Managed Services Not for Everyone

My phone rang at 4 a.m. Pacific time. On the other end was a VAR tortured by insomnia (fortunately for me, it was at least 7 a.m. in New York). He had been up all night racking his brain—and for good reason—over the quandary known as managed services.

Now, you would think that this is a pretty straightforward proposition: Buy the products to establish a presence in managed services, convert existing customers to a monthly recurring revenue plan and watch the profits roll in. OK, it’s not as simple as that, but you get the idea.

As an industry, we’ve preached to VARs for years to convert all or part of their business to managed services, which boasted healthy margins and predictable revenue streams. The logic for getting into managed services is self-evident: Hardware margins have been declining for years and sales were anemic through the recession; and software margins—which have been slipping as well—are being disrupted by the cloud computing phenomenon.

Now this VAR, we’ll call him Steve, hasn’t seen these problems among his customers. His customers continue to buy from his hardware and software portfolio, and rely on his services for maintenance and support. It’s a relatively simple business model that has worked well for the better part of a decade.

The problem with which Steve suffered through that night is integrating the value propositions that several managed services enablement vendors had presented. He was, in his words, “being badgered” by four vendors—one professional services automation software vendor, two remote monitoring and management tools vendors, and one master managed service provider. Given this was December, each vendor acted like the ghosts in Dickens’ "A Christmas Carol"; they professed to show him his sins and then the path to managed services enlightenment.

Here’s where Steve got confused.

The first vendor approached him with a tale of how its solutions would get him in the managed services business, solve all his worries and make him a rich soul.

The second vendor came in and presented a very similar pitch, but added that everything the first vendor said was dead wrong. The only solution, of course, was its.

The third vendor arrived bearing tidings in the form of the promise of managed services profits that could only be achieved by using its tools as the underlying platform. Of course, everything the first two vendors said was completely and utterly wrong.

And the fourth vendor, the master MSP, had the role of Christmas Future in which it said there was no need to build a network operations center or hire the staff to provide the services. Partnering with it would provide Steve with everything he needed to be a managed service provider. Oh, of course, everything the first three vendors said was bunk.

Scrooge only had to suffer one visit each by three ghosts in one night. Steve had the misfortune of these vendors revisiting him numerous times with the same tale of woe. And, with each visit, they came armed with new and creative explanations for why the last guy was wrong. The other thing they all had in common is the solution for integrating their managed services model with Steve’s business model: Add servers.

Here is Steve’s problem: Like many VARs and IT solution providers, he built his business to service and support VSBs—very small businesses. His company does slightly more than $1 million annually by catering to the IT needs of dozens of small businesses—many of which are either one- and two-man shops—in his greater metro area. They mostly have laptops, desktops, digital modems, wireless routers and perhaps a firewall. And, of course, he services and repairs everything he installs.

Managed services, each of the aforementioned vendors told Steve, would make his business wildly more profitable, since he wouldn’t have to roll a truck each time one of his customers suffered the Blue Screen of Death. He would be able to monitor the health of their network and remote into each client via the local server.

Ah, therein lies the problem for Steve. His clients don’t have servers. In Steve’s model, customer interaction is an in-person proposition—the majority of his clients bring their machines to him for service. No problem, said each of these vendors, just drop in an HP home server running Windows and you’re home free. But that creates more problems in his world, since his customers don’t have the need for a server; a server—even an inexpensive home server—would add costs and complicate their lives.

So why was this keeping Steve up at night? Well, that’s our fault—and I mean the collective “our.” Because the industry—vendors, press, analysts, etc.—have breached the virtues of managed services and warned that failing to act would result in dire consequences, Steve thought that it was nothing less than an imperative that he figure out this problem.

Adopting managed services would require Steve to either abandon his existing client base or develop a new practice that catered to a different set of clientele—both expensive propositions. Yes, he has other options in acting as an agent of cloud services that don’t require the customer to have a server, but that doesn’t address the break/fix model he lives on today.

I’m sure Steve’s story isn’t unique. Small VARs that service small businesses are peppered with advice and best practices that apply to larger businesses or businesses that have larger customers. “The industry” may say a lot of things, but choice and logic remain on the side of the VAR. If your business model is working well and producing the revenue and margins you expect, is there really a need to change just because analysts, press and vendors catering to a general partner base tell you so?

In some cases, VARs should follow what Steve ultimately decided: “if it ain’t broke, don’t fix it.” Steve knows he has to evolve his business, but he needs sound advice and guidance; not just hype and wishful thinking. Until then, he’s going to keep taking meetings with those vendors; he gets a free pen and t-shirt every time.

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