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Managed services: Maximize profits with a recurring revenue stream

Managed services provides VARs and consultants a recurring revenue stream that one-time sales cannot. This tip offers strategies for turning one-time customers into recurring customers.

Tired of the day-to-day struggle of chasing one project to the next? Want a better way to run your business so you don't have to staff up just to lay off employees a couple of months later?

In the past, many information technology solution providers were driven by clients that needed additional staff and capacity. Hardware upgrades, software version updates, relocations and acquisitions drove new business to the IT industry. As one project was completed, a new project emerged on the horizon.

Over time, the business environment has changed and solution providers are finding that chasing project upgrades is a tough way to do business. Prospects that need products and services are now requesting competitive bids. Needing higher profit margins, hardware vendors market directly to end clients and bypass the channel. Hardware is a commodity and security devices such as firewalls are now "appliances."

With profits squeezed, proactive solution providers need to change their business model. Managing client systems creates a recurring revenue stream. Solution providers can then forecast expenses, cut costs and improve profitability.

Case study: Networking VAR

Let's consider a networking VAR that provides computer and network support services on an hourly and materials basis. The quote is a single page document detailing the hourly rate, estimated number of hours to complete the project and costs, but without specifying benefits or ROI information.

By emphasizing dollars, the networking VAR is typically awarded the project when it's the low-cost bidder. However, the variable nature of the work doesn't allow the VAR to commit to long-term rental agreements that can lower overhead rates.

This can be solved by:

  1. Replacing the one-page quote to a Word document emphasizing benefits and client return on investment, and changing the document from a "Quote" to an "Investment Proposal." Prospects can better see their benefits and the additional value added services. The new format attracts clients that pay higher rates.
  2. Contacting prior clients and offering a slight discount, converting clients from time and materials to a contracted monthly service level agreement, specifying the services to be provided and the fixed fee. Clients appreciate the fixed fee as it is easier to budget and pay.

By emphasizing benefits instead of costs, the VAR raises its effective hourly rates and improves its bottom line profitability. A year after instituting such changes, one such VAR saw over 50% of its revenue come from clients under contract. Payments for the invoices were processed by the client and received in 33% less time. With predictable income, longer term contractual agreements lowered overhead costs and improved profitability. Changing the business model from project related work to managed services created a recurring revenue stream and maximized profits.

About the author
Jim Kelton is President of Altius Information Technologies (www.AltiusIT.com), a southern California based IT consulting firm. In addition to his leadership in the IT arena, he is past president of the Association of Professional Consultants.


 

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