By Paul DeGroot [bio]
Posted: Jun. 18, 2007

The following is the full text of an article published by Directions on Microsoft, an independent research firm focused exclusively on Microsoft strategy & technology. More samples of our content, as well as a list of upcoming articles and reports are also available.

Prodded by competitive pressures and financial imperatives, Microsoft's managed services plans are evolving. The company now plans to offer hosted desktop management services and hosted versions of Microsoft server software to a wide range of customers, and expects many business customers to be using these managed services offerings—purchasing them either from partners or from Microsoft itself—within 10 years. Customers and smaller partners may benefit from the change, but large partners who provide managed services today could find themselves competing with Microsoft or relegated to less-profitable parts of the business.

Moving Past Trials

Microsoft's most notable effort so far to directly provide managed services for customers is a contract with Energizer Holdings, followed some time later with a similar managed services contract with XL Capital, a financial services firm. Energizer has about 7,000 desktops in more than 40 countries; numbers for XL Capital have not been disclosed. In June 2007, the company said it had two unnamed customers ready to launch, as well as others that are considering a managed services engagement.

Microsoft hosts the servers on which these companies' Exchange and SharePoint software runs, and its management tools deploy, update, and maintain the software on their desktop computers. The companies continue to have some IT staff of their own for application development and user training, but helpdesk services and deskside support are provided by Siemens Business Services, under a contract with Microsoft.

Microsoft originally positioned its managed services engagements as "product design and learning experiences," and its managed services unit was part of Microsoft's own IT organization. However, the company took an important step toward commercialization in late 2006 when it repositioned the unit, formally naming it Microsoft Managed Services (MMS), taking it out of the internal IT organization, and moving it into the same product organization as its server platform software and development tools. MMS was charged with a mission to help make Microsoft products more manageable and to add services capabilities to every server product.

Going Big

Ron Markezich, vice president of managed solutions and head of MMS, clearly signaled that Microsoft no longer regards managed services as a learning opportunity when he stated in June 2007 that MMS "is a business for us. This is not an R&D effort or best practice effort." He also said for the first time that Microsoft plans to make its managed services available to its entire business customer base.

Initially, Microsoft is targeting customers with more than 5,000 seats, because managed services customers prefer to have dedicated hardware to keep their data and business processes isolated from those of other customers. However, pricing and availability are in flux. Markezich said that although MMS is already rolling out the services to some customers, soliciting business from others, and has price lists for its services, it is not ready to release a roadmap outlining which services will be generally available to customers, and when.

The group has grander ambitions over the next 10 years. Markezich said the company eventually wants its managed services to be available to customers of any size. A key prerequisite: "multi-tenant" features in Microsoft's server applications, which enable multiple instances of an application to run simultaneously but in logical isolation from each other. This in turn enables hosting customers to share hardware more cost-effectively than even hardware virtualization can offer today, reducing the overall cost of serving smaller customers. Within the next decade, as many as 20% of all business desktops could be using Microsoft's managed services (delivered by Microsoft directly, or through partners), Markezich said.

An unstated goal of Markezich's group may be holding off emerging competitors, such as Salesforce.com and Google's Apps for Your Domain. Although their technical architecture is different from Microsoft's desktop client focus, these and other competitors are offering Internet-based applications and services that accomplish customer goals similar to those of managed services: by reducing the role of the client PC to running a Web browser, the customer reduces IT costs associated with ongoing management of software and hardware, and can put more of its budget into projects that offer incremental business advantages.

Customer Benefits, Risks

Microsoft's entry offers several advantages to potential managed services customers.

One throat to choke. Many customers have asked the company to run the software that it writes, Markezich says. Partners that manage Microsoft desktops on behalf of customers often blame Microsoft for problems, while Microsoft may identify poor management processes, configuration choices, or badly behaved custom applications as the culprits. Given that Microsoft is ultimately the only company that can permanently fix problems associated with its ubiquitous desktop OS and applications, some customers feel that turning management over to Microsoft improves their chances of a smoothly running operation.

