The BIG business of managed services for SMBs: as applications grow more complex, a key enterprise segment looks for expert guidance

America's Network, August 1, 2004 by Carl Weinschenk

Here's the nightmare scenario for Bankers Integration Group (BIG): The sales manager of a car dealership it serves sits across the desk from a couple that has made a tentative decision to buy. Hoping to cement the sale, the sales manager turns to the BIGFNI Web-based application to locate the best financing package available.

But in this nightmare, something goes wrong. The sales manager can't get into the system. The sale is lost. Most likely, so is the dealership's relationship with BIG.

Such a meltdown was far more likely to happen when BIG hosted its own equipment and applications, says Dennis Lorenz, BIG's vice president of strategic alliances and technology. That's precisely why it doesn't do so anymore. Last year, executives decided that the risk was too great. The company, which provides the interface between automobile dealerships and financing companies, entered a managed services agreement with SBC.

The telco's managed services arm hosts all of BIG's applications, runs an extensive storage-area network (SAN) and provides the wide-area network (WAN) link between its Laguna Niguel, Calif. office, Detroit office and others. SBC's main data center is in Irvine, Calif. with a Dallas backup, Lorenz says.

He adds that SBC provides the kind of redundant, disaster-recovery infrastructure BIG wouldn't want to build on its own and at a significantly lower cost.

SENSIBLE CHOICE

In short, the decision to go with a managed service provider (MSP) was easy. "It just makes the most sense for a company like BIG to go with the pros in the industry who built their whole business around creating this infrastructure," Lorenz says. "Our business is software development. We are relying on their expertise to provide us with the infrastructure and technology to run our business."

It's an example of what is becoming a fairly standard story about the benefits of MSPs. The twist is that BIG, with fewer than 50 employees, is quite small. It's only recently that companies this size (and even smaller) began to routinely require such sophisticated applications and infrastructure. They are discovering MSPs eager to provide them.

Though there is no ironclad definition of an MSP--any oversight of a circuit or application can be called a managed service--it's clear that small and medium size enterprises (SMEs) are handing off more day-to-day control of their applications and services to outsiders.

There are many reasons this is happening. The most basic is that the needs of the SMEs are outstripping their ability to provide those services in-house. The MSP move also is being pushed by industry-specific storage and security mandates that these companies must meet. The MSPs also are changing, as new provisioning and management technologies make smaller companies more logical targets.

GROWING NEEDS

Much of the impetus for managed services starts with the growing sophistication of SMEs' demands. The explosion of broadband has whet the sector's appetite for enterprise-grade applications, and the SMEs understand that they can't provision these services on their own.

"A lot of [smaller] businesses' needs are becoming very technical," says Scott McMillan, the vice president of CompuNet Consulting Group, a small network and data consulting firm in Alpharetta, Ga. "The IT arena is changing on an hourly basis. As everything changes, the SMB can't keep up with things."

The well-documented shortage of IT personnel also is pushing SME use of MSPs. Even when they can be found, engineers, developers and technicians demand high salaries and generally focus on only part of the big picture.

"It's very hard not only to recruit but to retain expertise," says Laurel Burton, the product manager for Qwest Hosting. "This is an efficient way to find resources elsewhere. Unlike [SMEs], we can take advantage of economies of scale because we have a wide breadth of resources." Burton says that about 80% of the companies he hosts are SMEs.

SMEs have gotten the message that if it is going to get done, somebody else is going to do it. "There is less and less concern over relinquishing control of the network to an outsource provider," says Justin Spencer, the product manager for firewalls, VPNs and e-mail hosting for Covad. "Specialized companies now have credibility and trust to take over. The smaller business doesn't have to hire dedicated IT expertise."

A second major driver is the rash of demanding industry-specific mandates. The healthcare industry is in the midst of an intense ramp up to satisfy demanding requirements of the Health Insurance Portability and Accountability Act of 1996 (HIPAA), which is a boon to managed service providers with security expertise. The financial services sector is subject to exacting financial accountability rules and storage requirements mandated by the Sarbanes-Oxley Act.

There are other, less newsworthy (but equally draconian) regulatory demands. For instance, a new California law requires businesses to inform all their customers if their network has been hacked, says Rick Shaw, the technical marketing vice president for AT&T Select Markets. The requirement, he says, is very hard for smaller businesses to meet without the help of MSPs.