Colocation Managed Services Problems

Today we’re going to dive into Colocation Managed Services Problems -- problems with managed services at colocation providers.

Part of what motivated me to put this episode together is we’ve found that there's a lot of schizophrenia going on with small- to mid-size colocation data center providers (colo’s) and managed services providers (MSPs).

What does the schizophrenia look like? What does this dysfunctional nonsense appear like on the surface?

Avoiding Poor Colocation Business Strategy

You end up with some very fuzzy strategy. There just simply are not enough conversations going on about working on the business -- as opposed to working in the business -- as followers of Michael Gerber’s E-Myth would likely related to.

We need to be thinking more about differentiation, the mission of the company, the culture of the company, and product/market fit; In other words, the degree to which we know exactly

  • Who our ideal customers are
  • What products and services they purchase from us
  • The price points that they purchase those products and services at
  • The durations and quantities that we can expect those purchases to be made at

Once we have the answers to those questions, we know if our company is capable of satisfying strong market demand.

When we do not have the answers to those questions, we end up with where a lot of small colocation providers are at: The state of schizophrenic, very fuzzy strategy where anyone and everyone that has a credit card is a great potential client. And then you just end up spreading yourself too thin and trying to be all things to all people.

Typical Symptoms to Watch For

This is a big problem. Often in these situations, these companies have relatively low revenue, relatively unsophisticated technical staff, both on the facilities and on the IT side.

There's a lot of outdated or obsolete equipment.

Facilities and software aren't terribly impressive.

All of this is keeping these colocation providers away from more lucrative mid-market and enterprise IT business that’s being won in spades by their competition that are able to outmaneuver them, by being able to address all of their shortcomings that they currently have.

So a lot of these smaller colocation providers end up chasing business based on price, competing on price. And this is the hallmark of a commodity broker, a commoditized vendor.

And this is the same hallmark of a managed service provider who also doesn't have a very sharp strategy. That's not having enough conversations about what makes them special and different, their mission, their culture, and their product/market fit.

Why Small Colocation Providers and Small Managed Services Providers Think the Grass is Greener

But at the end of the day, as crazy as it sounds, colocation providers many times are jealous of managed services providers. Colo’s are jealous of MSPs. And MSPs are jealous of colo’s.

If they only knew that the grass isn't greener on the other side of the fence!

They're both chasing -- the colo’s and the MSP’s-- after the same small business owners.

The colocation providers rationalize that they'd rather have small business owners on their client lists because there’s a much quicker sales cycle.

It is, but it's for much smaller dollar amounts and much lower profit margins. And small businesses without in-house IT expertise need a lot more hand-holding.

If the hand-holding brought about lucrative professional services sales, that would be awesome. But many times, it's free hand holding up and it’s tying up your support department and engineers on very low profitability monthly recurring revenue payments.

At the end of the day, a lot of what's differentiating these companies in the marketplace isn't what they think it is.

The clear demarc, that just about everyone agrees on, is that the colocation providers are largely providing remote, off-premise support.and managed services providers will go out to clients’ offices and provide on-site support.

They both think that the grass is greener. But it isn’t. Both business models, colocation and managed services -- at least in the SMB space, especially with smaller businesses -- are highly commoditized businesses with lousy profit margins.

Now, I do think that it's a good idea for most small colocation providers to offer managed services. But these colocation providers should do that from the standpoint of their business model being a colocation data center and not a disguised managed services provider.

Managed Services in 1999

In order to really think that through, let's look at how managed services has changed over the past decade or two.

If you think back to managed services way back in 1999, it was largely about outsourced virtual IT for small- and medium-sized businesses.

One of their primary offerings was selling remote access to clients; in other words, telecommuters and remote workers being able to get access to resources in the office when they were not at the office.

One of the big things that they sold as part of that managed services was server log monitoring. MSPs offered babysitting for server logs and looked for problems to try to be proactive about staving off issues with storage space, utilization, security, and things like that.

Y2K-, Year 2000, related concerns were on the front burner.

