The Biggest Risk to the Managed Services Market

When it comes to our own lives, high blood pressure is considered the “silent killer.” In recent weeks, I think I’ve spotted a silent killer in the managed services industry; it’s an unspoken threat that could harm both the software vendors and the managed service providers themselves.

It’s called shelfware. Simply put, a few (though certainly not all) software providers are pushing far too many licenses on managed service providers. In some cases, I believe selected software vendors have installed bases where 35 percent to nearly 50 percent of their licenses sold are not being leveraged by MSPs and end-users.

Those licenses essentially are shelfware — sitting unused, and causing some potentially serious problems:

1. For MSPs: In some cases, they are struggling to pay for licenses they don’t need — at least not yet. And there’s a chance they may never need those “extra” licenses.

2. For software vendors: In some cases, I believe a few software vendors are addicted to licensing models that force MSPs to accept more licenses than are really required. As a result, the software vendors’ revenue becomes somewhat artificially inflated.

3. For market disrupters: The opportunity for pure-play SaaS (software as a service) companies is huge. Without worrying about legacy licensing models, “pay as you go” SaaS-driven software providers can disrupt on-premise software providers that have been pushing MSPs to buy more licenses than they need.

Knowing the Risks

In some very selected cases, I think one or two software vendors may be running a house of cards. Here’s why: As those software vendors attempt to transition or extend from on-premise to SaaS (software as a service) solutions, their expensive, artificially bloated on-premise licensing models no longer work.

MSPs, like end-customers themselves, want fair “pay as you go” licensing models.

MSPs put up with the old licensing models because, until recently, they had no other options. But now, I suspect MSPs will push back against shelfware models because they can use pure-play SaaS alternatives as leverage.

Sorry I’m not naming names. The information above is more of my own theory based on side conversations I’ve had with a few MSPs. There’s no “smoking gun” to suggest a specific MSP software provider is about to fall. But as I watch some vendors struggle to offer both on-premise and SaaS options, the on-premise shelfware problem is becoming more apparent to me.

And if I can pinpoint a few specific examples over the next few weeks, I promise to do so for you.

Another Judgment Day

In the early 1990s, temporary channel stuffing and client-server software licensing models often allowed technology vendors to “sell” products that actually sat on shelves. Eventually, those practices caught up with the channel stuffers.

I believe judgment day will arrive in the MSP space within the next 12 to 18 months. Some MSP software providers will attempt to acquire companies and/or get acquired. Software companies that sold thousands or millions of unused software licenses will have a difficult time selling their companies at a healthy valuation.

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