As basic transport and connection services come under increased cost pressure, particularly in the area of enterprise and small and medium-sized business (SMB) services, service providers have looked at 'climbing the OSI stack' to higher levels to increase their profits. At the same time, providers have recognized that their economies of scale for providing support could make managed network services another strong profit source. Today, the two concepts are being combined in a new managed service model that promises the first major source of new revenue since data services began.
Managed services are a relatively recent success in the U.S., but they've been popular in the rest of the world for more than a decade. The basic concept of managed services is that the resources needed to operate an enterprise network are expensive and hard for an enterprise to utilize efficiently. Service providers, with strong network expertise and a larger pool of skilled personnel, have a better economy of scale for support tasks. Mirroring this economy of scale could allow service providers to sell users a wide-area network (WAN) service that includes support for routers, switches and other devices at a lower price than the user could achieve, but one that would still earn the provider a profit.
Managed services vs. in-house services staff
While the basic concept of managed services is that of economy of scale, multiple factors influence just how valuable managed services might be to a user:
Skilled support personnel in the local labor pool. The larger the available labor pool, the lower the likely cost of acquiring skilled personnel. In a small labor pool, it's difficult to retain personnel, and in-house support is always a risk.
Efficient support for the user compared with having in-house staff. Businesses can approach service providers for support in terms of economy of scale.
The pace of technology changes and network complexity. The more specialized the resources needed, the lower the chance users can attract, afford and retain the personnel they need in-house.
In the last 10 years, momentum in all of these areas has been shifting toward managed services, but not always in the obvious ways.
Networking growth, new services drive managed service adoption
More skilled network professionals than ever may be in the job market, but the number needed is far outstripping the number available. Networking was once the province of large companies, but now even small businesses use it. In 1990, the number of skilled support organizations was approximately the same as the number of companies with private networks. Today, the number of skilled support organizations has grown by 300%, but the number of private networks is 20 times higher, and that's almost entirely because the need for networking has spread into the SMB market. Smaller organizations have neither the ability to attract and retain skilled network support personnel nor the size to utilize them efficiently. If a router expert costs $100,000 a year in salary and benefits, a company with 100 routers in its network can justify the cost, but not a company with two or three.
Improved operations tools are also increasing the economies of service providers in supporting users through managed services. For more than a decade, the rule of thumb was that the cost to an enterprise of supporting a network was approximately equal to the capital cost of equipment and the monthly cost of WAN service -- the so-called 'two-x' rule.