And this was the golden age of Microsoft BackOffice and Microsoft Small Business Server (SBS).

It was pre-MSP, but the reality is that most of what was being done was similar to what would morph into the typical definition of managed services providers.

Managed Services in 2009

Fast forward 10 years from 1999 to 2009, and a lot of things changed. Managed services still outsourced virtual IT for small- and medium-sized businesses that were just big enough to have IT problems, but not big enough to have a sophisticated in-house IT department.

In 2009, businesses were weathering this global economic downturn. The original iPhone had come out (2007) and people were doing a lot more on their mobile devices. So managed services providers got involved in mobile device management (MDM).

Remote monitoring and management (RMM) was also now a big deal. And we started to see software companies that were having managed service providers white label their platforms to more effectively, more efficiently, and more profitably manage a much larger installed base of devices.

Google Apps had come out and was starting to chip away a little bit of some of Microsoft’s near Monopoly power with their iconic Office franchise -- which ultimately created a lot of problems for the bread-and-butter of managed services industry, at least in the SMB segment with Microsoft Small Business Server.

Amazon Web Services (AWS) was starting to gain traction. And that also would change how people looked at Software as a Service (SaaS) and cloud.  Along the same lines, Salesforce was starting to gain a lot more traction and that would eventually get Microsoft a heck of a lot more interested in getting involved in the CRM business (customer relationship management).

What was also different about 2009 versus 1999: the client/server hardware refresh cycle, the gravy train, had largely been halted.

But interestingly enough: managed services providers and colocation data center providers were still completely separate business models. They really appealed to completely different kinds of businesses.

You didn't see colocation data center providers aggressively going after the SMB space that was largely the domain of managed services providers.

Today’s Managed Services

Thinking about where we are today:

If we look at managed services and colocation side by side, think about the local one location colocation provider. And think about the local one location managed services provider.

And maybe if we stretched that definition out a little bi,t we think about the regional player that has two or three locations, that are within a car drive of each other.

So these companies have usually anywhere from  6 to 25 employees, maybe 50 employees at the most --  usually more in the 20 to 30 employee range, they really tend to top out around $3 million to $5 million in annual revenue.

Inside the Local Managed Services Provider

On the MSP side, their small business clients are demanding hosting. They're demanding that MSPs provide support for cloud services and colocation needs.

Managed service providers will buy wholesale colocation and sell it as retail colocation.

The prevailing attitude is something like, “Hey, we’d better manage that or somebody else will.”

MSP’s are all about account control issues right?

In terms of differentiation, MSP CEOs are routinely quoted as saying things like, “We have the best people, the best service, and the best price -- that's what makes us the best and that's why we win.”

Inside the Local Colocation Provider

What about the colocation CEO and their company?

The small, local colocation data center has a similar kind of footprint; a single location or a couple of locations regionally within a car drive of each other.

There’s anywhere from 6 to 25, maybe up to 30 employees.

Colocation CEOs are now attracted to the bread-and-butter of the MSP -- the SMB clients --  because they like the idea that there's a quicker sales cycle and they tend to need more professional services.

The question is: are those professional services profitable for the colocation providers? That’s another, whole separate podcast episode!

The colocation CEO recognizes however that getting a foot in the door with the best small business clients is not so easy. VARs, systems integrators, and what’s become MSPs have been doing this for decades. So these colocation CEOs say, “Oh, well let’s partner with these MSPs, selectively.”

And along the same lines, the colocation CEOs recognize that MSPs are terrible, for the most part, at marketing and sales -- where colocation CEOs feel that they have an edge of MSPs.

Now granted, a lot of small colocation providers aren't hitting it out of the ballpark either on marketing and sales. But compared to managed services providers, yes colocation providers look like geniuses with this marketing and sales.

A lot of colocation CEOs have this attitude, just like the MSP CEOs, that “We’d better manage that or somebody else will.” Again, an account control issue.

And just like MSP’s CEO, a lot of colocation CEOs are frequently quoted as saying things like ”We have the best people, the best service, and the best price. And that's why we win.”

