In the Margins

Posted: 2/2004

In the Margins
Managed Services Help Resellers Raise ARPU
By Tara Seals

A local chainsaw company needs a WAN to link its three retail locations with headquarters, in order to use an inventory management application that will streamline operations and bolster profitability. The problem is such a network would require at least two in-house technical personnel to maintain  the cost of which would outweigh the benefits of the application. The solution is outsourced network management and applications. These so-called managed services, often sold on a monthly subscription basis, place networking  and other converged voice and data services  within the reach of small and midsized firms by eliminating the need for technical personnel or on-premises equipment.

Smart service providers and resellers are meeting new demand for more sophisticated computing and communications services by packaging everything from managed network monitoring and firewalls to outsourced Web conferencing into a WAN sale. For resellers, managed services represent new opportunities by overcoming cost objections while generating higher margins than commoditized circuits and routers. By layering the services onto a WAN sale, resellers can increase the average revenue per customer and reap larger profits.

The bundled approach does more than open customer doors. We found that over time our channel partners have specifically gone towards offering a bundle as theyve been challenged by price erosion and margin pressure, says Cliff Young, CEO of ClearPath Networks. So [with outsourced services], they can realize ongoing managed service revenue streams, plus there are better margins.

ClearPath Networks is taking on the smaller enterprise market with plug-and-play WAN solutions using a shared infrastructure. Resellers can offer such customers a completely outsourced LAN/WAN environment, including ClearPaths network reporting, device monitoring, SLA compliance, firewall, intrusion detection, content and URL filtering, and antivirus and anti-spam services. Each end-user organization has a customized management portal, called iNOC.

Another company, Mariner Systems Inc. (MARSYS), offers a range of managed services, from hosting applications to full project and program management of mission-critical systems. Rick Maharaj, director of professional services at the company, says it was a no-brainer to package them for rebranding. Service providers could offer the same things, without actually having to go through the headache of research and development and actually creating it themselves, he explains. Companies want to be able to resell assessments and deployment schemes and compression and e-mail and security and storage and consolidation  all these things that add value to their sales. But, a lot of it was beyond what they could provide. [Now] they can pick up a service and go to market, and we go in and do the work for them under their brand name, and it works out well for everyone.

As one example, MARSYS offers a disaster recovery package as a payas- you-go model. The client doesnt have to go and purchase this very expensive and hard-to-manage expertise required for storage area networks, says Maharaj. A medium-sized company that isnt quite ready to purchase this kind of equipment  and the yearly licensing fees that come with it  can be set up to comply with Sarbanes-Oxley in less than two weeks.

Such turnkey solutions not only make it easy for the reseller and the customer to deploy needed technologies, but are necessary for technology to penetrate the second tier of accounts that might lack IT resources, experts say. Principally, the dividing line between large corporations and smaller businesses is not the need for applications but the total cost of ownership, explains ClearPath Networks Young. It requires people with specialization to implement. So for smaller businesses looking at applications, its difficult for them to understand how soon theyre going to get the payoff, how well it will work for them and what the real costs are going to be.

NOT JUST DATA NETWORKS

The managed service opportunity goes beyond data network oversight. Centra Software Inc., for one, is in the process of ramping up its reseller program, targeting service providers and even large conferencing providers such as AT&T Corp. and MCI for its outsourced Web conferencing service with integrated VoIP. Most of these guys are coming at it with the converged solution perspective  a single neck to choke, says Michael Tupanjanin, vice president of strategic alliances at Centra. Instead of having disparate solutions, customers can just go to one place and get everything under one umbrella. Resellers are integrating Web conferencing with the other applications they offer and being a single point of contact for customer service.

For instance, integrating the solution into a CRM system, PBX or legacy system would be a way for resellers to bring value to their accounts. So when youre doing a Web conference, you can actually initiate a Web conference from the CRM application, record the session, then store it back into the system in the notes section, explains Tupanjanin.

In another example, Sylantro Systems Corp. offers service providers and resellers an integrated communications platform that lets them package services along with a WAN that would replace on-premises phone and communications services (PBX services and conferencing, among others) for $45 to $75 per month per employee. Theres a lot of margin associated with these services, they definitely increase the ARPU, and theyre more strategic, because now resellers are providing a real mission-critical services, its not just a pipe, says Laura Thompson, vice president of corporate marketing at Sylantro. End users definitely want more simplicity, and right now they pay lots of different bills to lots of different communications suppliers and it can be overwhelming. When they look at buying a new IP PBX, the price tag is a bit overwhelming. All those things contribute to customers turning to a one-source supplier.

The key to marketing managed services successfully, say industry players, is not just costeffectiveness. The service or application also needs to solve a business need. Its not talking about technology; nowadays, the CIOs arent really interested in that, says MARSYS Maharaj. They want the bigger picture, because really IT software and hardware is there to solve some kind of business problem or help make things more productive.

For instance, Centra signed a resale agreement with International Video-Conferencing Inc., a conferencing integrator. IVCi will offer Centras solution as a managed service, and will market it as a way to make inefficient meetings efficient again. Partnering with Centra and integrating their premier Web conferencing applications into [our portfolio] provides IVCi with the ability to enhance a companys existing communication environment, while reducing costs and increasing productivity, explains Adam Zeitsiff, CEO at IVCi. Centras solutions provide process automation before, during and after the event, resulting in enhanced meeting efficiency. Too often we see companies being forced to use conferencing tools ill-suited for their specific application.

Similarly, GoBeam Inc. will target the midmarket by reselling Sylantro Systems Corp.s hosted communications services for PBX station users. The offer has options for adding and migrating users to advanced IP Centrex capabilities selectively traditional phones can be enabled with IP Centrex services or continue to use PBX capabilities. This solves the business need of giving workers needed productivity tools, such as hosted directories, click-to-call, Microsoft Outlook integration, unified messaging and conferencing, without requiring additional investment in PBX equipment.

MARSYS takes it one more step, offering customized applications management, so the chainsaw company could turn over the inventory management application along with the network management to a third party. Its Snapshot assessment service takes an application and helps resellers to perform an audit. For us, application management is not just taking someones application and managing it. We try to understand why the application is in existence, what the main purpose is, explains Maharaj. Then, we try and understand the business requirements, how this application is serving their customers or other needs. Once we gather that, then we can start to talk about the actual architecture and layout of the system, then an assessment, then down to the code level.

All of this activity will place managed services providers in a good position, according to the analyst firm Gartner Inc. A November 2003 report titled Big Revenue Opportunities to Emerge for Managed Services, says managed services have evolved into a necessary core product for the survival of carriers and systems integrators and are expected to contribute significantly to their future service margins as commoditization ravages the telecommunications markets.

Enterprises, says the firm, need a single, flexible, integrated end-to-end solution capable of supporting a range of converged business applications, such as multimedia/video services, voice and content hosting. The challenge for service providers during the next year is to develop an effective approach to plug their technology/ process, resource and industry-specific capability/ expertise gaps that would prevent them from widening market reach and fully exploiting the most lucrative portion.

Momentum does seem to be building. SBC Communications Inc. announced it would deploy IP Centrex in 100 cities by the end of the year, using Sylantros hosted voice-software suite. I think were definitely getting to the hockey stick, says Thompson.