Magazine Article | September 16, 2013

Get Your Managed Services Act Together!

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By Jay McCall

This MSP made four changes to its business model, which led to an almost immediate 600 percent improvement in profitability plus double-digit revenue growth.

As Hilltop Consultants prepares to celebrate its 10-year anniversary, Founder and President Jim Turner reflects on the struggles he’s gone through to get the company where it is today. “If you look back more than three years ago, you would find periods where the business operated more like a hobby — making just enough money to make payroll,” he says. In 2010, Turner’s business made a major turnaround after hiring a director of operations who helped him look beyond his top-line business activities. “It’s easy for MSPs [managed services providers] to fall into the trap of thinking that a customer paying $2,500 a month for managed services is $2,500 toward the business’ bottom line,” he says.

“After we started investigating some of our customers and contracts more closely, we discovered that, after factoring in our software licensing, hardware, and labor costs, we were actually $500 in the hole each month for some of our customers.” After the MSP started paying closer attention to its profit margins, it made several changes to its business model during the next 12 months, which dramatically improved its revenue and profitability. Many VARs and MSPs could apply Hilltop’s business decisions to their own practices.

1. Audit your vendors, service providers, business practices.
One of the biggest problems that hinders most resellers is that the business owner spends so much time working for the business that they aren’t able to work on the business. As Turner discovered nearly three years ago, however, overlooking your business processes too long can be costly. One of the first steps Hilltop Consultants took to correct this problem was to audit its entire business, starting with its sales processes and continuing with its vendor and service provider partnerships. The MSP discovered several surprises along the way. “We were constantly failing to adjust customers’ monthly bills whenever they would buy new IT products or services from us,” says Turner. “For example, if a sales rep added 10 seats of antispam filtering to a law firm customer, the salesperson would be paid commissions for the sale, but often the message wasn’t getting to the billing department to increase the customer’s monthly invoice by $100 per month. Each error by itself wasn’t a huge loss, but combined, they become very costly.”

Another area where Hilltop found it was losing money was with one of its cloud service providers. “They used a complex algorithm to determine customers’ monthly charges, which was impossible to figure out, let alone to explain it to customers who expected a flat fee each month,” says Turner. “We ended up losing money on several customers’ cloud storage during months where they had spikes in data and/or bandwidth usage.” Hilltop investigated alternative cloud service providers and found a couple providers that used straightforward pricing models, including Dropbox, which recently added a business offering for channel companies.

A third area where the MSP’s audit led to changes was with its data backup and antivirus (AV) vendor partners. “The ones we had been using didn’t integrate with our Kaseya RMM [remote monitoring and management] and ConnectWise PSA [professional services automation] tools, which meant we had to view multiple portals for each customer, thereby taking more time to manage each customer and increasing the chances of overlooking problems,” he says. After identifying this issue, Hilltop stopped using its previous backup and AV vendors and replaced them with solutions that included APIs (application program interfaces) with ConnectWise and Kaseya.

2. Sell bundled IT solutions and services.
Few MSPs need to be convinced about the value of selling bundled solutions — higher revenue, easier technology management, better scalability, etc. However, convincing customers they should buy your bundled offering is where things fall apart. Turner picked up some valuable tips on this topic through his Robin Robins peer group, where he was introduced to master MSP CharTec. “After meeting CharTec CEO Alex Rogers, I enrolled in CharTec Academy, which is a two-day hands-on MSP training class that includes practical tips from Alex himself as well as CharTec’s vendor partners,” says Turner. The biggest takeaway from the training was that too many MSPs look and act the same, which causes their offerings to be viewed as commodities by their customers.” Upon his return from the academy, Turner added two new practices to his business to better stand out from his competitors. “First, we started selling HaaS [hardware as a service], using CharTec’s BDR [backup and disaster recovery] appliances,” he says. Turner has to admit, however, it wasn’t until sometime after initially selling HaaS that he started to really appreciate its value after he lost a deal to a competitor that had rolled a business-class firewall — which normally costs around $1,500 — into a customer’s service-plan proposal, causing Hilltop to lose the bid. “About a month later, we went up against the same competitor, bidding on a job that was four times larger than the first deal.” Knowing what he was up against, Turner included a HaaS BDR and business-class firewall in his service agreement, plus he added one additional differentiator that’s become part of his standard service contracts.

A second new business practice Hilltop Consultants added is loaner equipment. “With every service agreement, we let prospects know that we’ll provide them with a loaner laptop, iPad, projector, or air conditioning unit any time they need it,” he says. Of all those options, which one do you suppose customers most often take Hilltop up on? Hint: It’s not the iPad. “Throughout the summer months, we’ll have customers whose AC systems fail in their server rooms, and they’ll reach out to us for our loaner, which is a 17,000 BTU unit on wheels,” he says. “This special perk saves them from hours of downtime, and to my knowledge, no other MSP offers this service. Plus, even if they don’t use the loaner service, it’s a great conversation piece and lets clients know we have our act together, and we’re prepared to take care of all their IT needs.”