Managed Services Providers and Colocation Data Centers on a Collision Course with Each Other

So the problem is: if MSP CEOs and colocation CEOs are in these same local markets, the companies are similar in size, they're targeting very similar kinds of businesses, and they both say that their companies are wonderful for the same reason -- we need to control everything for the same reason, aren't they on a collision course with each other?

This is the inherent problem.

And if you have a partner, channel program for your colocation business and you're looking to recruit MSPs and MSP-ish kinds of businesses -- like network integrators, value added reseller (VARs), developers, computer consulting firms, or traditional Microsoft Partners, your colocation channel program is going to suffer until you're ready to confront these realities.

And these are definitely not easy decisions.

The Bottom Line on Colocation Managed Services Problems

So my advice:

  • Think more about strategy than tactics. It's difficult because usually the reason that the CEO, owner, or founder got into that business is that the person came from a pretty technical background themselves. They tend to be the most technical person in the company. So for all intents and purposes, in addition to being CEO, president, owner they're also usually the CTO -- getting pulled into really thorny technical issues or when a couple of members of their staff are out sick or on vacation -- putting on the superhero cape and fighting fires. With that mentality, it’s very easy to get stuck in the weeds and not think enough about strategy. Think about what your product and service offering is. How profitable your products and services are. Where the company's going in the next 6 to 24 months. All the things that true CEOs think about. But it's critical to work on that at least one or two days a week on a regular basis.

  • Think about who your ideal customers are. It's critical to have a strong understanding of who your ideal clients are. You cannot be everything to everyone. We've gotten way past the point where “small business” is a specialization, vertical, or niche. The only people that talk about small businesses like that work for giant banks or government entities like the U.S. Small Business Administration or SCORE (Service Corps of Retired Executives). For small colocation providers and small managed service providers, you have to have an idea of who your most profitable kind of client is that you want to attract into your business to grow with. Who’s the second most important or second most profitable kind of client that you want to attract? Because if you're trying to be everything to everyone, it's very easy to just be all over the place and end up totally unprofitable.

  • Have the product/market fit conversation often.

  • Be realistic about your company’s differentiation or lack thereof. Are you all about “the best people, the best service, and the best price?” Newsflash: everyone is saying that. And people only care about those when they’re existing clients are just about to become a client. For strangers that have never before heard of your company, the same strangers that are doing tons of research on search and social before they ever get to you, it's critical that we intercept them as early as possible in the first 70% of their buyer’s journey -- to help shape their purchase criteria, to be seen as an educator, a thought leader, a trusted advisor, and a subject matter expert. So all of those differentiators that you think that you have -- yes, they're relevant in the 7th, 8th, and 9th inning. Or in the fourth quarter of the game. But otherwise, nobody knows who you are and nobody cares (yet). We have to have a new way to think about differentiation.

  • The smaller your company is, the more you need to pick your battles very carefully.

  • Stop chasing that low-margin price competition business where you know the top line revenue looks healthy, but the bottom line is a joke. If you're not able to analyze your profitability by client, at least for your 10 biggest clients, take some time and think about it. Because it's entirely possible that you have clients that you're paying for the privilege of serving, as opposed to the other way around. It's also critical because of the way the buyer's journey has changed for colocation and wholesale data center services.

  • Get found earlier, so you can sell based on your team's real value, as opposed to selling based on price competition.

  • Non-technical small business owners, CEOs, presidents that don't come from an IT background get very confused about the differences between managed services and colocation. It's a challenge for you, but it's also a great opportunity for your company to educate and build trust.

We've been talking all about colocation managed services problems, both from the MSP perspective and the colo perspective.

Hopefully I’ve given you some good food for thought on the kinds of things that should get baked into your strategy, how to pick your ideal clients, how you differentiate, and how you can focus on much more profitable, much more lucrative business going forward.

I'm so glad to have had you with us for this episode of the ColoCast Podcast.

I'm Joshua Feinberg and we look forward to seeing you back again next time.