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Managed services providers struggle for complete business transition

Managed services providers work to perfect the recurring revenue stream of managed services. AGJ Systems & Networks and NSI Total Care are two MSPs trying to make the transition into 100% managed services businesses.

If you're worried that you're behind the curve in transitioning your business to a recurring revenue model, there's good news: You may not be after all. While vendors are clamoring for partners to adopt a cloud-centric, recurring revenue worldview, most companies, it seems, have not yet perfected managed services, the other recurring revenue stream.

In fact, in our recent Channel Directions 2014 survey, 337 North American IT solution provider respondents indicated a decrease in the percentage of companies that offer managed services . In 2013, 71% of respondents said they offered managed services of some kind. In 2014, that percentage went down to 63.5%. The decrease is small and the difference could be eroded by the survey's margin of error, but it does suggest a thinning down of IT companies doing managed services business.

Carolyn April, director of industry analysis at CompTIA Inc., offered an interpretation for this change. "What happens is, a lot of companies … jump wholesale to a new business model without really doing the diligence to think it through. And so, they'll identify [their businesses] one year: 'Yeah, we're an MSP [managed services provider], and we're doing this.' And then the next year, we'll see in a study that number is scaled back a little bit. Well, that's because these companies realize that what they were trying to do was hard and they weren't quite ready for it, or they didn't have the resources necessary to actually get there."

The survey also revealed that of those companies that provide managed services, 41% derived a quarter or less of their annual revenue from managed services. April said this number is consistent with what CompTIA has observed. This percentage compares with between a quarter and a half of annual revenue, cited by 22% of respondents; half to three-quarters of annual revenue, cited by 19% of respondents; three-quarters or more of annual revenue, cited by 9% of respondents; as well as 9% of respondents who couldn't identify how much of their revenue came from managed services.

Some channel firms will offer some managed services, but they're doing everything else, as well.
Carolyn Aprildirector of industry analysis, CompTIA

"Some channel firms will offer some managed services, but they're doing everything else, as well. … And so, while they may say, 'Yeah, we do managed services,' the percent of their revenue typically … doesn't exceed a quarter of their overall revenue," she said.

"Managed services is tough if you don't commit to it pretty heavily, and if you're only committing to it a bit, or on an opportunistic basis for your customers, you tend not to see the returns out of it that you would if you're really branding yourself as an MSP and making that your primary business model."

Becoming an MSP

Two managed services providers that have remained committed to the business model are AGJ Systems & Networks Inc. of Gulfport, Miss., and NSI Total Care of Naugatuck, Conn. Both companies derive more than 50% of their annual revenue from managed services and work doggedly to increase their managed services percentages.

Ryan Giles, partner at AGJ, started the company in 2002 with two other partners. The three came from traditional consulting backgrounds and so began AGJ by focusing on IT consultation. "We would support infrastructure for clients, but we did it on an hourly basis. If a new prospect or a new client needed hardware or software, we would help them purchase it. We would basically quote them project time to install and deploy their new equipment. And then after it was installed, we relied on them to call us when they had a problem," he said.

With AGJ taking a reactive, break/fix approach to resolving customers' IT issues, Giles said customers often contacted AGJ only after a the customer's minor IT problem had exploded into major technical issues. "We waited for customers to find out they had a problem and then they called us," Giles said. "And in some cases [by the time they did call], it was too late, or at least it was so late that what they had to fix that was very expensive."

Customers began asking for another option, Giles said. "We had clients that said, 'Guys, we love you, but we can't budget for this. There are months where our bills are very small, and then the next month the bill could be extremely large.' … At the same time, we said, 'We feel your pain, because it's hard for us to budget for staff. There are weeks where we feel like we need two techs and weeks where we feel like we need 200 techs.'"

AGJ adopted the managed services business model and took the proactive approach that customers asked for. "We figured out very quickly that it was good for our clients and also good for us," he said. Initially, AGJ tried to do the work on-site, visiting every computer, but the company soon discovered a combination of tools and automation that would reduce the cost of labor. "[The tools] helped us make it affordable," he said. The operational tools they began to use -- and continue to use -- include software for professional services automation, network documentation, network assessment and remote monitoring and management (RMM).

