Types of IT Service Providers

A big challenge, both to IT Service Providers and to their customers, is in attempting to define exactly what an IT vendor is and how their customers should expect to interact with them.  Many people see IT Service Providers (we will call them ITSPs for short here) as a single type of animal but, in reality, ITSPs come in all shapes and sizes and need to be understood in order to leverage a relationship with them well.  Even if we lack precise or universally accepted terms, the concepts are universal.

Even within the ITSP industry there is little to no standardization of naming conventions, even though there are relatively tried and true company structures which are nearly always followed.  The really important aspect of this discussion is not to carefully define the names of service providers but to explain the competing approaches so that, when engaging a service provider, a meaningful discussion around these models can be had so that an understanding of an appropriate resultant relationship can be achieved.

It is also important to note that any given service provider many use a hybrid or combination of models.  Using one model does not preclude the use of another as well.  In fact it is most common for a few approaches to be combined as multiple approaches makes it easier to capture revenue which is quite critical and IT service provisioning is a relatively low margin business.

Resellers and VARs:  The first, largest and most important to identify category is that of a reseller.  Resellers are the easiest to identify as they, as their name indicates, resell things.  Resellers vary from pure resellers, those companies that do nothing but purchase from vendors on one side and sell to customers on the other (vendors like NewEgg and Amazon would fit into this category while not focusing on IT products) to the more popular Value Added Resellers who not only resell products but maintain some degree of skill or knowledge around products.

Value Added Resellers are a key component of the overall IT vendor ecosystem as they supply more than just a product purchasing supply chain but maintain key skills around those products.  Commonly VARs will have skills around product integration, supply chain logistics, supported configurations, common support issues, licensing and other factors.  It is common for customers and even other types of ITSPs to lean on a VAR in order to get details about product specifics or insider information.

Resellers of any type, quite obviously, earn their money through markup and margins on the goods that they resell.  This creates for an interesting relationship between customers and the vendor as the vendor is always in a position of needing to make a sale in order to produce revenue.  Resellers are often turned to for advice, but it must be understood that the relationship is one of sales and the reseller only gets compensated when a sale takes place.  This makes the use of a reseller somewhat complicated as the advice or expertise sought may come at a conflict with what is in the interest of the reseller.  The relationship with a reseller requires careful management to ensure that guidance and direction coming from the reseller is aligned with the customer’s needs and is isolated to areas in which the reseller is an expert and in ways that is mutually beneficial to both parties.

Managed Service Providers or MSPs: The MSP has probably the most well known title in this field.  In recent years the term MSP has come to be used so often that it is often simply used to denote any IT service provider, whether or not they provide something that would appropriately be deemed to be a “managed service.”  To understand what an MSP is truly meant to be we have to understand what a “managed service” is meant to be in the context of IT.

The idea of managed services is generally understood to be related to the concept of “packaging” a service.  That is producing a carefully designed and designated service or set of services that can be sold with a fixed or relatively predictable price.  MSPs typically have very well defined service offerings and can often provide very predictable pricing.  MSPs take the time up front to develop predictable service offerings allowing customers to be able to plan and budget easily.

This heavy service definition process generally means that selecting an MSP is normally done very tightly around specific products or processes and nearly always requires customers to conform to the MSPs standards.  In exchange, MSPs can provide very low cost and predictable pricing in many cases.  Some of the most famous approaches from MSPs include the concepts of “price per desktop”, “price per user” or “price per server” packages where a customer might pay one hundred dollars per desktop per month and work from a fixed price for whatever they need.  The MSP, in turn, may define what desktops will be used, what operating system is used and what software may be run on top of it.  MSPs almost universally have a software package or a set of standard software packages that are used to manage their customers.   MSPs generally rely on scaling across many customers with shared processes and procedures in order to create a cost effective structure.

MSPs typically focus on internal efficiencies to maximize profits.  The idea being that a set price service offering can be made to be more and more effective by adding more nearly identical customers and improving processes and tooling in order to reduce the cost of delivering the service.  This can be a great model with a high degree of alignment between the needs of the vendor and the customer as both benefit from an improvement in service delivery and the MSP is encouraged to undertake the investments to improve operational efficiency in order to improve profits.  The customer benefits from set pricing and improved services while the vendor benefits from improved margins.  The caveat here is that there is a risk that the MSP will seek to skirt responsibilities or to lean towards slow response or corner cutting since the prices are fixed and only the services are flexible.

IT Outsourcers & Consultants: IT Outsourcing may seen like the most obvious form of ITSP but it is actually a rather uncommon approach.  I lump together the ideas of IT Outsourcing and consulting because, in general, they are actually the same thing but simply handled at two different scales.  The behaviours are essentially the same between them.  In contrast with MSPs, we could also think of this group as Unmanaged Service Providers.  IT Outsourcers do not develop heavily defined service packages but instead rely on flexibility and a behaviour much more akin to that of an internal IT department.  IT Outsourcers literally act like an external IT department or portion thereof.  An IT Outsourcer will typically have a technological specialty or a range of specialties but many are also very generalized and will handle nearly any technological need.

