IT channel companies that choose to reap the benefits of a recurring revenue stream face a number of challenges as they transition their business model toward managed services and away from product or project sales and reactive services. But the biggest obstacle value-added resellers (VARs), solution providers and systems integrators face is also the most important to overcome because it is paramount to one's success as a managed services provider: restructuring the sales staff.
"Sales is a big area that needs an overhaul. It's quite different to sell services and long-term contracts than to sell products or even project work. It's a different type of sale; it requires a different conversation with the customer and often with a different type of customer. You're selling to the line of business or CFO, as opposed to selling product to the IT department," said Carolyn April, director of industry analysis at CompTIA.
Tom McDonald, president at NSI, a managed services provider based in Naugatuck, Conn., agreed. "Selling it was a big difference," he said, referring to when NSI first made the transition to managed services. "None of the salespeople we had when we were in the VAR business could transition to this kind of sales process. It's a much more consultative and business kind of sale."
Invest in training
According to CompTIA, the inability of existing sales staff to sell services instead of products is the No. 1 sales-related challenge IT channel companies face as they restructure their sales team to support a managed services model. More than a third of respondents to CompTIA's 2012 study Trends in Managed Services Operations cited it as a major factor in sales restructuring while another 42% said it was at least a minor factor.
Tom McDonaldpresident, NSI, referring to the process of terminating sales staff
The different approach required to sell managed services necessitates retraining sales representatives. "I had to do [sales] initially until we could get the training in place, find the right salespeople and get them going," said McDonald.
Before NSI's transition to managed services, McDonald worked to sell the sales staff on it. "We had to get them slowly to understand the business, why there's value in managed services," he said. NSI provides services to very small companies, those with about 25 users, which is comparable to the size of NSI itself.
"I can go talk to that business owner and explain the value of outsourcing … versus hiring [internal staff] or a competitor [of ours] who will be reactive. We can charge one fixed fee per month, per user and cover everything for the client. I had to find people who could go out and deliver that message as well as I could or probably better," McDonald said.
For Lawrence McNutt, CEO at SOS, a Sacramento, Calif.-based network and voice solutions provider, it was also important to have sales reps with deep technical knowledge. "Somebody selling recurring managed services solutions needs to have a handle on how the technology pieces work together: the network carrier side, the server side, the storage side. They need the understanding of that, and that doesn't come from a year of training. That comes from having a career in IT," he said.
Make the tough decisions
Unfortunately, even with retraining, some sales reps may need to be replaced. "Some of your best sales reps that sell products today may not be equipped to sell services," April said. "The sad thing is you either stay in a legacy world of your business or you replace them. That can be hard for a smaller company that may have had its sales staff for many, many years."
McDonald can vouch for that. When asked what one thing he would do differently if he were to make the transition to managed services again, he said, "I would've ripped the Band-Aid off a lot faster than I did. It was death by a thousand cuts," he said, referring to the process of terminating sales staff. "I look back at it now, and I knew what I needed to do, and maybe I was in denial or didn't react fast enough. It is difficult to get rid of people that can't transition with you."
SOS also had to restaff its sales force. "We had complete turnover of sales staff and approach. I don't think it's an easy transition," McNutt said.
Adjusting compensation models
In addition to restructuring their actual sales team, IT channel companies find that they also need to restructure their sales compensation model as they transition to managed services. According to the CompTIA report, "sales compensation structures for the transactional world aren't readily transferable to the managed services model. Many channel firm CEOs are grappling with the best and most fair ways to structure these compensation agreements so that they are able to manage cash flow reasonably while also keeping sales reps content with the new system. It's a dicey challenge."
Unfortunately, there are no easy answers, as an industry-wide standard has yet to emerge.
"Sales reps are used to a big percentage commission on a big sale," April said. Under the recurring revenue model, sales reps may be paid the same percentage but on a monthly basis through the life of the contract, or a small chunk up front on the first year of the contract, she said. "The commission may add up or it may not, especially at the beginning. But, psychologically, it's hard for some reps to wrap their head around."
When it comes to restructuring a sales staff to support a managed services business model, April offered the following advice: "Take a look at your current sales staff and see who can be good in those roles and who may need to do some training. Look outside at new hires. Don't necessarily hire people with a technology background; look for sales skills around services. It can be anything -- insurance, for example. If they can be taught that, they can be taught managed services," she said.
About the author:
Crystal Bedell is a freelance writer specializing in technology. She can be reached at [email protected].