Magazine Article | March 17, 2014

A "No BS" Approach To Growing Recurring Revenue Sales

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By Jay McCall

This MSP’s 4-step business strategy, which is based on KPIs (key performance indicators) and years of hard-learned lessons, is resulting in 55%-plus service-based profit margins.

Just a few minutes into a conversation with Vince Tinnirello, CEO of managed services provider Anchor Network Solutions, and one can begin to understand why his company enjoys an 80 percent win rate when engaging new prospects. Tinnirello’s confidence in his company’s ability to provide SMBs (five- to 80-user companies is the MSP’s sweet spot) with mission-critical IT solutions and services is balanced by his candor in sharing real-world setbacks and failures along the way. Any VAR or MSP can learn from and adopt Tinnirello’s business lessons — specifically, the four key business drivers behind Anchor Network Solutions’ success.

Business Driver #1: “Bedside Manners” Are An MSP Must-Have
Part of being a successful IT service provider requires that salespeople, engineers, and technicians have a passion for what they’re doing. However, Tinnirello is quick to caution that some resellers can get so caught up in talking tech that they talk over the business owners’ or office managers’ heads they’re trying to impress and alienate themselves in the process. “You can hire brilliant technicians, but if they can’t relate to non-IT people and have engaging business conversations, you’re out of luck,” warns Tinnirello. “Some MSPs mistakenly think they can overcome this issue by using remote monitoring and management tools to minimize face-to-face conversations with customers, but that doesn’t work long term either.”

According to Tinnirello, these initial face-to-face business conversations enable a VAR/MSP to establish trust with a client, and if this is done right, the service provider doesn’t have to prove itself over and over throughout the business relationship. Tinnirello believes so strongly in having intelligent, face-toface business engagements with clients that two service department managers he hired have MBAs — in addition to strong communication skills. How does Anchor Network Solutions ensure its prospective new hires have good customer communication skills? During the interview process, the MSP looks for customer-friendly body language, such as eye contact and smiling. Further into the interview process, the MSP administers a personality profile test called DISC, which Tinnirello finds is very accurate identifying candidates with a good balance of “a sense of urgency to resolve problems” plus “cool under pressure.” As a final test, the MSP has the new candidate shadow a lead technician during a customer visit, just prior to making a formal job offer.

If you’re wondering how the MSP knows that focusing on hiring sales engineers with strong communication skills is important, consider this: 80 percent of Anchor Network Solutions’ revenue comes from consulting services and only 20 percent comes from selling hardware or software. A deeper look into the MSP’s consulting services provides further confirmation. In 2013, the MSP’s consulting revenue was composed of the following:

  • 88 percent was from recurring revenue contracts,
  • 9 percent was from projects,
  • 2 percent was from time and materials and subcontract labor projects, and only
  • 1 percent was due to time and materials from break-fix services.

Business Driver #2: Transparency Is Key To Building Long-Term Customer Relationships
If having the willingness to engage business owners and office managers in IT discussions at a practical level is an important prerequisite to getting its foot in the door, Anchor Network Solutions credits its transparency with clients as the key to strengthening its business relationships. This practice, which includes a “no white-labeling policy,” came from a couple of hard-learned lessons from the past. “A few years ago, we were white labeling an email service from a hosted Exchange vendor, and we lost a customer after the hosted provider’s email went down,” recalls Tinnirello. “After the incident I started thinking to myself, ‘I’m putting my company’s name on this service, making only $10 a month from this client, and I’m taking the blame for the outsourced vendor’s business problem?’ That’s ridiculous!”

Not only does Anchor Network Solutions avoid white-labeling any products or services, it’s also learned to manage customers’ expectations when it comes to choosing hosted IT solutions and services. “Years ago we were fired by a five-person client after they experienced a problem accessing their hosted Microsoft Office 365 applications,” he says. “Even though the client knew upfront that this particular application was being provided by and billed by Microsoft, the business owner told us he was firing us because we had recommended it to them and therefore we were responsible.” Tinnirello has never forgotten these difficult lessons, and he recalls them, often as a reminder of the importance of managing customers’ expectations early in the business relationships.

The MSP’s approach to selling BDR (backup and disaster recovery) services provides insight into how it manages customers’ expectations using its transparent communications. “Before we sign a BDR service contract I’ll meet with the customer and explain that I understand that they’re paying me $500 per month to keep their data safe, and for that kind of money they should not have problems. However, even nice new backup systems sometimes have problems. I then explain that I’m not recommending this particular solution because I’m making a lot of money from it, rather I’m doing it because I know it’s reliable and hopefully will cut down on my labor costs, too.” Tinnirello finds that this kind of transparency resonates well with clients and goes a long way in building their trust. “I conclude the discussion by reminding them that if some unexpected problem happens, they have a reliable partner that will take care of things as quickly as possible,” he says.