This category can act in a number of different ways when interacting with a business.  When brought in for a small project or a single technological issue they are normally thought of as a consultancy – providing expertise and advice around a single issue or set of issues.  Outsourcing can also mean using the provider as a replacement for the entire IT department allowing a company to exist without any IT staff of their own.  And there is a lot of middle ground where the IT Outsourcer might be brought in only to handle specific roles within the larger IT organization such as only running and manning the help desk, only doing network engineering or providing continuous management and oversight but not doing hands on technical work.  IT Outsources are very hard to define because they are so flexible and can exist in so many different ways.  Each IT Outsourcer is unique as is, in most cases, every client engagement.

IT Outsourcing is far more common, and almost ubiquitous, within the large business and enterprise spaces.  It is a very rare enterprise that does not turn to outsourcing for at least some role within the organization.  Small businesses use IT Outsourcers heavily but are more likely to use the more well defined MSP model than their larger counterparts.  The MSP market is focused primarily on the small and medium business space.

It is imperative, of course, that the concept of outsourcing not be conflated with off-shoring which is the practice of sending IT jobs overseas.  These two things are completely unrelated.  Outsourcing often means sending work to a company down the street or at least in the same country or region.  Off-shoring means going to a distant country, presumably across the ocean.  It is off-shoring that has the bad reputation but sadly people often use the term outsourcing to incorrectly refer to it which leads to much confusion.  Many companies use internal staff in foreign markets to off-shore while being able to say that no jobs are outsourced.  The misuse of this term has made it easy for companies to hide off-shoring of labor and given the local use of outsourced experts a bad reputation without cause.

It is common for IT Outsourcing relationships to be based around a cost per hour or per “man day” or on something akin to a time and materials relationship.  These arrangements come in all shapes and sizes, to be sure, but generally the alignment of an IT Outsourcer to a business is the most like the relationship that a business has with its own internal IT department.  Unlike MSPs who generally have a contractual leaning towards pushing for efficiency and cutting corners to add to profits, Outsourcers have a contractual leaning towards doing more work and having more billable hours.  Understanding how each organization makes its money and where it is likely to “pad” or where cost is likely to creep is critical in managing the relationships.

Professional Services: Professional Services firms overlap heavily with the more focused consulting role within IT Outsourcing and this makes both of these roles rather hard to define.  Professional Services tend to be much more focused, however, on very specific markets whether horizontal, vertical or both.  Professional Services firms generally do not offer full IT department or fully flexible arrangements like the IT Outsourcer does but are not packaged services like the MSP model.  Typically a Professional Services firm might be centered around a small group of products that compete for a specific internal function and invest heavily in the expertise around those functions.  Professional Services tend to be brought in more on a project basis than Outsourcers who, in turn are more likely to be project based than MSPs.

Professional Services firms tend to bill based on project scope.  This means that the relationship with a PS firm requires careful scope management.  Many IT Outsourcers will do project based work as well and when billing in this way this would apply equally to them and some PS firms will be billing by the hour and so the IT Outsourcing relationship would apply.  In a project it is important that everyone be acutely aware of the scope and how it is defined.  A large amount of overhead must go into the scoping by both sides as it is the scope document that will define the ability for profits and cost.  PS firms are by necessity experts at ensuring that scopes are well defined and profitable to them.  It is very easy for a naive IT department to improperly scope a project and be left with a project that they feel is incomplete.  If scope management is, and you will excuse the pun, out of scope for your organization then it is wise to pursue Professional Services arrangements via a more flexible term such as hourly or time and materials.

All of these types of firms have an important role to play in the IT ecosystem.  Rarely can an internal IT department have all of the skills necessary to handle every situation on their own, it requires the careful selection and management of outside firms to help to round out the needs of a business to cover what is needed in the best ways possible.  At a minimum, internal IT must work with vendors and resellers to acquire the gear that they need for IT to exist.  Rarely does it stop there.  Whether an IT department needs advice on a project, extra hands when things get busy, oversight on something that has not been done before, support during holidays or off hours or just peers off of whom ideas can be bounced, IT departments of all sizes and types turn to IT Service Providers to fill in gaps both big and small.

Any IT role or function can be moved from internal to external staff.  The only role that ultimately can never be moved to an external team is the top level of vendor management.  At some point, someone internal to the business in question must oversee the relationship with at least one vendor (or else there must be a full internal IT staff fulfilling all roles.)  In many modern companies it may make sense for a single internal person to the company, often a highly trusted senior manager, be assigned to oversee vendor relationships but allow a vendor or a group of vendors to actually handle all aspects of IT.  Some vendors specialize in vendor relationship management and may bring experience with and quality management of other vendors with them as part of their skill set.  Often these are MSPs or IT Outsources who are bringing IT Management as part of their core skill set.  This can be a very valuable component as often these vendors work with other vendors a great deal and have a better understanding of performance expectations, cost expectations and leverage more scale and reputation than the end customer will.

Just as an internal IT department is filled with variety, so are IT service and product vendors.  Your vendor and support ecosystem is likely to be large and unique and will play a significant role in defining how you function as an IT department.  The key to working well with this ecosystem is understanding what kind of organization it is that you are working with, considering their needs and motivations and working to establish relationships based on mutual business respect coupled with relational guidelines that promote mutual success.

Remember that as the customer you drive the relationship with the vendor; they are stuck in the position of delivering the service requested or declining to do so.  But as the customer, you are in a position to push for a good working relationship that makes everyone able to work together in a healthy way.  Not every relationship is going to work out for the best, but there are ways to encourage good outcomes and to put the best foot forward in starting a new relationship.

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