Challenges of managed service providers

Service-level agreements I managed service providers

An MSP often provides its service offering under a service-level agreement, a contractual arrangement between the MSP and its customer that spells out the performance and quality metrics that will govern the relationship.

An SLA may be linked to an MSP's pricing formula. For example, an MSP may offer a range of SLAs to customers, with the customer paying a higher fee for higher levels of service in a tiered pricing structure.

Challenges of managed service providers

Regardless of pricing model, a key challenge for MSP business management is to set pricing low enough to entice customers to buy their services but high enough to maintain an adequate profit margin.

In addition to pricing, MSPs pay close attention to operating costs and the cost of maintaining skilled employees. Labor is typically an MSP's greatest expense. To keep labor costs in check and improve efficiency, most MSPs employ remote monitoring and management (RMM) software to keep tabs on clients' IT functions. RMM software lets MSPs remotely troubleshoot and remediate issues with servers and endpoint devices. With RMM, MSPs can manage numerous customers' IT systems simultaneously. MSPs may also use automated scripts to handle routine systems administration functions, such as checking hard disks for errors, without human intervention.

Another challenge MSPs face is the mainstream adoption of cloud computing. As more of their customers' IT infrastructure components migrate to the cloud, MSPs have had to find ways to manage hybrid cloud environments. MSPs also seek to provide their own cloud computing services or resell other cloud providers' capabilities, with cloud-based backup and disaster recovery (DR) a common entry point.

In addition, just becoming an MSP can prove challenging. The prospect of MRR has attracted many traditional solutions provider companies, such as VARs, to the MSP business model. However, would-be MSPs have struggled to establish themselves in the market. The MSP line of business calls for companies to adopt different performance metrics, technology infrastructure components and sales compensation programs, to name a few challenges. As a result, many MSPs derive revenue from business lines other than managed services, such as IT project work, break/fix business and on-site support. Pure-play MSPs are relatively rare in the IT services industry.

What MSPs are used for

Small and medium-sized businesses (SMBs) are typical MSP customers. Many smaller companies have limited in-house IT capabilities, so they may view an MSP's service offering as a way to obtain IT expertise. Larger enterprises may also contract with MSPs, however. For example, government agencies, facing budget pressure and hiring limitations, may contract with an MSP to supplement in-house IT staff.