How to build a managed service provider business

With hardware and software sales increasingly commoditized, the motivation for building a managed service provider business has never been greater, but getting from Point A to Point B isn't so easy. We explain what the risks are and how to make a successful transition to an MSP business model.

As margins for hardware and software continue to fall, many resellers are moving toward providing services to stay profitable. These often include deployment or auditing services, but managed services -- monitoring and remote maintenance -- are an increasingly popular option, especially for value-added resellers (VARs) who target the small and medium-sized business (SMB) sector. Although there isn't a clear consensus about exactly what an MSP is, MSPs generally monitor and fix clients' IT infrastructure remotely. Building a managed service provider (MSP) business out of an existing VAR or break-fix shop isn't always easy, but this Channel Business How-To will give you a head start.

Many companies operate with a hybrid model, offering reselling or integration services in addition to managed services. With this model, the managed services offerings are essentially another line of business. Although companies often struggle to quantify exactly how much of their revenue comes from managed services, 73% of companies that offer managed services reported that those services were profitable, according to a CompTIA survey published in December 2006. Companies were more likely to report that they made a profit from managed services if 50% of more of their revenues came from that line of business, the report found. So, if you decide to make the transition to an MSP model, dipping your toes into the business is not the approach to take.

Before you start shifting your VAR business toward an MSP model, it's important to know the market. MSPs generally serve SMBs that have strained IT resources; the MSP's job is to handle day-to-day IT operations, freeing the client's staff to work on new projects instead of putting out fires. Clients often hire MSPs to provide networking or security services, storage and disaster recovery, and email or Web hosting.

The biggest factor for clients in picking an MSP was a specific service the MSP offered, according to the CompTIA survey, with 27% of end users citing that as their most important criterion. After that, 23% said they chose an MSP due to an existing relationship they had with the company. Taking on a "trusted advisor" role is a key part of building a managed service provider business, since clients are trusting you with the security and uptime of some of their most vital IT resources.

MSPs bill on a recurring basis, but the specifics are up to you. MSPs usually charge by the month, quarter or year, and many set a flat fee based on what services the client wants and how many devices need to be supported. If you do decide on a flat-fee system, it's important to try to predict how much time and money you'll spend on each client, since extra, nonbillable hours eat away at your profits.

You should avoid negotiating a customized contract with each client, said Oli Thordarson, CEO of Alvaka Networks in Huntington Beach, Calif. Although the temptation is there, especially when you're starting out, having to worry about too many different contracts makes building a managed service provider business harder as you try to scale up, he said.

Internal transitions

The shift from VAR to MSP involves changes to your technologies, staff and business model. Resellers who depend on large but infrequent payments will need to go through a transition period to adjust to more payments of lower amounts, and employees need to straddle the line between sales and engineering.

One of the biggest changes you'll encounter while building a managed service provider business is that sales representatives need to learn how to sell services instead of products. Because services are intangible, your sales team has to adjust to pitches based on opportunity costs and the costs of downtime that your business could prevent, rather than just selling a product's features. Not all sales representatives can make the transition, Thordarson said; one of the reps who did the best job in a VAR setting couldn't adjust to selling services, so Thordarson had to let him go when he moved to an MSP model.

Similarly, engineers need to be more conscious about billable and nonbillable hours. Engineers are natural problem solvers, and their instinct will be to solve employees' problems even if they're beyond the scope of the contract. While that can initially build up customer loyalty, it costs your business money. It can also become a problem later on if you need to start charging for the service. It's also important to have engineers who can up-sell and cross-sell services when they're working with a customer, rather than working only on the task immediately at hand.

Because your engineers will be working on a greater number of smaller projects, it's important to have a good scheduling system. This is also true for any repairs that can't be done remotely, such as fixing a printer or other piece of hardware. Try to build some wiggle room into the schedule, so that if a client has an urgent but relatively easy problem, you can send a lower-level engineer rather than a more costly senior engineer. Depending on your current business, you may need to hire more techs to handle the ongoing support that a managed services model entails. Many MSPs use management software like Autotask to help with scheduling.

External transitions

One of the hard parts about building a managed service provider business is making sure you don't lose your clients in the process. The MSP model is relatively new, and clients used to just buying and installing products may wonder why they should pay for monitoring and maintenance services they didn't have before. Companies often don't notice issues like network maintenance, security or backup until they develop into major problems, so your sales force will have to focus on the potential costs of not proactively maintaining systems instead of the specific ROI of projects.

It's also common for IT employees at your potential client to worry that they will lose their jobs to your services. Since companies generally want to keep morale high, even the perception of the threat of outsourcing can be a hurdle to signing a managed services contract. You should make sure IT staff understand that you will be complementing them and taking only the day-to-day tasks, letting them focus on longer-term projects.

Most of your clients probably won't know or care about the term "managed service provider," so you should avoid using it in your marketing or sales materials, said MJ Shoer, president of Jenaly Technology Group Inc., a Portsmouth, N.H.-based managed service provider. Instead, focus on your specific brand, your role as a trusted advisor and the specific services you're offering.

You will also need to write a service-level agreement (SLA) that outlines your responsibilities in both general and specific terms. An SLA specifies what your services are and which devices at the customer's site you cover, as well as your client's obligations. For instance, limiting a client's ability to hire a third party to work on devices ensures that you won't be responsible for fixing someone else's mistakes.

Because building a managed service provider business takes time and money, you may want to look into partnerships with other companies. Talking to MSPs in noncompeting parts of the country is a great way to bounce ideas around and learn from one another's mistakes and successes. There are also many companies that provide consulting and licensing services. Vendors of MSP tools, like Kaseya and N-Able, often provide training to help businesses make the transition.

You may also talk to established MSPs to outsource all or some of your managed services to them. For instance, Ingram Micro's Seismic lets partners resell email and Web hosting, online backup, network monitoring and other services. This approach lets you start building a managed service provider business without requiring many of the up-front investments, like building your own network operations center (NOC).

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This was first published in April 2008

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