However, this goal may be difficult to achieve. MMS is positioning its role as a relatively narrow one, with room for partners to be engaged in many critical migration and application development roles. Unless Microsoft carefully restricts what partners can do (to the potential disadvantage of both customers and partners), customers will continue to face vendor conflicts.

Unique product expertise and improvements. Microsoft is uniquely positioned to exploit new capabilities of its products. Direct involvement in operations could provide further insight into manageability features that Microsoft's products still need, which can be put on the schedule for future product releases.

At the same time, Microsoft also presents some specific risks as a managed services provider.

Software churn. By maintaining control of managed services contracts, Microsoft will be in far better position to influence the makeup of customers' desktop and server software. The company has strong incentives to put customers on the latest software, which might lead to customers moving before they are ready.

Competitor lockout. Unlike other managed service providers, Microsoft is an enterprise software developer, so it has an incentive to exclude competing ISVs, such as Google (enterprise search) or VMware (virtualization tools), even if a managed services customer might be better suited for products from those companies.

Partner Impact

Managed services partners play a significant role in current MMS engagements. For instance, on the Energizer engagement Hewlett-Packard provides helpdesk services, while Siemens provides deskside support. But the company sees a larger role for partner involvement in MMS engagements in the long run.

MMS divides customer adoption of its managed and hosted services into four phases: planning, preparation, migration, and ongoing operations (including support). Of those roles, Microsoft may perform only the operations role in many engagements. During the other phases, partners will be involved in preparation and migration activities required to create a baseline for managed desktop and hosted Exchange, SharePoint, and Communications Server, including hardware upgrades, network design, Active Directory implementation, application rationalization and testing, on-site deployment work, and creating "run" environments, such as packaging applications for delivery by Microsoft's SoftGrid OS virtualization and software distribution environment.

Managed services partners could also see improvements to profit margins through server consolidation and improved server manageability, if Microsoft improves the hostability of its major services and adds multitenancy to more of its servers (one of the reasons that MMS was placed in a server product group).

However, the role that Microsoft will retain in its managed services engagement—ongoing operations—is a strategic one that partners may be loathe to give up, for reasons such as the following:

• Being in charge of ongoing operations places the managed services provider first in line for additional lucrative services and applications, and partners who currently use managed services as a wedge that delivers additional services may not be happy with a secondary role in a Microsoft-managed shop
• Having partners perform advanced IT roles such as data transformation or application development on top of Microsoft-managed infrastructure does not prevent finger-pointing when problems occur
• The major MMS roles that partners have today—running a helpdesk and providing deskside support—are labor-intensive roles that hold little attraction for many managed services companies
• Although Microsoft says its managed service customers will have to purchase volume licenses through standard channels, managed services engagements could help Microsoft sell more licenses. This could give Microsoft a greater profit from managed services than its partners can earn from the same business at the same price.

Smaller Partners May Benefit

Depending on the concrete form that Microsoft's managed services eventually take, small ISV partners who currently do not provide managed services may find Microsoft's proposition attractive. Their customers may not have a large IT organization of their own, and customer adoption of a standard desktop platform, dictated and managed by Microsoft, can relieve these ISVs of additional customization required to adapt their products to nonstandard customer environments.

These partners may also welcome the incremental revenue they might receive from reselling Microsoft SKUs for management services; management services are not a current revenue source for many of these partners.

Resources

Earlier articles on Microsoft's managed services strategy include "Executives Clarify Managed Services Strategy" on page 29 of the Aug. 2005 Update, "Managed Services Beginning to Gel" on page 28 of the Apr. 2006 Update, and "Managed Services Readied for Customers" on page 29 of the Dec. 2006 Update.

Microsoft's roadmap for systems management software is outlined in "Systems Center Product Roadmap" on page 3 of the June 2007 Update.