Secrets of a perfect MSP partner program

Beneath the best partner programs for managed service providers is a little-known but powerful algorithm – the ‘Rule of 78’.

Moheb Moses, founder of consultancy Channel Dynamics, says his company distinguishes classic reseller programs and their MSP equivalent – whose implications are still being absorbed by the channel.

“A value-added reseller would [traditionally] sell the product and then sell professional services, but the MSP sells the service that includes the product,” Moses says. “It’s the difference between me selling you a car and providing a car lease.”

Moses says classic partner programs are geared to big and lumpy sales. But resellers transitioning to MSPs have different needs caused by initially smaller monthly revenues. Hence the ‘Rule of 78’ – a quick calculation to estimate recurring revenue over a year.

It suggests that for an MSP, there are 78 billing events in a year. Assuming the MSP sells $120 of services to a client in January, the MSP gets $10 a month for a year (12 payments). In February, the MSP signs another client and gets $10 a month over 11 payments (and $10 from the first client). In March, same again ($10 x 10 payments + $20 from the first two clients) and so on.

And as seen in the table, this means $780 in billing of $10 a client a month or 78 payments. This method is preferred over an annualised run rate because it more accurately compares an MSP to a reseller.

The move to annuity revenue challenges the infrastructure and software vendors in particular, because a $100,000 sale in a month “is a big number”, while $5,000 is not. But the MSP model has its advantages.

“Like a car lease, the customer never sees what the vendor’s product is worth, they just see the service,” Moses says.

“It’s very easy to compare prices; but it’s difficult to compare car leases because you can include other things.”

Ticking the boxes

It typically takes 18 months of 'financial pain' for the IT provider to get back to an even keel after swapping from transactional deals to recurring sales, he says. This transition is no joke – it is often called the 'valley of death' – which is why the best partner programs acknowledge that MSPs contend with different requirements for working capital, cash flow, financial reporting and business valuation.

“The vendor must recognise that a partner who closes a $5,000-a-month deal is, over time, equally or more valuable than one that closes a one-off $100,000 deal,” says Moses.

In terms of incentives, he says “rebates are very important to VARs but not to MSPs. What’s far more important is invoicing the partner on a monthly basis so they can manage their cash flow.”

A top MSP program should have dedicated training and technical staff. And this leads to the second 'fundamental shift' in attitude.

Vendors also must enable MSPs to talk to line-of-business management and help them enhance their bundles to limit customer churn.

Paul Izbicki is chief executive of Total Inter Action, which specialises in training and consultancy for IT companies. Previous clients include NetApp, Microsoft and Adobe. He says that Total Inter Action is seeing significant demand from vendors to help train sales and pre-sales staff to better engage with line-of-business buyers, outside of the IT department – such as sales, marketing or HR.

These vendors are investing in training both for their own sales forces and as part of their channel programs. “The more they can enable those partners to be successful, the more benefit it will bring. The smart vendors are investing time and effort into those channel partners to help them to address this problem,” says Izbicki. When selling IT as a service, he says it is all about “conversations moving away from transactional, moving away from the speeds and feeds, and understanding what outcomes the clients want to achieve for the business”.

Total Inter Action is currently working with a major global vendor around its partner program, which will include developing an elite tier of partner who gets special training to sell services to business buyers.

Next: The move to usage as a metric

In the MSP world, vendors should also focus incentives on usage rather than monthly spend alone, Moses says.

This is clearly the line being taken by Microsoft. For cloud products like Office 365, Microsoft partners must now ensure customers achieve ‘active usage’ in order to access funding support – it increased this threshold from 15 percent to 30 percent in July.

VMware has created a service provider program that wraps around its vCloud Air platform. This hybrid cloud offering, based on vSphere and hosted in Telstra’s data centre, allows MSPs to extend their data centre and scale out without adding fixed assets.

The vendor has cut the red tape for partners shifting from transactional sales into the MSP program, says Geoff Waters, VMware’s global vice president for the services provider channel. “There’s a simple amendment to the base contract, but [MSPs] don’t have to go through a ton of net-new components. It’s pay-as-you-go – there’s a 12-month commitment, a rolling scale discounting model so the more you commit, the bigger the discount you get.”

