According to most of the IT market research firms, managed services is one of the fastest growing segments of the IT/networking industry. THINKstrategies’ own research and consulting engagements also confirm greater interest and receptivity to managed services among enterprise decision-makers in both large-scale organizations and small/mid-size businesses (SMBs).

Yet, every managed service provider (MSP) that I talk to admits that the business is a lot harder than they expected. They are struggling with longer sales-cycles, smaller scale contracts and less up-selling opportunities than they anticipated.

The struggles of the MSPs to gain broad-based market penetration is also obvious when you compare the customer lists of the Software-as-a-Service (SaaS) providers vs. the MSPs listed on THINKstrategies’ SaaS Showplace and Managed Service Showplace online directories. Many of the SaaS providers boast an impressive assortment of Fortune 500 and other brand-name companies among their customers, while most of the MSPs have a limited number of more modest local or regional customers.

Although I’ve been a proponent of managed services for many years, I’ve also written numerous articles and commentaries on the barriers to success in the managed services business. My most recent column is in last week’s Channel Insider which identifies three primary problems facing most MSPs—

1. They must rebuild their corporate cultures… Rather than focusing on selling and servicing products, MSPs must become comfortable selling and managing their customers’ IT and network operations.
2. They must swap out their traditional sales teams… Most traditional salespeople are skilled at selling the technical features of packaged products, but not the business benefits of managed services.
3. They must restructure their revenue models…Rather than depend on the upfront revenue that comes from traditional product and maintenance contract sales, MSPs must become acclimated to the incremental revenue flow of subscription oriented managed services.

Yet, these internal issues are only a small subset of a longer list of challenges facing MSPs. The full list includes competitive challenges that I outlined in a CNet commentary almost two years ago. The most important of the competitive challenges that I identified then still plagues the managed services market today—a proliferation of managed service players defining managed services differently to serve their proprietary interests rather than their potential customers’ needs.

There is also an underlying customer perception issue facing MSPs. Most large-scale enterprise and SMB decision-makers are still uncomfortable “out-tasking” part of their IT/network management responsibilities to an outside vendor/provider, especially one that performs the management function remotely. The need for MSPs to gain the trust of potential customers was the primary theme of one of my NetworkWorld commentaries nearly a year ago and still is a major barrier to success today.

Unlike the software-as-a-service (SaaS) market that is soaring because a growing number of customers can easily recognize the value and believe they can mitigate the risks, most customers are still apprehensive about the threat that MSPs may pose to their jobs or the impact a managed service failure could have on their IT/network and business operations. The way many decision-makers see it, they can withstand a specific application being unavailable due to outages like Salesforce.com has recently suffered, but they cannot risk having an entire IT/network or business function fail that was being handled by a MSP.

The truth is that many MSPs have better performance records than SaaS providers like Salesforce.com. But, MSPs have done a terrible job quantifying and promoting their success. They’ve also failed to develop free samples of their services like many SaaS providers offer that enable potential customers to test their managed service capabilities and get a taste of their potential benefits.

There are many challenges MSPs face in order to succeed, never mind survive as I suggested in a CRN column entitled “Crossing the Managed Services Chasm.” Ultimately, as I stated in my NetworkWorld commentary in September, independent MSPs that fail to overcome these challenges will join the growing list of providers that have folded or been acquired by bigger players.