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Managed services a learning process for VARs, customers

VARs can realize gross profit margins of 40% or more on managed services. But, managed services is a new way of operating for most resellers.

If you're a VAR and you're not in the managed services business, you probably should be. The margins are much—much—higher than product sales and the revenue stream more predictable. But it's a different way of doing business and probably is an alien concept to your customers.

"One of the biggest problems in offering managed services is: How do I approach customers?" said Robert Cohen, president and business editor of Integrated Corp. "I never put you on service contract before, and by the way, I will charge you. Most VARs feel very uncomfortable when they first approach an SMB."

In a recent survey by MSP Partners and Integrated's ChannelLine Research, VARs said the majority of their customers and prospects had little or no understanding of managed services.

"How do I walk into Mr. Small Businessman and say I'm charging $300 a month flat as opposed to $100 an hour?" said Harry Brelsford, CEO of SMB Nation Inc.

Managed services are one huge step towards professionalizing our industry.
Robert Cohen
president and business editorIntegrated

A big part of the selling problem behind managed services is that VARs are now charging for services they either didn't know how to charge for or were afraid to charge for lest they lose their core sales business. For example, VARs would sell you PCs and servers and perform basic support services for free to maintain their thin sales margins, Cohen said.

"You can't have a professional industry where no one takes responsibility for a service," he said. "Managed services are one huge step towards professionalizing our industry."

Even after you explain what you're talking about, you still may get an uncomprehending, even hostile look from your customer.

The way to really win over your customers is not to talk in terms of "managed services," which will get you nowhere, but in terms of their business drivers and how your services can address them, said Jim Hamilton, MSP Partners executive director.

"Understand their core business drivers, then, take out of the managed services sales toolkit a way to enable those drivers," he said.

You'll probably need some help developing that toolkit, perhaps because you don't have the marketing materials, the experience or the training to sell the benefits of the idea.

Training is available through organizations like MSP Partners, managed services platform providers and a number of other organizations and companies that offer managed services education programs. Individual vendors will supply technical support and sales training for their products and services and they're increasingly aiming at most VARs' target market: SMBs. But that's assuming you've already retooled your business to provide managed services.

"VARs are generally techies who have a fabulous relationship with the people they sell to," Cohen said. "Now vendors want them to be their commission-based sales team, and do all the services and support and marketing."

For most VARs, managed services will mean building on those "fabulous relationships" in areas they're comfortable with.

"It's a great buzzword, but I've always thought of it more narrowly," said Brelsford. "It's a pretty simple view: I manage my customers' machines remotely, monitor their networks. What's new for my guys is the monthly contract – for $300 month, we're going to do everything."

Pricing is another issue that vexes managed services newbies.

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There are no standards to guide you on what to charge for managed services, but Jim Hamilton recommends defining the levels of service you plan to deliver and structure your pricing around.

"What kinds of response times, what kinds of monitoring will you provide?" he said during a recent webinar to discuss the MSP Partners-ChannelLine Research survey findings. "And determine what levels of service you want to provide: Break it into entry level, medium level and premier level and develop pricing around them."

However, Hamilton cautioned that not all managed services are equal. Services built around newer technologies are generating tremendous gross profit margins and you should charge accordingly, he said.

Profit margins are pretty spectacular for managed services across the board. Capable managed services providers are realizing margins in the 40% range. Best-in-class providers are seeing margins of 65%.

Hamilton identified several best practices areas around which to build an outstanding managed services practice:

  • Define and execute a strategy for growth. Services that are growing do better, are more profitable.

  • Sell beyond the IT department. Adopt a trusted business advisor concept.

  • Look for new technology opportunities. Expand your services.

  • Invest in and execute a marketing program.

  • Invest in infrastructure--your NOC, brick and mortar. Be able to scale and provide level of service customers are looking for.

  • Invest in your practice—your tools, processes and, in particular, your people--sales and technical people--and inculcate into them the ability to sell managed services as opposed to the "break-fix" approach.

"With the break fix model, there's a crisis call. Your customer's worst month becomes your best," Hamilton said. "With managed services, you'll move from an antagonistic relationship to a cooperative relationship."

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