Dan McLean, director of cloud and service provider sales, says that by providing application programming interface (API) training, VMware helps MSPs shave costs through automation. The program also includes standard features such as three MSP support teams, marketing collateral and lead generation through outbound telesales and its partner referral portal vcloudproviders.vmware.com.

Virtualisation backup vendor Veeam separates its partner programs into two: the traditional ProPartner model; and a Veeam Cloud Provider (VCP) for MSPs, especially those who offer backup and disaster recovery as-a-service.

Don Williams, Veeam’s Australia & New Zealand vice president, says: “Our solution is straightforward – just one licence per virtual machine and there’s no capacity-based items that restrict a lot of MSPs.”

Peter Bender, Veeam’s ANZ channel and alliances manager, adds: “On VCP we don’t have rebates but we have a good buy price. We do a lot of joint marketing with cloud partners.”

One Veeam partner is Sydney-based MSP Nexon. Co-founder Barry Assaf was crafting Nexon’s Agile Business Cloud platform based around Cisco, NetApp and Palo Alto (for server, storage and security, respectively), but lacked the last piece.

“We were looking for a solution that would give us backup and disaster recovery [but] we couldn’t find anyone in the cloud,” Assaf says. Rejecting a $300,000 investment from a storage vendor, he chose Veeam.

“The technical team was impressed with the capability and how easy it was to deploy.” For Assaf, it was more than a nice thing to have; 70 percent of his customers have strict regulatory requirements and all demand rapid recovery.

Assaf adds that channel programs built for resellers don’t necessarily suit service providers. “We need vendor and financial models to scale and drive outcomes. Usually, they put very high barriers in for us [while] we have revenue and customer satisfaction targets to meet. That’s challenging when this is a new revenue-generating part of our business and we have to provide a vision for our customers.”

The hardware suppliers

Perhaps the biggest evolution is happening among the hardware vendors, as their channel partners increasingly kit out private clouds based on data centre infrastructure, rather than simply resell servers, storage and networking gear.

Lenovo, for instance, launched its MSP program earlier this year, following its acquisition of the System X hardware line from IBM. The program includes discounted equipment, cash flow support and business development funds to speed up the transition.

Netgear also has a fresh focus on MSPs through its Business Central IT management platform, which enables MSPs to securely manage customers’ wireless networks through the cloud.

Netgear territory sales manager Domenic Torre says the portal brings enterprise management features to small businesses and their MSPs, and Netgear is training its resellers in managed services.

Vendor support is vital for Netgear partner Synergy Managed Services, says director Michael Bailey. “We’re looking for a vendor that has a vision for where the technology is going, and Australian support, and where the technology works in a managed structure as well.”

He says Netgear helped the MSP by loaning products to test in a prospect’s environment, but most hardware vendors are yet to bridge the gap between upfront capital costs and the limitations faced by MSPs in an annuity payment world. “I’d like to see vendors take on hardware-as-a-service as a monthly fee. That would be utopia for us.”

Sydney MSP Oriel is a major Australian partner of many tier one vendors, including HP, VMware, Cisco and Microsoft. The company’s founder, Jake Wynne, has seen hardware vendors attempt to move from transactional models to ‘as-a-service’ models – with limited success.

Wynne, who sold his business to publicly listed BigAir late last year, told CRN that vendors are “having difficulty themselves trying to come from a run-rate business to being annuity based”. Vendors need to align the pricing model with the way customers want to invest – on a consumption basis. Structuring a capex sale on a lease agreement is not enough.

“That’s no good. I can do that myself. What you want to look at is pay-as-you-go. Put something on the floor for free, work out a way where we can get the revenue for it and work out a percentage split. Then there’s some commitment on both sides.

“The marketplace is still immature because everybody’s still doing capex [but] from a vendor perspective, they’re starting to realise they have to make this new switch… Vendors are realising they have to start a proper pay-as-you-go model where it’s not just a device worth $100,000 amortised over three years.”

But vendors are quarterly revenue-driven – “the long-term annuity revenue model does not fare well in this environment”, adds Wynne.

Compounding this challenge for vendors, says Wynne, is the fact that in a service provider channel, customers – and hence the MSPs that supply them – are less fixated on brand preference. With their buyers caring less about what the private cloud is built on, MSPs will gravitate towards vendors that can help with things like consumption billing, monitoring and metered usage.

Best practice for MSP partner programs