Managed services thrive in tough times

Phil Sayer

Every six months, Forrester Research produces a report tracking the managed services contracts signed by telecom service providers with firms based in Europe. We do this by requesting information from the service providers themselves, as well as taking information from public sources such as press releases.

We have recently published our analysis of the deals completed in the second half of 2008, when the financial crisis was reaching its peak. So it was a surprise to us that the number of deals we identified was not only higher than the previous six months, but greater than any six-month period in the past three years. However, the total deal value was down to less than half the figure for the previous six months. So what is going on, and why?

Three strong trends became clear. Deals are getting smaller and shorter, and the number of multi-service deals has fallen rapidly ­ 75 per cent of all the deals that we tracked were for a contract value of less than €5m (£4.3m), and two thirds were for three-year terms or less.
We talked to a number of service providers and users. This is what emerged:

• Companies are looking to reduce costs by signing simple contracts for single services that can be negotiated and implemented quickly, delivering savings in the current budget year.
  

• IT budgets are under great pressure, with many firms reporting cuts in spending and staff levels.
  

• The requirement for flexibility is paramount ­ long-term multi-service contracts take too long to negotiate and are too inflexible.
  

Under these circumstances, infrastructure managed services are attractive to firms. They enable them to reduce or avoid capital expenditure (capex) and to focus IT on areas of their business that are key to success and are not a commodity.

Telecom service providers’ strengths lie in providing services that are close to their core networks’ business, such as operating datacentre infrastructure and providing network-based services.

This explains why we are seeing rapid growth in managed services for infrastructure services such as managed LANs, PBXs and firewalls. These are all well-defined commodity services for which responsibility can be quickly transferred to the service provider, which has the economies of scale and processes to reduce a company’s costs compared to a DIY approach.

Hosting services are also looking attractive ­ not many firms can or want to raise capex to build or expand a datacentre while cost pressures remain.

In Forrester’s Enterprise and SME Networks and Telecommunications Survey, North America And Europe, Q1 2009, 40 per cent of firms said they are interested in managed services beyond infrastructure and network services such as network-based security services and application hosting.

As a result, even at firms where overall budgets for IT are being cut, spending on managed services is increasing. Make-or-buy decisions for new and often complex applications such as unified communications, collaboration and Web 2.0 are looking easy ­ with no staff and no capex available for the project, managed services make perfect sense.

Budgets for managed network and telecoms services, for desktop and server hardware outsourcing, and for applications and management outsourcing are planned to be larger in 2009 than 2008 spending at more than one fifth of firms.

Will the trend continue, even when the crisis eases? That is down to the service providers. If they deliver good service and value for money, the future for managed services looks very bright.

Please visit www.forrester.com/computinguk for several complimentary reports made available to Computing readers by Forrester Research. Phil Sayer is a principal analyst at Forrester Research.

Read more opinion at http://forrester.computing.co.uk