By Jay McCall, Business Solutions magazine.
If you’re among the 60% of VARs that still don’t offer managed services, now is the time to take another look at what you’re missing.
While attending a recent training session for MSPs (managed services providers), I was struck by a statistic from a recent CompTIA study that stated only 40% of VARs are currently offering any kind of managed services. Surprised by this revelation, I reached out to some industry experts to get their take on what’s holding some VARs back from making the move to an annuity business model. Following are their comments on common fears, objections, and misperceptions — as well as some helpful advice for VARs willing to take a second look at this business opportunity.
Confront Your Managed Services Fears
There are a handful of fears/concerns most VARs have about selling managed services. Perhaps one or more has been holding you back:
“Annuities are small compared with break/ fix revenue” — True, but shortsighted. “Many VARs sell product or project contracts where they deliver a solution, receive payment in 30 to 60 days, cover their operating expenses, both fixed and variable, and recognize their profit,” says Jason Bystrak, director of sales at value-added distributor Ingram Micro. “Managed services and cloud services are an annuity business model where revenue and profit are deferred over 12 to 36 months, and VARs need to make sure they have access to working capital to cover operating expense gaps and maintain profitability while making the transition.”
“How do I know what to charge?” — This is a legit concern, but there are a couple of ways you can address it. One thing you should be doing is getting involved with industry trade shows in this space. A good place to start is with two associations that have a strong managed services focus, CompTIA (www.comptia.org) and ASCII (www. ascii.com). In addition to the valuable information you can learn by attending training sessions at these events, the opportunity to network with other MSPs is even better. “Seek out an MSP that doesn’t sell in your area and ask them how they’re pricing their managed services,” recommends Eric Townsend, SMB and managed services director, North America, at Intel. In addition to networking, some of the managed services vendors have configuration tools that take the guesswork out of managed services. CharTec, a master MSP and HaaS (hardware-as-a-service) vendor, has a configuration tool that enables MSPs to create quotes for hardware and software solutions and wrap those around a managed services offering.
“What exactly should we be managing?” — There are a lot of options to consider with managed services, including PCs, phone systems, printers, network appliances, and storage devices. According to Townsend, “If you’re a small VAR, you may start with just a couple of services, based on your current skill set. As your MSP practice grows and matures you can become more efficient at delivering these services by creating policies and procedures that make it easier for new hires to ramp up on delivering services. If you spread yourself too thin, it makes it difficult to do anything well.”
What It Takes To Move From Break/Fix To Managed Services
If you’re considering making the move to selling managed services, you need to take into consideration a few key things you’ll need to do to ensure success. First, you need to assess your current customers to determine how ready they are to make the move. Townsend recommends segmenting your customers into three categories: A, B, and C. “Your ‘A’ customers are the ones who have been asking you if you offer services, ‘B’ customers are the ones you’ve had for a long time and you’ve done project work for them in addition to selling hardware and software,” he says. “A ‘C’ customer only buys hardware or software and you only hear from them once a quarter. The reality is that you’re going to lose some customers when you make the move to managed services. However, you’ll be in a position to gain more customers, too.”
Make Training A Top Priority
One of the most important decisions a VAR needs to make before selling managed services is to invest in training. “The average managed-services contract is worth $72,000 over a three-year period,” says Alex Rogers, CEO of CharTec. “If you don’t invest in training, you’re throwing money away as you lose potential business during your learning curve.” So, exactly how much should you expect to pay? According to Rogers, a VAR with about 20 employees will need to invest $1,500 to $2,000 a month for a PSA (professional services automation) and RMM (remote monitoring and management) tool, plus an additional $2,000 to $5,000 a month for the first year to get the sales team and technicians trained. If you keep in mind the $2,000 per month average cost for a managed services contract, it will take three managed services contracts before you start to reach your breakeven point.
For smaller VARs, Townsend believes they can save some up-front costs on their PSA. “I’ve seen some small VARs start out tracking their services using Excel spreadsheets,” he says. “Once they grow to 10 customers, they move to a freeware PSA system, and then when they grow to 20 customers on a managed services plan they move to a professional PSA solution.” When it comes to RMM tools, however, Townsend believes it’s necessary to make this investment in the beginning. That said, many RMM vendors price their tool in such a way that allows MSPs to start small. “For example, an MSP that wants to manage 10 end points at a customer site can pay just $3 per end point per month,” he says.
Three MSP Pitfalls To Avoid
One of the biggest mistakes a VAR typically makes when transitioning its business to managed services is not changing its sales compensation model. “If you continue to pay your salespeople the same way, they’ll be more incentivized to keep selling break/fix services and things won’t change,” says Bystrak. A new sales model needs to be implemented that changes the incentive to the annuity sales model. “Your salespeople should be commissioned on what you want more of: hardware profit, labor profit, agreements, and customer retention,” says Rogers.
Another common mistake new MSPs make is trying to get in the game by undercutting their competition on price. All the experts I talked to agree this is not a sustainable business model. “Maybe it will work for six months to a year, but you won’t make enough profit to cover the expenses necessary to provide your customers with the level of service you’re promising them in your SLAs [service level agreements],” says Townsend.
A final pitfall to watch out for is thinking you have to make all the decisions and handle all the customer services yourself. As mentioned earlier, networking with other MSPs will be a key part in your success. Your vendor and/or distributor partners have a stake in your success and many have the available resources to help you with training, give you advice when you run into difficult situations, and even to advise you on best practices for partnering with other providers to cover the services you’re not currently skilled enough to offer or are outside your areas of interest. By plugging into managed services events and developing relationships with other MSPs and services providers, you can still make the move to managed services — and the opportunity to start earning recurring revenue is far from saturated.