After months of preparation, you're ready to make the move to a recurring revenue model. You've streamlined technical operations and gotten the proper business training. You've determined a pricing strategy, and restructured your sales team. With a few customers on board, you can ditch the product sales and rely on your new managed services or cloud services business -- right? Wrong. At least for the foreseeable future you'll need to maintain your legacy business -- and you may choose to do so indefinitely.
"For those already in the channel, the transition is not the flip of a light switch. It is more baby steps while continuing to maintain a legacy business," said Carolyn April, director of industry analysis at CompTIA. "Most channel companies [transitioning to a recurring revenue model] will exist in a hybrid model for the foreseeable future. They will continue to nurture a transactional business. They need to continue to have cash flow."
IT channel companies are lured to the managed services business model because it offers the promise of a recurring revenue stream. "You can have droughts in transaction sales, and then make a killing. That's the nature of that business. You have to make sure you have enough money to support you when you're not getting that business. With managed services, you want to keep at the levels you're used to at the peak times of your transactional business," April said.
Carolyn Aprildirector of industry analysis, CompTIA
But this requires having more customers in your MSP sales pipeline. "[With managed services] you need a higher volume of customers … than you do in a transactional model. You need a lot of customers paying monthly in a smaller increment to [reach] the total amount [you earn with transactional sales]," she said.
As a result, April said new managed service providers "need to do a ton of lead generation and business development to start getting more sales, more customers in the pipeline."
This is where marketing becomes incredibly important and, like sales and operations, requires an overhaul when transitioning to a recurring revenue model. Now customers are putting their trust in the managed service provider itself rather than the channel company's association with a vendor. "It's much more important as an MSP to get branding straight around your individual value," April said.
But that's not all. Your marketing should also aim to educate customers on the value of managed services. According to the 2012 CompTIA report Trends in Managed Services Operations, "One key piece of any successful business transformation is the ability to raise awareness and educate existing and new customers to the new model your company is launching. This is not always an easy task. … But once accomplished, channel firms can effectively demystify new models such as managed services, raising awareness to a point where customers see the business benefits of different types of IT decisions. For example: forgoing an upgrade purchase of new servers in favor of signing a managed services contract for outsourced data center management."
In addition to communicating the value of managed services and the provider, marketing efforts should drum up as much potential business as possible. Existing customers are the perfect place to start. "Not every company is a fit for managed services, but there's a compelling case to be made on the cost side and the predictability of it," April said.
She continued: "You already have the relationship, so this is a much easier target than net-new business. It helps you get [customer] volume up, but it also gives you customer testimonials. So once you have them on board and experience running their IT, you can use that as case studies to prove your value." Such case studies show prospective clients that you successfully deliver managed services for a subset of customers.
This type of communication doesn't stop once you have customers. Lawrence McNutt, CEO at SOS, a Sacramento, Calif.-based network and voice solutions provider, said that his company sends monthly reports to its clients so that they know what SOS is doing for them and how the channel company is of value. "The more we can communicate with managed services clients the better, because the ideal situation is they never have an emergency and they forget you exist," McNutt said.
Even after building up a healthy MSP sales pipeline, it is not unusual for IT channel companies to maintain a hybrid business model that combines product sales with managed services. According to the CompTIA report, "The majority of MSPs today continue to sell product alongside contracts for services. Often the hardware or other infrastructure they sell [to] customers is then added to a managed services contract for monitoring and management on a per-user or per-device recurring fee."
McNutt agreed that there is value, for both the customer and the MSP, in continuing to offer product and project sales. "[Some have] found that business is lucrative enough when combined with managed and leveraged services that they needed to keep doing it. I wholeheartedly agree. You need to provide a complete solution for your client; otherwise, you lose a business proposition," he said.