Although managed services gained a lot of attention during that period, most of the first wave of MSPs failed because they invested too much money in showcase management facilities and were unable to generate an adequate level of customer demand to survive. Customers were hesitant to adopt managed services at that time because they were apprehensive about the security risks of having an outside company monitoring and managing their operations remotely. Customers were also uncomfortable entrusting their IT operations to relatively unproven providers. Today, advances in security technologies and the availability of online reporting capabilities have made SMBs more comfortable.

As managed services gain greater SMB acceptance, nearly every market research firm is forecasting double-digit growth in the managed services market. And, as the complexity and cost of managing IT and communications escalates, THINKstrategies believes managed services are quickly becoming a "must have" rather than a "nice to have" component of SMBs’ IT and communications operations.

In response to the growing market demand for managed services, an expanding array of hardware and software vendors, value-added resellers (VARs), systems integrators and telecommunications carriers are offering managed services. The escalating competition has created a buyer’s market for SMBs.

Yet, most of the managed services players are still trying to properly package, price, position and promote their managed services to make them more attractive and profitable. Some of the MSPs have made the mistake of packaging their managed services as purely remote solutions with limited on-site or customer support. This approach doesn’t appeal to SMBs who prefer to do business with vendors with whom they have a face-to-face relationship.

Even the established vendors, VARs and carriers who have existing relationships with SMBs have made the mistake of creating separate managed services business units that force SMBs to contend with multiple sales reps from the same supplier, disjointed support and confusing bills.

As the MSPs resolve these operational issues, they are finding customer interest and demand remains high. A joint MSPAlliance/THINKstrategies Benchmark study in 2005 found MSP sales revenues had grown 80 percent in the past year. The MSPs’ average sales cycle time had dropped from six months in 2003 to four months in 2005, and average contract length had grown to approximately 20 months, compared with 16 months in 2003. Not only were MSPs finding it easier to sell their services, the proportion of existing clients that bought additional managed services grew to 67.8 percent. As a result, nearly two-thirds (64.3 percent) of the MSPs participating in the benchmark study reported they were cash-flow positive, and the majority that were not currently cash-flow positive expect to be within twelve months.

As SMB reliance on complex IT and communications systems rises, finding more cost-effective ways to manage this technology becomes more imperative. As the managed services industry matures, these services represent an increasingly viable option for offloading the tasks of day-to-day IT and communications management.

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