We’ve all seen it many times. Margins on profitable products and services erode as they become commoditized. And now, the same process is starting to happen to the IT services market.
It began with the commoditization of hardware and software sales and service. IT service providers saw their margins steadily shrink as more and more companies undercut prices to gain market share. The price decline meant there was almost no profit attached to a sale, making it virtually impossible for companies to thrive.
To escape this situation, VARs and IT companies started to rely more on delivering services but found, once again, the market was becoming inundated with competitors who were selling services as a unit of time — creating a new wave of commoditization.
This led many IT service providers to make the move to managed services. The majority are at the “reactive” stage of service delivery, which means they are delivering basic managed services – involving primarily network monitoring and on-site resolution efforts – to build a loyal customer base and a recurring revenue stream, while transforming their business into a full managed service provider (MSP).
But now there is a stampede of companies entering the lucrative managed services market. Many VARs, large telcos and big box retailers who have seen their margins on hardware and software sales and service diminish, are now starting to offer their own brand of managed services, which are typically time- or device-based as opposed to value-based. Because they don’t have the expertise or experience to deliver true managed services, they are lowering their prices to attract small- and medium-sized business (SMB) customers.
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