Even though HaaS sales comprised nearly 15 percent of Hilltop Consultants’ revenue in 2012, Turner is quick to point out that proposing HaaS to every customer would be disastrous. “I had another MSP share with me an awkward encounter he had with a customer he was trying to sell a HaaS solution to,” he says. “The customer asked him, ‘Why are you trying to rip me off by doubling the cost of the server and spreading it out over two years?’” The key, says Turner, is to find out ahead of time your customer’s position on capital expenses (CapEx) compared with operating expenses (OpEx). “You can’t just assume the answer to this question based on the size of the customer or its vertical market; you need to ask,” says Turner. “There have been plenty of situations where a client needed several new computers and servers, and paying $8,000+ up front would have shot down any chances for selling them a managed services agreement. But they’ve been happy to pay a little more and spread out those costs over a two-year period.”

Although Hilltop’s HaaS offerings and its willingness to loan clients equipment help overcome some objections to buying bundled solutions, the MSP has learned that educating customers about data recovery is important, too. “We used to allow clients to use whatever kind of backup they wanted, and we’d just focus on selling remote monitoring and management services,” says Turner. “If you’ve ever recovered a customer’s data from tape, you can appreciate what a losing proposition that is.” If customers give pushback to Hilltop’s recommended bundle, which typically includes a CharTec BDR for its HaaS offering or a Datto BDR for outright purchases, the MSP walks the client through a data recovery self-discovery process. “We help them understand the time it takes to build new servers, install operating systems and drivers, and copy their data from tapes — 16 hours of downtime at a minimum. For our law firm customers that bill at $400 an hour, that kind of downtime is way outside their acceptable range. We also try to help customers see why it’s not wise to back up their data to consumer devices such as USB thumb drives, which don’t have the safety features and reliability of business appliances.”

Hilltop’s success rate selling bundles and retaining clients is very high, but Turner admits he doesn’t keep every customer. In fact, since selling bundled managed services, Hilltop lost two customers last year and one customer this year — specifically because the MSP wasn’t willing to compromise and allow customers to buy part of its offering. “It’s too risky to service clients for a flat monthly fee if those clients aren’t willing to make the same commitment back to us and take our advice,” says Turner. “One of our engineers jokes that when we do have to break ties with a customer, which is a rare occurrence, it usually turns out to be ‘addition through subtraction.’ In other words, it’s usually the clients with the highest needs and paying the least amount of money that go away, which allows us to focus more attention on upselling other clients and going after more profitable new business.”

3. Make QBRs (quarterly business reviews) a must.
Scheduled meetings with customers used to mean one thing for Hilltop Consultants: The customer is unhappy. One of the MSP’s takeaways from the CharTec Academy was to begin having quarterly meetings with clients. Turner finds QBRs offer several benefits to his company and his customers. One of the biggest challenges MSPs face is customer attrition, which occurs when clients feel they’re paying a monthly IT service fee and not receiving any value. “We include summary reports from our Kaseya RMM tool, which helps our client see all the potential IT disasters we thwarted without them even realizing it,” says Turner. “QBRs are also a good opportunity for MSPs to uncover small customer problems that, if left unchecked, lead to bigger problems, which are harder and more costly to resolve. And finally, QBRs are a great way to uncover new upsell opportunities.” Turner shares an example to illustrate this point, involving a small lobbying firm customer. “During a QBR, I discovered that the firm had started using its Windows 2003 Small Business Server as a coat rack, which was causing it to overheat,” he says. “Because their office was small, and they did not have a proper server room, we took the opportunity to talk to the client about getting rid of their server and moving to the cloud.”

4. Create a formal onboarding and training program.
One new change the MSP implemented to help correct its turnover problem was a new onboarding and training program. “We start with a personality test called the DISC profile to make sure each candidate’s personality mapping fits with our available position,” says Turner. “If we’re looking for a sales rep to bring in new business, for example, the candidate should score very high in the categories of dominance [D] and influence [I], whereas if we were hiring an accountant, we’d want scores that were high in steadiness [S] and compliance [C].”

The MSP also developed a 90-day road map for new employees, which includes mentoring from senior-level employees plus certification training on Hilltop’s PSA and other business applications. “One of the benefits of having a formal onboarding process in place is that it avoids turning new employees loose on your customers until they’ve had a chance to prove they can properly represent your company. New employees know that this 90-day period is our opportunity to evaluate their performance, and they can be let go if they don’t meet the requirements set out at the beginning of the probationary period.”

Hilltop uses the same concept when considering existing employees for new positions within the company. “We recently gave an employee a 90-day road map to move from the help desk to an NOC [network operations center] technician role,” says Turner. “After completing the road map, which included a trip to the CharTec Academy for two days of hands-on training, the employee is doing very well in the new position.” Since adding the onboarding program, Turner has only terminated one person during the probationary period, and he hasn’t had any other terminations.

Currently, 70 percent of Hilltop Consultants’ business includes recurring revenue services, which represents 95 of the MSP’s customers, and Turner sees that number continuing to climb over the next few years. “The key driver in our continued growth potential will be moving more clients from tape backups or cloud-only backups to BDR solutions like CharTec, which give customers the best of both options.” Now that Hilltop has its managed services act together, this goal is a very realistic one.

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