Additionally, AGJ had to determine what offerings would be most profitable. Giles said AGJ trialed several designs for its managed services offerings but has settled on the all-you-can-eat plan that offers monitoring and management of backups, antivirus, security, servers, desktops, patches, mobile devices and so forth.

AGJ began offering managed services five years ago and today derives between 60% and 65% of its annual revenue from it. "We want to increase that [percentage], but that's where we are right now," Giles said. Going forward, the company intends to commit exclusively to managed services, and in order to do so, has cut non-managed offerings, such as its Web design services, which AGJ had provided for 12 years. Giles said AGJ had hoped its Web design customers would buy other services from the company but found most of the customers "weren't a great fit."

"We decided to focus on what we're great at and to leave the web design to someone else. So that's a step towards the managed service direction," he said.

NSI came into managed services by a different path about 10 years ago, Tom McDonald, president of NSI, explained. "We went to a company called Silverback [Technologies]. … Part of what their business was [was] to teach you how to be an MSP. So we got into it then," McDonald said.

"We made a big investment where you have to go buy not only the tool for the RMM agents but they also trained you. … We really didn't know what we were doing, I would say. It took us five years maybe to really get a good understanding of what we were doing, and part of that was because we had other businesses," he said.

The company had a background in selling hardware, and it wasn't until 2008 when the recession made an impact that they realized the hardware business would no longer work for them. "We've been fully committed to [transitioning to managed services] for the last four years, solid."

NSI currently derives 58% percent of its annual revenue from managed services and wants to reach approximately $150,000 a month in recurring revenue. The remaining 42% of its revenue is derived from reselling hardware. "I only have one product sales person left, and that person sells into state [and] local government and K-12," he said. "The rest of the team is dedicated to selling managed services."

"We're not looking at trying to sell any new hardware unless it's an existing customer who wants to do something. We try to stay away from project work as well, but sometimes you have to do that to get the business," he said.

Trial and error

AGJ and NSI face a variety of challenges while building out their managed services business. The challenges have demanded improvements. "Managed services forces you to work smarter, because you really do get to spend some more time on your business working on efficiencies," Giles said. "It forces you to be more efficient."

The mindset is completely different from offering break/fix services, said McDonald. "You can't sit around and be the superhero and come in when [something] breaks. [You have] got to prevent things from breaking [in the first place]," he said. "You have to have excellent processes, and you have to go from being the guy [who] says 'yes' to every opportunity to the guy [who] says 'no' to a lot of opportunities," he said. "You've got to constantly stay on top of it … It's a great business to look at on paper, but you've got to really have some hard controls on everything."

Giles and McDonald are active members of different peer groups. Giles is a member of The ASCII Group and HTG. McDonald belongs to the Ingram Micro VentureTech Network's Master Mind peer group, which is made up of 10 managed services providers located throughout North America, he said.

Giles recommends that an IT company that is trying to become an MSP join one and speak to other MSPs. "If you try to go through everything on your own and trial and error, it will take you years to get it all figured out. So, find a good peer group and you can learn from someone else's mistakes," he said.

AGJ has spoken to other IT companies that have offered managed services but pulled out. "They said, 'Hey, I got into managed services because I thought I'd be making a lot of money, and now a year later, I'm less profitable or not profitable at all,' " Giles said.

"You have to make sure that you do have your processes down, because it would be easy to lose money and not realize it," Giles said. "We track profitability by client every month. For example, we've changed our pricing models once because we tracked them and found out we had quite a few customers we were losing money on. And it wasn't the customer's fault. We gave them a price and they approved it, and we were serving them for it, but maybe there were things we didn't take into account."

He also stressed that MSPs have to be selective when taking on new customers. "If you're billing somebody hourly, it doesn't matter how bad a customer they are. As long as they pay their bills, you can never lose money. They can call you 10 times for the same problem." If it’s a managed services customer plagued repeatedly by the same problem, you may need to take preventative. "[For example,]if we're getting lots and lots of calls for Microsoft Outlook, then maybe we should go over to that client and schedule a one-hour class for the whole office on how to use Microsoft Outlook. Yes, it will cost us an hour … but it may save us 50 tickets over the next quarter," he said.

