Recurring revenue business model: Pretransition considerations

Review factors to think about before transitioning to a managed services model, including pre-assessment, efficiency, financial backing and training.

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For IT channel companies, a managed services or a cloud services business model offers an alluring benefit: a recurring revenue stream. The opportunity to achieve a steady cash flow is a welcome change for value-added resellers (VARs) and solution providers that are subject to fluctuating business, as well as to the increasing commoditization of hardware and software. However, experts agree that before IT channel companies adopt a recurring revenue business model, there are several things they should do to help ensure success in their new line of business.

Assess your current business

"One of the things we recommend before transitioning into a new business model is doing an assessment of your current business model," said Carolyn April, director of industry analysis at CompTIA. "Before jumping into something new, make sure that what you do currently is done most efficiently -- that you are getting all the margin you can possibly wring out of a line of business." This means evaluating everything, including costs, operations and accounting.

Just like any purchase or venture, make sure that you can afford [to move to a managed services model].

Carolyn April, director of industry analysis, CompTIA

"It's better to shore up that business and address leaks before you start something new. Really get your ship in order so that you're in a good position to pay attention to the new models that are out there," April said.

Tom McDonald, president at NSI, a managed services provider (MSP) based in Naugatuck, Conn., said that there were a number of processes and standardizations that his company had to apply internally for the transition from product sales to a recurring revenue business model. "We should have performed the changes before [the transition]! But in our case, it was as we went, and the longer we took, the harder it was," he said.

"We had to document and get better at how we control all of the things we can control. We needed to eliminate as many risks as possible," McDonald explained. "We don't want [customers] calling us to come and fix stuff, because that's an additional expense. We wanted to change from being reactive and getting paid to go on-site, to getting paid and not going on-site."

Become as efficient as possible

According to the December 2012 CompTIA report Trends in Managed Services Operations, "it behooves the MSP to automate as many of the technical monitoring and management processes that they can in order to keep human intervention on basic tasks to a minimum, thereby containing costs as well as expanding capacity to handle larger volumes of customers."

Lawrence McNutt, CEO at SOS, a Sacramento, Calif.-based network and voice solutions provider, agreed. "It's been this whole transition to continue reinventing ourselves to be more efficient with managed services. Some of the things that were critical for us were having rigorous processes for managing, ticketing, being proactive, but also maintaining the ability to respond to emergencies, because they do occur. We had to balance project time for emergencies and maintenance for the health and feeding of the network," he said.

Get financial backing if needed

While assessing their current business model, IT channel companies should also consider their financial standing. "Just like any purchase or venture, make sure that you can afford [to move to a managed services model]," CompTIA's April said. "If you're on shaky ground [and] you're barely paying the bills with your current business, then you're not in the position healthwise to launch into something new, because you're not going to make a profit for quite a while. You need to have financing you can count on to keep you afloat while you make the transition."

This may mean doing something that, according to April, many VARs and solution providers are "loath to do."

"I recommend getting a line of credit. The banks are lending again. That's another way to have a safety net for the time that you're making the transition to recurring revenue and you're not seeing the revenue that you're used to," she said.

Learn about the business of managed services

Finally, before transforming their business, IT channel companies should obtain some type of business training. According to the CompTIA report, nearly four in 10 IT channel companies not yet offering managed services say they'd benefit from business training specifically geared toward best practices in managed services.

April pointed out that CompTIA offers vendor-neutral managed services training. "But vendors are also a source for training," she said. "Companies should talk to key vendor partners that they work with today [about training options]."

Industry peer groups also offer an opportunity to obtain valuable insights. For NSI's McDonald, the No. 1 thing that helped him was joining a Mastermind Peer Group within the Ingram Micro VentureTech Network. The Mastermind Peer Group, which meets quarterly, consists of MSPs across the country and Canada. Members of the group review one another's financials and help one another with the structure of their business. McDonald said the group has allowed him to see business issues he'd never seen before or to see them faster. "And they hold me accountable, which is extremely important. As a group we help each other," he said.

Crystal Bedell is a freelance technology writer. She can be reached at cbedell@bedellcommunications.com.

This was first published in March 2014

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