Moving to a Managed Services Model

One of the fastest growing segments of the IT and networking markets is managed services. A ThinkStrategies industry benchmark survey in conjunction with the MSP Alliance in 2005 found MSP sales revenues had grown 80 percent in the past year.

Yet, many VARS attempting to convert themselves into MSPs (management service providers) have discovered that achieving success in the managed services business isn’t a slam-dunk.

What makes migrating to managed services so difficult and what can VARs do to overcome these barriers?

The answer lies in the need for VARs to rebuild their businesses in three important ways.

First, they must rebuild their corporate cultures. Rather than staying focused on selling and servicing products, VARs trying to become MSPs must become comfortable selling the responsibility of managing their customers’ IT and network operations.

This may sound obvious, but there is a big difference between taking the responsibility for fixing or maintaining individual products and taking responsibility for keeping a client’s operation up and running.

The support staff of a traditional VAR is accustomed to reacting to customer problems and resolving them as soon as they can. The staff of an MSP must monitor customers’ operations 24/7, look for problems before they arise and resolve them before they disrupt their clients’ business.

Click here to read about how MSP Do IT Smarter helps VARs shift to the emerging model.

The salespeople of most traditional VARs may be skilled at selling the technical features of packaged products, but not the business benefits of managed services. The sales staff of a MSP focuses on how their services can reduce the TCO (total cost of ownership) of a client’s IT and network operation, and improve the return on investment of their technology.

While changing the staff’s attitudes and skill sets is essential for a VAR to successfully become an MSP, the second big step toward success is acquiring and deploying the right set of management tools to deliver cost-effective managed services.

These tools should automate the tasks of monitoring client operations, so as to quickly uncover and resolve problems. The good news is that there is a growing assortment of all-in-one, management “appliances” to perform these functions available from companies like BMC, N-Able and SilverBack Technologies.

The third major component in the migration to managed services entails restructuring a VAR’s revenue model. Unlike in their traditional business, VARs migrating to a managed services model can’t depend upon the “big hit” and upfront revenue that comes from product and maintenance contract sales. Instead, the subscription fees of the managed services business are spread across the contract period.

This means that VARs must be particularly careful about the investments they make in their managed services businesses to ensure that they can cover their initial and ongoing costs.

On the other hand, if a VAR makes the right investments and builds an effective managed services sales and delivery engine, it can create a more profitable annuity business that will differentiate it in an increasingly commoditized product market.

Read guest columnist Charles Weaver’s commentary here on how to avoid the pitfalls of managed services.

As proof, ThinkStrategies’ 2005 industry benchmark study in conjunction with the MSP Alliance found that MSPs’ average sales cycle time had dropped from six months in 2003 to four months in 2005, and average contract length had grown to approximately 20 months, compared with 16 months in 2003.

Not only were MSPs finding it easier to sell their services, the proportion of existing clients that bought additional managed services had grown to 67.8 percent. As a result, nearly two-thirds (64.3 percent) of the MSPs participating in the benchmark study reported they were cash-flow positive, and the majority that were not currently cash-flow positive expect to be within twelve months.

Making the transition from a traditional VAR business to managed services isn’t easy. But VARs willing to retool their sales, delivery and revenue models can reap the rewards of the managed services business in 2006.

Jeff Kaplan is the managing director of ThinkStrategies, a strategic consulting services firm based in Wellesley, Mass., and the founder of the Managed Services Showplace and Software-as-a-Service Showplace. He can be reached at jkaplan@thinkstrategies.com.