At a traditional solution provider, engineers get paid to solve problems and salespeople get paid to bring in new business.
At managed service providers, on the other hand, everyone works in an environment in which improving relationships with just a few customers reaps huge rewards.
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"In a managed services business, you aren't paying for dead time anymore," according to Charles Weaver, president of the MSPAlliance in Chico, Calif. "Now, you have [employees] working from a home base most of the time, so you can expand the number of clients they maintain. Their time is still their time, but you aren't billing clients for it," he said.
That may reduce administrative overhead, but it also means that a managed service provider requires a different pay and incentive plan than a business that bills by the hour.
"On the managed services side of the house, we are developing a compensation plan that is more based on customer satisfaction," said Rory Sanchez, CEO and president of SLPowers, a managed service provider in West Palm Beach, Fla.
"In the old pay-as-you-go model, every incentive was for the customer to have trouble, because we billed by the hour," Sanchez said. "Now our goal is aligned with customer goals, and when they have less trouble, we make more money. Quick resolutions, successful backups, less downtime become the things to measure."
The Right Price for Selling
At least part of a sales compensation plan should be based on the way a company bills its customers, according to Tim Hebert, CEO of Atrion Networking, a managed service provider in Warwick, R.I.
Atrion bills its clients annually and gives the salesperson a lump sum each time a new client signs on.
"It can be a pretty substantial sum depending on the size of the deal," Hebert said. "It's high-margin and it's immediate."
Atrion averages 55% net profit on its services offering. It pays its salespeople a cut of the gross margins, ranging from 12% to 20% depending on the position, said Hebert.
Supporting and extending a customer relationship becomes the responsibility of the salesperson who opens the account.
"This high-touch approach eliminates problems and provides a recurring revenue stream for the sales team," said Hebert. "It's an annuity they are building and they get very excited about it."
When properly structured, these annuities can mean that a successful salesperson needs fewer clients to meet a sales quota.
"Instead of 100 accounts, they manage 25 to 30 clients very well," Hebert said.
Managed service providers should also plan carefully to ensure that their compensation plans don't fall into the trap of cannibalizing their profitability in order to attract top salespeople.
"We've seen MSPs hire a salesperson without considering how profitable the solutions are," said Mike Ellison, director of partner development at N-Able Technologies Inc., a managed service provider based in Ottawa. "They get so excited at the prospect of hiring a talented salesperson that they don't do due diligence and play with compensation plans to see if they can afford those levels and still say profitable."
Instead, managed service providers should decide what they can afford to pay and then hire from that point. "What I suggest and what we do with our partners is work backwards from number of contracts the company wants to build," Ellison said. "What's the average size of contracts, how profitable does it need to be, and how many of each account type the salesperson is supposed to get."
That approach "encourages salespeople to target good solid profitable business because they will continue to eat off the account as well," according to Justin Crotty, vice president of services at Ingram Micro North America in Santa Ana, Calif.
Designing Compensation for Engineers
Compensating engineers to reinforce behaviors that ensure high levels of service and customer satisfaction becomes at least as important as sales compensation plans, Crotty said.
"In the old model, you are getting paid when things break and, in the new model, the focus is on keeping things up and running," Crotty said. "You have to compensate engineering and operational folks in this new model and there are hundreds of ways to do it."
Unlike salespeople, engineers are typically compensated almost entirely by base pay; at a well-run managed service provider, overtime is nonexistent, according to Greg Donovan, CEO at Alpheon Corp., a managed service provider based in Morrisville, N.C.
"We had always used an hourly billing model, and our compensation model reflected that," Donovan said. "Last spring, I told them that we were moving to a base salary plus bonuses. I removed the variable part of the salary but looked back on what they had made historically and increased their base salaries."
The engineers are so removed from the up-front selling process that compensation has to be based on back-end support and things they can do to help the business grow, Hebert said.
Atrion uses what it calls the "hedgehog concept" -- a plan in which the company tracks the revenue-to-profit ratio for a managed service, tracks that profit margin over time and rewards engineers with bonuses for incremental improvement.
Some organizations choose to compensate or reward engineers based on achievement compared to the service-level agreement (SLA) promised to the customer, added Crotty.
The challenge then is how to measure these things accurately. Do IT Smarter, a distributor of managed services in San Diego, recommends that managed service providers ask clients about their experiences. The company uses a customer service tool that randomly surveys customers. It gives periodic, one-off bonuses to engineers based on the responses, according to Lane Smith, the company's president. Do IT Smarter passes the tool on to its own MSP customers -- which are mostly VARs it has helped to evolve into a new business model.
"For people on the phones doing remote support, we set fixed salaries and monthly bonuses based on customer satisfaction and team praise," Smith added. "We look for evidence that they are taking initiative to reach out to other team members to train them and grow their skills."
Do IT Smarter makes its accolades and bonuses as public as possible.
"It absolutely builds morale," Smith said. "We have a meeting and hand out bonuses. We are working in a competitive environment and it helps people to see how they can be the best."
Biggest benefit: Tools to succeed
Although dollars and cents mean a lot to employees, the less tangible benefits of a company truly add to employee satisfaction at most managed service providers.
"The training that we do allows our people to outshine their peers," said Hebert. "All of our salespeople have been trained on public speaking and presenting in a professional manner. That's huge."
Alpheon sees its benefits package, including healthcare and disability, as a major perk for its employees. "We reevaluate the benefits package three or four times a year with an eye to what more we can offer our employees," Donovan said, adding that the company was recently named one of its region's best places to work by a local business journal. "We picked a couple of Fortune 500 companies and called people we knew and asked them about their benefits package, and we matched that."
Good people translate to good business, and smart managed service providers realize that paying for talent is worth the cost. A strategic approach to compensation and benefits for engineers and salespeople can give managed service providers an edge in growing their business.