Although the trend among enterprises of all sizes is to outsource, or ‘out-task’, an increasing proportion of their IT operations to third-parties to reduce costs and increase operating efficiencies, the rate of adoption continues to vary between managed services and software-as-a-service (SaaS).

According to THINKstrategies research, SaaS is gaining acceptance among organizations of all sizes in almost every industry, while managed services continue to be of greater interest to small- and mid-size businesses (SMBs). And, even in this category managed service providers (MSPs) still find the sales cycles longer than they would like, making the managed service business more challenging than they imagined.

Ironically, managed services and SaaS are similar in many ways and the terms are often used interchangeably. Both assume responsibility for performing an IT or business function. Both alleviate the hassles and upfront costs of performing the function. Both rely on a centralized provisioning process to deliver their solutions. And, both monitor and manage their solutions in a continuous and remote fashion to ensure the availability and performance of their solutions in economic fashion.

Given the fundamental similarities between managed services and SaaS, why is there a dichotomy between the adoption rates of the two out-tasking alternatives?

The first major difference is that MSPs are asking potential customers to trust them with the management responsibility of some aspect of the customers’ IT operations, while SaaS providers are simply making it easier to utilize a business application. The level of perceived risk is very different between relinquishing control of an IT function and acquiring the right to use an application. Although an application failure can adversely impact an organization, the impact can often be isolated to specific business area. IT management problems could disrupt an entire organization.

Given the greater level of perceived risk, organizations must have a higher level of trust in their MSP than a SaaS provider. In many cases, unless an organization already knows the MSP they are unlikely to relinquish even poorly operating IT functions. On the other hand, organizations are less apprehensive about trying a new application from a relatively unknown SaaS provider that can enhance their business operations. As a result, many SaaS providers are able to sell their applications via the web with minimum human interaction. On the contrary, most MSPs must still use face-to-face, direct sales techniques to convince customers to acquire their services.

As a result of the hesitancy among organizations to adopt managed services from providers they don’t know, many MSPs are attempting to sell their services via local resellers and integrators who already have an established customer base. Although many of the local companies are seeking a new revenue stream and method to strengthen their customer satisfaction and loyalty, few fully understand the business implications of becoming a MSP. This has forced many MSPs to dedicate more time and money on training and education programs to teach their local channel partners how to succeed in the MSP business. They must also develop a sales, support and revenue-sharing model that work for both the local reseller or integrator and the MSP.

For the most part, SaaS providers don’t have this problem. They can generally sell their applications directly to their customers, avoiding the channel development and coordination challenges and costs faced by MSPs.

SaaS providers also don’t have to worry about complicated start-up procedures and costs when they acquire a new customer. In most cases, the customer follows a few easy steps to begin using a SaaS solution and can get the tech support they need online or with a quick phone call.

In contrast, many managed services require an assessment of an organization’s IT systems and service issues before the managed services can be properly deployed. After the organization’s IT management needs are determined, the MSP must then design its technology and services to address the organization’s specific needs. This requires costly technicians and customization on the MSP side, and demands that the customer accommodate the MSP’s management technology and techniques.

In many cases, this also means that the MSP must penetrate the customer’s firewall to assess the current state of their systems and continue to monitor the customer’s systems on an ongoing basis to properly manage them. This creates a variety of security concerns for the customer.

MSPs also face a greater packaging and promotion challenge than their SaaS counterparts. Successful SaaS providers often offer free trials or single-user versions of their applications to entice new customers. They can also offer month-to-month subscription rates. This eliminates the financial risk in the SaaS transaction. The complexity and the cost of deploying most managed service offerings preclude MSPs from offering similar incentives.

Until MSPs are able to overcome these issues they will continue to lag the growth rates of SaaS providers.