This is the first of a two-part series exploring why throwing more manpower at problem resolution no longer works for managed service providers.
The labor arbitrage model is now broken. As a result, managed service providers and emerging cloud service providers are going through an industry transformation.
Managed Services Value Proposition
MSPs understand that IT and unified communications are not their customers' core competencies. Financial services companies or retailers, for example, can outsource these enabling technologies so they don't need to focus on ancillary elements. As a result, IT and UC are commonly delivered as services.
Over the past 30 years, MSPs have focused on using a very simple business model of labor arbitrage -- sometimes called "your mess for less." They've managed customer environments for less by being more efficient (primarily by offshoring labor). In the past, they've been successful at this model without having the benefit of true economies of scale. But MSPs still trying to use labor arbitrage are now facing significant challenges.
A similar scenario occurred during the advent of electricity. Utility companies realized that building power stations was a more cost-effective model than having each household run its own generator. Why? Aside from the fact that the average homeowner wouldn't have known how to maintain and service a generator, the advantages of economies of scale proved to be incredibly powerful. We're seeing the exact same events playing out in the IT and Unified Communications space.
Unfortunately, MSPs have taken individual customer environments (their personal enterprise power generators) and simply let them run as-is within their infrastructures. They've not achieved economies of scale.
Now that cloud architecture is coming to fruition, MSPs have the opportunity to transform into cloud service providers. They can drive economies of scale so they're no longer simply running and maintaining a server and infrastructure for every customer. Running and maintaining hundreds of individual servers, even virtualized, will never deliver the same outcome or economy of scale as having them all contained within a multitenanted cloud-based facility.
A New, Less Manual Model
Labor arbitrage is reaching the limit of its cost impact.
MSPs are feeling the squeeze -- they can only drive low-cost labor so far in terms of its ability to deliver more productivity. Therefore, the scalability of services is limited. What's more, low-cost locations such as India and the Philippines aren't so cheap anymore. Wages in those regions are beginning to increase. Even if they're still lower than the regions that they serve, the additional cost of running a separate operation in another part of the world is quickly making up for the difference and squeezing MSP margins.
The squeeze also comes from another angle: increased complexity in the IT environment. Unified Communications is becoming an enormously complex arena. Think of it, for example, as a subset of the Internet of Things. Think about what's involved in making a simple voice call. It involves an enormous ecosystem of technology, including the hardware devices at each end, the cables that make the physical connection, and the applications running in the background. They all need to work together to facilitate a crisp, clear conversation.
A voice conversation can quickly turn into a video conversation, desktop and/or document collaboration. At the same time, the callers might be instant messaging with other parties. All of those rich interactions are triggering immense levels of complexity. It's simply becoming humanly impossible to manage that kind of service in real time using human labor. The solution, which I'll elaborate on in my next post, is automation.