Everywhere you go solution providers seem to be debating the merits of two business models: the managed services approach versus the time and materials approach.
Of course, the problem with this debate is that it assumes that one model is better than the other when, in fact, both are required in different measures.
Take, for example, the way dbaDirect goes to market with a managed service for databases. The managed service essentially comes in two forms. The first element focuses on the basic operations associated with managing the database, which is called the Guardian Plus Continuous Service Assurance program. The second level of the service I call Guardian Plus On Demand, which are services that dbaDirect offers around scheduled tasks such as database migrations, system upgrades, backup and recovery, and other one-time services. By segmenting the services this way, dbaDirect is better able to maintain profit margins, since all the services are not offered to the customer on an all-they-can-eat basis.
But dbaDirect CEO John Bostick knows there is a lot of revenue to be had by also offering professional services on a time and material basis. As such, dbaDirect keeps a number of database experts on staff to help customers with special projects. Today, the company’s business derives 40 percent of the revenues from the Guardian Plus CSA offering, 50 percent from Guardian Plus On Demand and 10 percent from special projects. In the future, Bostick said he’d like to see the revenue distribution model balance out to something that is closer to 30 percent Guardian Plus CSA, 40 percent Guardian On Demand and 30 percent special projects.
One of the primary reasons for this is that managed services, like all products, are subject to laws of diminishing margins. Too many solution providers think that managed services will be the answer to the fact that product margins have fallen through the floor. The problem with that thinking is that a managed service is essentially a physical service that has been turned into a product that is now delivered remotely. As such, the profit margin on that service that is now a product will fall. And you can bet it will fall a lot faster than most people might expect.
To stay profitable, solution providers need to balance their portfolios of low-cost managed services that may have high profit margins today with higher-margin professional services that are delivered on a time and material basis. Relying too much on one model over the other is an invitation to a life of low-margin managed services. Any managed services model that is ultimately going to add valuation to your company needs to be balanced with higher-margin professional services.
So the next time someone starts talking about one extreme over the other with regard to business models, just remember that just as with investing, the long-term winners are usually the people who have the most diversified holdings.
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