Business Driver #3: Lower The Barrier Of Entry For Doing Business With Your Company
One of Tinnirello’s pet peeves he sees other MSPs make is trying to lock customers in with three-year managed services contracts. “I get the fact that some MSPs want to position themselves for M&As [mergers and acquisitions] down the road, but you have to take the customer’s perspective into consideration,” he says. “We have one-year contracts with customers, plus we give them a 30-day out if they’re unhappy for any reason. If clients want to cancel, we just ask them for a 30-day notice in writing. We want to make doing business a low-risk proposition — not a gamble.”

Subscribe to Business Solutions magazineAnchor Network Solutions adds a 100 percent money-back guarantee to its offering and invites prospects to talk to its other customers for references and testimonials, too. “We rarely have a new client wondering if we’re going to be the right fit for its business,” he says. “We currently have 75 customers under contract, and our retention rate is in the high 90s. Typically, if a client cancels our contract, it’s due to something outside our control such as the customer’s business shrinking or perhaps the client was acquired by another company that’s under contract with another IT service provider.”

Another practice that illustrates the MSP’s “easy to engage with” business philosophy is selling on a per-user (rather than per-device) basis and providing customers with a fixed monthly fee. “Per-device contracts make customers feel like you’re nickel and diming them,” says Tinnirello. “Plus, this approach can backfire as customers move their servers to the cloud, then expect you to discount their monthly service.”

Business Driver #4: Let KPIs Be Your Business Guide
Every IT solution company that makes the transition to selling managed services will agree profit margins are a very important metric to pay attention to. But, according to Tinnirello, “You can’t determine your hardware, software, or servicing profit margins until you know your business operating costs.”

For Anchor Network Solutions, using its Autotask PSA (professional services automation) is critical for tracking costs. “The PSA needs to track a variety of business activities, including the specific time it takes to perform each activity,” says Tinnirello. “For example, the clock starts when a client calls to inquire about an IT problem, but it stops when I’m waiting for a client to get back to me with an update. Having a PSA configured properly to track time and send alerts when certain thresholds are met is essential to gaining confidence in your data.”

Tinnirello says that some MSPs don’t factor in driving to or from a client’s office as part of their service costs, but he believes strongly that it should be tracked along with time spent corresponding with clients via email or phone. “I include this information when I review clients’ service contracts to let them know, for example, that it took 500 hours to support you during this last period, which included 50 hours traveling to and from your office, 10 hours corresponding with you via email, 20 hours corresponding over the phone, etc.,” he says. “It’s not that we’re billing them every time they call or every time we go on-site, but it is important that we know the true cost of our services.”

Having detailed information about its expenses enables Anchor Network Solutions to have a deeper understanding of its profits. “For example, we had a profit margin of 64.13 percent on our managed services business last year,” he says. “That statistic accounts for our labor costs, too. As a rule of thumb, we always strive for at least 60 percent margins on services.” Tinnirello says that new clients are a lot like making investments in mutual funds. During the first year with a new managed services client, it typically results in a minus-2 percent profit margin due to all the time spent fixing/upgrading their IT environment. The profit margin jumps to a healthy 62 percent average for all subsequent years. “We review our KPIs twice a year for each client, and we look at our staff resource productivity regularly, too,” says Tinnirello. “We like to track where staff members spend their time — on an individual and company-wide basis. For example, if we see that one engineer spent 70 percent of his time on a particular service activity and another one spent only 50 percent, we need to investigate to understand why.”

It’s not uncommon for Anchor Network Solutions to make significant business changes based on its data. For example, after recognizing that its average profit margins on selling computers and software was only 16 percent, the MSP made a concerted effort to bundle these commodities with its professional and managed services contracts. Additionally, not long after realizing that its largest customer yielded a profit margin well below its standard, it made the decision to cut ties with the client. “I’ll take 10 smaller companies paying me $1,000 per month over one large company paying me $10,000 per month any day,” says Tinnirello. “If too much of your revenue comes from one client, you start making concessions you wouldn’t otherwise make because you’re afraid to lose that customer.” Tinnirello admits this is a lesson he’s had to learn the hard way and says that his decision to fire his largest client a couple of years ago was one of the best business decisions he’s ever made. “It’s easy to get caught up in only paying attention to the monthly revenue coming in the door and failing to see the extra time spent servicing the client due a myriad of exceptions you made for them over the years, which ultimately led to a flat profit margin and constant headaches,” he says.

Fortunately, Anchor Network Solutions hasn’t had to fire many clients over the years, and Tinnirello says he learned yet another valuable lesson from that experience. “One of the traps MSPs need to avoid is allowing clients to judge their worth by looking at hours spent supporting their network,” he says. “We still show customers these stats, but we explain why it’s a bad number to look at.” For example, the MSP may show a customer that it spent 100 fewer hours this year servicing the client compared with the previous year as a result of the new servers and workstations it implemented for the client. “We then explain that they want this number to continue to drop because they’re paying us for uptime, not to fix things that are always breaking,” he says. “Managing clients’ expectations and helping them properly interpret what the KPIs show is 99 percent of the battle.”

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