Magazine Article | May 15, 2014

Making The Case For Managed Services

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By Jay McCall

Despite the fact there are serious obstacles that need to be addressed, making the transition to managed services is well worth it in the end.

During an interview with Warren Hino, president and owner of managed services provider Numa Networks, I was reminded about the polarizing effect that selling managed services can have on an IT service provider’s (ITSP’s) business. Hino got his start selling IT services in 2004 when he and a business associate cofounded a break-fix business. After several years of 80-hour workweeks and unpredictable income, Hino wanted something more, which he found in 2010 when he started Numa Networks. The story that’s nearly as intriguing as Hino’s last four years of year-overyear growth (which you can read about on page 30 of this issue, or click he re if you’re reading this online), is why Hino and his former partner parted ways. The truth was that a large portion of his former company’s clientele didn’t want to change, and his business partner wasn’t willing to change, either. Change is hard. And making a change — which requires extra hours of research, training and certifications, and oftentimes hiring new salespeople and technicians — doesn’t guarantee one’s success. But, for those like Warren Hino who want a better experience and are willing to make the necessary short-term sacrifices, the rewards are well worth it.

I asked three industry experts from PSA (professional services automation) vendors Autotask and ConnectWise and value-added distributor Ingram Micro to share their insights on this difficult decision, which many ITSPs have yet to make.

Why The Managed Services Model Is Better For Your Customers
The decision to sell managed services raises many important questions, starting with this one: Would my break-fix customers be better off in a managed services agreement than where they are now? Jason Bystrak, senior director of the Americas at Ingram Micro, responds: “Historically, service providers had to be reactive — clients called when something stopped working, and the service provider had to roll a truck to assess and fix the issue.” There are two problems with this scenario: First, the customer is often already experiencing lost productivity or downtime when it makes the call, which means that by the time the service provider shows up hours later the customer is losing money and in a panic. And second, the service provider is often going into the situation blind. Does the customer have a virus? Is a hard drive full? Did a server motherboard get fried as a result of a power surge? After determining the underlying culprit, the service provider may need to leave the customer’s premises to get the necessary parts to fix the problem, causing further delays and downtime.

“Advancements in technology make it possible now for service providers to proactively detect many of the problems described above before they become full-blown issues and to resolve those issues without truck rolls,” says Bystrak. This remote monitoring and management capability are at the heart of managed services. “These services are typically sold as monthly contracts, which helps service providers plan and align their staffing levels to optimize their bottom lines while at the same time delivering superior service levels to their clients,” says Bystrak. “In addition to improved SLAs [service level agreements], end users benefit from having predictable monthly costs.”Subscribe to Business Solutions magazine

The key issue here is downtime. If you have clients that aren’t negatively impacted when servers are down for several hours — and those companies do exist — then there’s not as much incentive for them to enter into managed services agreements. For those who are dependent on their data and having their IT systems up and running, however, managed services is a no-brainer.

Why Is The Transition To Managed Services So Hard?
There are lots of stories about break-fix companies that tried making the switch to managed services and either reverted back to break-fix or went out of business, which makes one wonder: Is managed services a better option for every reseller? And, Which resellers are the best candidates to sell managed services? Contrary to popular opinion, larger service providers may have the hardest time making the switch, according to Mark Sokol, director of marketing at ConnectWise. “Start-up companies actually may have the upper hand in that they have no fixed costs and can start immediately with this new model,” he says. “In fact, we have seen that it is much harder moving to the ‘as-a-Service’ model when you have an established organization.”

Sokol even believes that it could be too late for some organizations. Numa Networks’ story, mentioned earlier, seems to confirm this position. Rather than taking his previous company through the process, Hino had to start a brand-new company and part ways with his previous business partner. So, why is this transition so hard — especially when you consider that it’s better for the majority of end users and it’s better for service providers in the long run? The key is understanding the “in the long run” part of the equation. This is where service providers need to focus their attention and prepare themselves.

Using simple math, let’s say that a break-fit project generates $3,000 in immediate revenue for your company. To address the same customer’s IT needs under a managed services agreement may generate $125 per month for your business. In this example, for the first two years the managed services option would be less profitable for your company. During year three and beyond, however, the smaller-but-consistent managed services model surpasses the break-fix model. For the Numa Networks of the world that have made it through the first couple of years while they built up their managed services contracts and made it past the break-even point, they’re now in a great position. Steady income. Predictable growth. Lower stress.

The real question, then, becomes: How can service providers get through the lean times that often accompany a move to managed services? Ingram’s Bystrak responds, “VARs need to develop a comprehensive go-to-market plan across functional areas including finance, technical development, operations, marketing, and sales. Setting up the back office and service delivery process is just as important as the sales strategy, but is often overlooked by VARs seeking to transform their business.”

“My first piece of advice would be to not even think of offsetting project revenue with managed service revenue.”

Len DiCostanzo, senior VP of community and business development, Autotask

Len DiCostanzo, senior vice president of community and business development at Autotask, adds, “My first piece of advice would be to not even think of offsetting project revenue with managed service revenue. Managed services is a complementary offering to project work. An ITSP would have a hard time offering only managed services to a prospect or even an existing client. The typical managed services client/prospect often needs the ITSP to come in and execute a remediation-type project in order to clean up and prep the environment before delivering a managed service solution.” DiCostanzo suggests service providers should sell this remediation project separately, and then start delivering the managed services.

ConnectWise’s Sokol concludes, “The best stories we have heard [aside from only doing the managed service model at start-up] have been building a plan to slowly transition your clients over time.” He cautions, however, not to fall into the trap of pushing that transition into some undefined future. “It’s essential to put a stake in the sand and commit to the end goal that, ‘In five years we will have 100 percent predictable recurring revenue.’ If you have a goal and if you focus on it, you can get there. Without that you are just doing the same old thing — hoping to transition, but not really executing on transitioning.