Network assessments play a role in this. "[AGJ] started doing much better network assessments upfront, so we know what we're getting into. … We're interviewing the customers as much as they're interviewing us," he said.

Marketing managed services

Transitioning to a managed service business requires a greater number of customers when compared to other business models, such as a transactional model.

"One of the things that's really important when you make a transition to managed services is you've got to get a high volume of customers," said April of CompTIA. "You've got these folks on recurring revenue contracts. They're paying you much smaller amounts monthly than, say, if you had sold them a one-time crop of products or a big project and they're writing you a huge check for that. So instead now, that money is spread over a whole year of incremental payments coming in monthly. Well, that's a cash flow issue for a lot of these small solution providers that try to do managed services. How do you solve that? You've got to have many more customers … It's constantly having to go out there and acquire net-new customers."

To acquire net-new customers, AGJ and NSI employ a variety of advertising methods in each of their particular markets.

In Mississippi, AGJ has tested everything from printed newsletters to cold calling, but Giles said referrals have worked best. "The biggest marketing tool that we've found is simply referrals," Giles said. "So we have referral contests. We have prize giveaways."

AGJ features a referral program on its website. When a person sends AGJ a referral that leads to an appointment, the company sends that person a gift card for $25. If the referral becomes a new client, then AGJ sends an additional gift card for $200.

Last Thanksgiving, AGJ did a turkey giveaway. "If you send us a referral, you get a turkey," Giles said. "We got someone from our office dressed up in a turkey costume. We went out and visited everybody that gave us a referral. So it was great pictures for Facebook and social media. It was a really good time."

AGJ also posts "Tech Tips," a series of two- to three-minute educational videos relating to technology, on its website. Customers have responded positively to "Tech Tips" and reference the videos frequently, Giles said. "['Tech Tips' are] educational. We're not trying to make a hard sell," he said. "We were doing about two of those a month. Last month, we stepped it up and started doing three of those a month."

"We try to spend 80% of our time educating customers and 20% selling," he said. "We don't want to seem like we're trying to push products down their throat or push services down their throat."

The "Tech Tips" series provides a draw to the AGJ website. Giles said the company then tries to gather information from visitors, such as an email address or physical address where the company can then send its newsletters.

In Connecticut, NSI uses email drip campaigns, either contracting companies like HubSpot to produce the email content or doing it in house. Additionally, the company uses social media and events such as lunch-and-learns and cookouts to show potential customers NSI's facility, its network operations center and its operations. NSI also contracts companies to do cold calls.

"There's no silver bullet for us," McDonald said. It’s the combination of efforts that works for NSI and helps it stand out among its competitors. "You've got to do all these things. You've got to constantly try to refine it and try to do new things."

Like Giles, McDonald also focuses on doing educational work as a means of generating leads. "It's not a sales pitch. It's always educational. It's always, 'Hey, we may not be the right fit for you, but if you need some help, I'd be glad to stop by and talk to you about what we see and what other people are doing and how we can help you do that,' " he said. "You just need yourself present, so when someone has an opportunity, they know how to find you."

The rewards

Neither Giles nor McDonald is interested in cutting back on managed services. The advantages of the business model are well worth the many investments.

For McDonald, the business model provides more control and gives an IT company "a better way to provide service."

"Your clients will be happier," Giles said. "You'll be happier because you can sleep at night knowing that you've got guaranteed cash flow."

Distinguishing managed services providers from other types of IT companies, McDonald said it's analogous to farming versus hunting: "If you're a farmer, you plant your crop and you know in three or four months, you're going to produce 'x' amount. If you're a hunter, you hope you're going to go out and be able to, you know, shoot a deer … But you don't know [if you will] … You can't be guaranteed that that's what's going to happen."

"Ultimately, I'm in the business of helping our customers be successful, and I think that managed services help them be successful," he said. "I think it's a better model for the customer as well as it is for me to run my business."

Next Steps

CompTIA report says providers' lack of commitment hinders the MSP model

How to protect your MSP practice against security risks

Per device versus service-level agreement pricing models

This was first published in September 2014

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