid evolution and requirements. Two years ago, for example, Cisco Systems Inc. marketed its telepresence solution as an easy installation for internal corporate networks.
"What has happened with telepresence, more than the complexity of it, is just the sheer bandwidth required for multipoint telepresence call -- and frankly, the audience," he said.
"These telepresence rooms, because they cost a quarter of a million dollars, are typically going on the executive floors first. And there are a lot of IT managers who don't want to lose their jobs over a five-minute delay on a video bridge," he said.
Large service providers like AT&T and British Telecom have found a ready market for a fully managed Cisco TelePresence solution, Dewing said. The providers reduce the complexity and cost of high-bandwidth, real-time video over wide area networks and LANs.
A second driver for managed services has to do with tech investment cycles. Forrester sees late 2009 to 2017 as an innovation and growth cycle, during which business will rapidly invest in new and innovative technologies. Indeed, the common refrain sounded by Forrester and other analyst firms in the midst of the current meltdown is just how important it is for CIOs to ready their companies for the coming upturn. When prosperity returns, Forrester predicts CIOs will increasingly look to managed service models as the best way to try out these new technologies without up-front capital investment.
Which brings Dewing to his third argument for the rise of managed services: the high cost of capital. Typically, it has been the small and medium-sized businesses that look to managed services as a means of minimizing capital investment while simultaneously increasing IT infrastructure flexibility. But the current constraints on borrowing money are also forcing large companies to take a harder look at managed services, he said.
"People are looking for alternatives," Dewing said. He noted that since the report came out he has fielded several calls from clients seeking more information about managed services.
One reason for turning over the more utility or basal functions of IT to managed service providers is to free up CIOs and their staffs for the strategic work that differentiates the business and, most important, grows revenue.
Harvey Koeppel, executive director of IBM's Center for CIO Leadership and former CIO of Citigroup Inc.'s Global Consumer Group, said CIOs are under tremendous pressure to manage "human capital." He said the center's recent survey of 300 CIOs from across the globe shows that CIOs need to delegate more to "the one-downs and two-downs" to handle the more tactical aspects of IT, so they can focus on business strategy.
"If you speak to CIOs, you typically will hear that their focus is really almost crisis to crisis, and most of their time spent firefighting operational kinds of issues. Those are more often than not the kinds of challenges that could be delegated, because they are more day-to-day," Koeppel said. That would allow CIOs to focus on the more innovative IT initiatives.
A more sober reason for using managed services providers is that companies can quickly ramp up or down as their employee ranks are thinned, or as whole swaths of their companies disappear in this fiscal crisis. (For example, Koeppel's former employer, Citigroup, this week announced record layoffs of some 50,000 employees.)
Vendor shakeout in managed services
Finally, the role of Software as a Service (SaaS) can not be overlooked in any predictions about the growth of managed services, Dewing said.
"SaaS has brought home the fact that, 'Hey I can do a monthly recurring charge, I can avoid a lot of up-front fees, I can turn it on and off and play with flexible volumes," Dewing said. "This wakes people up to the notion that this is really is an attractive model."
Indeed, Dewing predicts that the SaaS model (which he includes under the rubric of managed services) of monthly, no contract, pay-by-the-seat engagements will drive a change in how traditional service providers charge for their services. Cloud computing will push that change further. During the next two to five years, there will be a significant need to manage hybrid architectures, where some resources are on-site, some are in the network and the responsibility for managing them is split between in-house IT and the services vendor.
"We may see some business models pop up that we don't recognize today. There is no reason that even an on-site managed service provider can't adopt that same pricing," Dewing said.
"At the end of the day, then, it becomes who can truly deliver the best cost with the most flexibility, as opposed to signing a three-year contract vs. the month-by-month. That difference will go away."
Let us know what you think about the story; email: Linda Tucci, Senior News Writer