Seismic shift in managed services market on the cards

SolarWinds' acquisition of LogicNow is set to create a powerhouse for the next era of managed services

With SolarWinds buying rival LogicNow, the race for the legacy managed services market is officially over.

The race for the future of managed services is just beginning.

The question on everyone's mind: Why did SolarWinds make this deal? (Or, rather, why did LogicNow - a seemingly healthy and prosperous company - make this deal?)

The simple answer: the shifting economics of the services marketplace.

The channel is quickly evolving from a product-led model to a services-led one. The average solution provider already makes more than one-half of its revenue from a combination of services - professional, managed and cloud. Vendors are racing to convert their go-to-market models and channel strategies to this paradigm to get in on the recurring, predictable and profitable revenue streams.

For much of the past decade, managed services vendors, such as SolarWinds, LogicNow, Continuum, ConnectWise and others, have grown based on MSP recruitment. As new MSPs came onboard, they activated new accounts and increased the recurring revenue flowing upstream. In the early days, adding hundreds of resellers and MSPs to the partner rolls would translate into tens of thousands of new dollars in monthly recurring revenue.

Recruitment as a growth strategy worked well, as long as there was plenty of white space to fill. In 2014, The 2112 Group mapped the managed services segment and found that 21 percent of MSPs were using home-grown remote monitoring and management (RMM) tools and another 20 percent were using tools of niche and non-mainstream vendors. Also, 14 percent of MSPs surveyed were not using a professional services automation (PSA) platform, and 10 percent were using alternative management systems.

In other words, a fair amount of white space in the market remained, but it was shrinking fast.

Today, recruitment isn't necessarily the most efficient way for managed services vendors to grow. Instead, they're nurturing their existing MSPs and expanding their utilization by adding more services to their portfolio. Companies like SolarWinds and LogicNow now offer not just straight RMM but also an array of services that include security offerings, backup and disaster recovery, email management and archiving, help desk support and operational analytics, to name a few. By increasing average revenue per partner, vendors are pushing growth without reliance on new partners.

Now, the SolarWinds-LogicNow deal likely marks a new stage in the development of the managed services marketplace. In legacy economics, market segments go through a five-stage lifecycle: introduction (early stage), rapid growth and supplier proliferation (two stages in one, if you will), maturity (usually accompanied by consolidation) and decline (the segments gets displaced by new technologies). Managed services is likely different, as the need for automation and professional support is only increasing.

SolarWinds is doing something that's probably overdue: consolidating the supply side and the channel. By bringing a large chunk of the global delivery supply under one umbrella, SolarWinds will have a significant advantage over its rivals in the development of next-generation management platforms. Moreover, SolarWinds will have the ability to prepare simultaneously and evolve its army of thousands of global MSPs to deliver the next wave of managed services innovation.

Driving change for the future is significantly important. Managed services in their current form are becoming commoditised. According to 2112's annual Channel Forecast report, managed services profitability fell 21 percent to 30 percent; just a few years ago, managed services were boasting gross profit margins as high as 60 percent. With the oversupply from multiple quarters, MSPs are competing on price to win and retain business, and that's driving down margins.

At the same time, the market is looking for more evolved providers. Organizations of all sizes, from SMBs to enterprises, want MSPs that can deliver advanced services, such as cloud infrastructure management, application and workload management, and - eventually - business process outsourcing. It's going to take more technically capable and technologically armed MSPs to meet the future market needs. Based on the comments by SolarWinds and LogicNow executives, this is precisely the direction the combined company is going.

"SolarWinds is focused on growing the MSP market by making it easier for our existing partners to expand and advance their IT service capabilities, and for other channel partners to become successful MSPs," said SolarWinds CEO Kevin Thompson.

SolarWinds isn't the only managed services vendor making consolidation moves. Earlier this year, Kaseya bought peripheral PSA vendor Vorex, ConnectWise removed the last vestiges of separation between its PSA business and its LabTech RMM division, PSA vendor Autotask acquired CentraStage for RMM capabilities and Continuum bought R1Soft to incorporate backup into its managed services platform. None of these deals and moves had the same gravitas as the SolarWinds-LogicNow combination.

"We have always been committed to delivering not only the best products but those that make the most business sense for those who use them, and SolarWinds MSP meets that objective head on," said Walter Scott, the former CEO of LogicNow, who is transitioning to EVP of the new company.

Some MSPs are already chattering about how the new company will operate and whether there will be disruptions to the existing SolarWinds N-able or LogicNow platforms. It appears that the two platforms will operate in parallel for the time being, but if history is any indication, a company like SolarWinds will eventually retire one platform and transition partners and customers over time.

As is often the case with a major merger, time is the catalyst that will reveal all truths. It will take a while for the full impact of the SolarWinds move to unfold. But it was high time for the managed services segment to consolidate and mark a new beginning to its next era.

Larry Walsh is CEO and chief analyst at The 2112 Group