This content is part of the Essential Guide: IT channel sales and marketing strategy for the digital era

Build a channel or generate referrals? The MSP debate

MSPs struggling with sales may be tempted to launch a partner channel, but experts advise that referral networks may prove more effective.

Starting a partner channel for your managed services provider (MSP) business is no substitute for creating an effective sales and marketing organization or referral network to attract new customers.

That's the going sentiment among MSP insiders as the topic of creating a partner channel continues to be a hot one in the community. The reality, however, is that many MSPs have attempted, struggled and failed to build out a channel to sell their services because when you get down to the nuts and bolts of spinning out a partner channel, it requires a level of business maturity, stability and cost that most MSPs don't possess.

"Too often MSPs will say, 'I don't want to keep banging my head against the wall because I can't get my sales people to produce.' So, what do they do? They create a channel, as if that's going to be a magic solution to their issues," said Charles Weaver, CEO and co-founder of the MSPAlliance.

There's no magic in running a partner channel. John Burgess, president and cofounder of Mainstream Technologies, Little Rock, Ark., knows that.

Not only did he speak on the topic -- Channel or Referral -- at the MSPWorld 2015 Spring Conference held in March, but he also shared his personal experience of creating a partner channel with about 50 MSP attendees.

"I found that trying to go the formal channel route -- the cost associated with standing up what's essentially, a second sales and marketing organization, outweighed the benefits," Burgess said. Mainstream's stab at forming a channel was shut down in 2014 concluding the two-year effort.

A channel is a complex endeavor that takes a lot of effort, experience and maturity to do it well.
Charles WeaverCEO and co-founder, MSPAlliance

The driver for his company's channel attempt was to broaden Mainstream's reach and brand recognition for a backup as a service offering it was rolling out. Mainstream Technologies, founded in 1996, has three lines of business: custom software development, hosting and hosting-related services, and managed IT services.

"We, like other MSPs attempting to run a channel, don't succeed because it only amplifies problems we already had internally," he said, referring to customer acquisition or lead generation. Burgess also said Mainstream was too young and too small, relative to the MSP portion of its business, to be successful at starting a channel.

Weaver pointed to two key issues around customer acquisition that have plagued many MSPs for more than a dozen years: massive confusion around sales and marketing and the inability to develop a professional referral network to generate new business.

Burgess believes that what the MSP industry suffers from is it's run by technologists rather than business people. "We excel at service delivery and performance but we don't get the nuances of messaging and marketing," he said.

It's at the point that many small MSPs think starting a channel is the way to go without fully understanding if it's right for their business.

Some central pieces of a channel program, defined as a business strategy vendors develop to encourage other firms to sell its products or services, include: creating territories; clear product and services documentation; clearly defined roles, responsibilities and expectations around things such as, support and invoicing, contractual documentation, compensation, marketing and messaging; risk and liability for product defects and claims; and, tighter service-level agreements, invoicing and reporting, and lead generation.

A channel program is a formal business arrangement where the vendor has to stay within the program and deliver what they say they'll deliver. "Rules are dictated by who owns the channel," Burgess said.

"A channel is a complex endeavor that takes a lot of effort, experience and maturity to do it well," Weaver said. While it may sound like the answer to the longstanding marketing and new customer acquisition issues that many MSPs grapple with, it isn't, he contends.

Flip IT Cloud, a company started overseas in 2006 as an MSP business unit of a 20-year-old network company, has its own cloud automation software. Flip IT Cloud started a U.S. business in Miami in October 2014. The company is currently establishing itself as a vendor and is working on creating a channel of service providers, according to Miguel A. San Martin, director of business development and sales for the U.S.

The strategy of the U.S.-based startup is to help MSPs grow their cloud business. The company has the expertise to offer architectural design and management services as well as sales and technical enablement to MSPs.

"It's been a bit of a challenge to gain traction here but we're making some progress," he said, noting that the company just tested and delivered its first solution to a Miami-based hosting provider that's shifting its focus on becoming more of an MSP.

Flip IT Cloud delivers IT as a service, providing a platform for service providers to deliver their own cloud solution and also offers the Flip IT provisioning and management portal for virtual desktops, infrastructure as a service, and also voice. San Martin added that MSPs can also offer hosted Exchange and recently integrated with Microsoft Office 365 through the portal. The Flip IT Provisioning Portal, which can be white labeled, is also offered to service providers already offering their own cloud solutions.

While San Martin is optimistic about the company's growth he said building a channel is difficult.

"At least here in Miami, it's more about who you know than what you know and some MSPs don't understand what we do," he said.

The company won't just sell an MSP its software and walk away. "We're going to be partners, we're going to deliver leads. The more successful they are, the more successful we are," San Martin said.

Referral network

Another and better way to go -- to address sales and marketing -- is for MSPs to go the route that other professions take: referrals.

"You don't see other professionals building channels, they have a radically different and simple approach to generating new business -- they create and lubricate referral networks," Weaver said.

A referral network includes customers, strategic partners and other professional providers and embraces concepts for referring business out and accepting new business.

A base of satisfied customers is essential to participation in a referral network, also called word-of-mouth advertising. From there, referrals could potentially expand a partner's geographic reach, create demand for an MSP's unique offering and increase new customer acquisition.

"I believe if MSPs adopt referral networks like other professions do, they'll see more business and will see their revenue go through the roof," Weaver said.

In a 2015 State of the Market report by the MSP Alliance, 89% of mature MSPs reported new business leads are generated from referrals as opposed to methods such as list rental, cold calling, participation in trade shows and organizations and advertising online.

"For mature MSPs who've figured out how to do referrals, they're doing well and growing at a sustainable rate. However, for many MSP firms, growth has either stalled or there's a moderate amount of new customer acquisitions," Weaver said.

MSP firms have a lot of customer churn. MSPs lose about 2%-5% of customers every re-sign cycle and gain 5% of new customers so there's no new net growth, according to Weaver.

MSP insiders reported referral networking has eluded the MSP industry because MSP firms don't trust other MSP firms. Additionally, many small MSPs don't have enough resources to devote to a sales and marketing organization, or even to a referral network.

This year partners can expect to see the MSPAlliance roll out an online and automated directory and referral network for members.

Amy Rutt, MSP Consortium board president, recently talked to SearchITChannel about shaking things up in the MSP industry, addressing sales and marketing organization challenges as well as creating an online referral network for MSPs to partner with one another.

Making progress

Today, 75% of new business at Mainstream Technologies comes from referrals and 25% from new customer acquisition, according to Burgess. The company's MSP and hosting business continues to grow 30% annually.

While the 75% figure for referrals is down 15% points from where it was two years ago, the company president said that's a good thing. "We're still getting the same amount of growth out of our referrals; it's just that we're doing a better job of finding and acquiring new customers on our own," he explained.

Up until recently, Burgess said Mainstream could have been the poster child for spending on marketing programs without getting results. That changed 18 months ago with the help of Forrester Research training and education around sales and marketing.

Calling the investment with Forrester "the single best investment Mainstream has ever made," the company has turned around its less than stellar attempts at sales and marketing. Through a combination of consulting, research and playbooks that address different business processes, the sales and marketing function finally made sense to Burgess.

"We've gotten a lot better in our targeting and messaging, and in expressing our value proposition, especially to organizations that aren't familiar with the managed services model," Burgess said. Not only have these marketing improvements helped Mainstream find new customers, they have also shortened the time it takes to close on referred business.

Channel and referral networks help to scale a partner's MSP business beyond its four walls. Each strategy relies on quality and consistent performance. MSPs need to take an honest look at their business to evaluate if one of these routes is right for them.

Next Steps

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