The managed services and cloud market is shifting so quickly that providers can struggle to keep up.
Should you build out your own data centre footprint or utilise the public cloud? Invest in service desk software or develop your own intellectual property? Does your existing salesforce have the acumen to sell services or will you need to re-hire?
Different managed service providers are working out their own solutions to these thorny questions.
Stuart Applegate is a local pioneer of the managed services sector. He started his managed services provider (MSP), Business Computing Australia, in 1997 and sold it 16 years later to Melbourne-based GPK.
When Applegate started, there was no alternative to rolling your own services at great risk. Now a lead figure at professional association HTG Peer Groups, Applegate recalls how things changed when Amazon Web Services began targeting the reseller channel. “AWS was only just getting a reseller program off the ground and we said, ‘You need to give us more support so we can sell your system’. It was a bit too early for them.”
Other veteran MSPs, such as Jamie Warner, founder of Sydney-based eNerds, have also moved with the times. Warner has taken the intellectual property behind the software platform that runs his business and is turning this into a saleable product (also done with great success by US professional services automation software vendor ConnectWise).
Whatever sort of MSP you are, the guide below will help you make the right calls to grow your business.
1. Change your mindset (and that of your sales staff)
Who doesn’t love the adrenaline rush of a big payday? But amid the champagne and slaps on the back, there’s a gnawing doubt: ‘Can I pay the bills next quarter?’
“If [salespeople] aren’t incented correctly, they won’t sell,” says Joshua Beil, cloud strategist for infrastructure software maker Odin (formerly Parallels). Beil says resellers might need to compensate on new metrics, “like how many seats did you bring on?”
The “simple sale” has to cede to more “sophisticated” selling, says Simon Xistouris, managing director of Sydney-based Klikon Solutions. “[Sales staff] were used to saying, ‘You’re buying X and we’re providing services and receiving Y’. [Sales staff] need to be trained to understand what they’re selling and present that story to the customer.”
Xistouris says unsupported staff will become disenchanted. “Some guys just feel comfortable selling [boxes]. We say, here’s your overall targets, you’re free to move up and down with the product lines, and on the services side we’ll attach [managed services] specialists to help you sell.”
2. Cash flow is king (but EBIT is God)
Even eNerds’ Warner, a frequent flyer on the CRN Fast50, laments that his early days were spent “playing footy and drinking beers” to the detriment of his financials.
“I was so disconnected from my numbers,” Warner says. “Having a strong understanding of your numbers is absolutely mission-critical.” Attention to earnings before interest and tax (EBIT) is mandatory, he says.
“Our results have improved but I’m actually still dissatisfied; I haven’t got to that 15 percent EBIT margin yet, but it’s close, and I want to get to 20 percent, and that’s ridiculous.”
Many upstart MSPs sail close to the wind, says Jamin Andrews, chief executive of Conetix, a Queensland-based web hoster that provides services aggregation for MSPs. “We’re seeing a lot of the MSPs taking longer [to pay] than they would have 12 to 18 months ago.”
As resellers try to tip the scales away from traditional capex-based professional services and towards recurring revenue streams, some are even “walking away from projects,” says ConnectWise marketing director Mark Sokol. “The one-off projects distract your managed services team and you’re affecting recurring revenue and customer satisfaction on the other end [of the business].”
But flipping the switch off the heritage business isn’t the answer, says Applegate. “You have to plan the transition over 12 months or two years so you’re slowly moving from one scenario to another.”
3. Get more MSP clients (start at home)
There are three ways to grow your managed services client list: existing customers that want to change models; hunting for prospects; or educating recalcitrant customers.
For the third group, it’s important to pick the right time for a lesson. “When they have downtime and things that occur on break-fix, that’s the time to say, ‘On a managed services agreement, I would have already moved you across to a managed server, a guaranteed service-level agreement of X number of hours’ and so on,” says Sokol.
He says a reseller can shift a third of their customers to managed services without much difficulty, and a third of customers will be a three-year journey, “then there’s 10 to 30 percent of customers you’ll lose”.
And you can always pitch for your competitors’ customers who have bought into managed services, he says. “Every year it will get easier; [customers] are almost expecting to pay a monthly fee now.”
Next: Seeking help
4. Seek help (there’s strength in numbers)
Safe peer forums are essential for your business and personal health, says eNerds’ Warner, who was president of the non-profit Entrepreneur’s Organisation last year. EO forums helped Warner focus on his business, reveal weaknesses in his approach and open doors.
“I faltered at $3 million [revenue]. My EO forum helped me understand what to do: I took a hat off and got an experienced sales manager.”
The business grew another $3 million in three years; it had taken the past 11 years to hit that figure the first time.
EO also introduced Warner to the burgeoning Sri Lanka IT scene. Warner has since launched eNerds’ first offshore presence, a network operations centre in Colombo. “It’s been a huge success, we’re really happy with the outcome. If you’re going to get to 20 percent EBIT, you need a hybrid model for offshoring.”
Other groups such as HTG and SMB IT Pro offer collegiate advice. Applegate took a year “off the grid” to do a “big lap” of Australia while the industry found its new level. Now he counsels MSPs: “We go very deep on the business. We help them with their leadership and business plans, and their life and legacy plans.”
5. Date lots of new vendors (and accept that some won’t keep up)
Applegate says the vendor relationship “has never been more important because you’re both closer to the customer”. Vendors must realise that while “there’s a place for both of you, the MSP is in the middle” of the customer relationship.
Klikon is building managed services that leverage technologies in the market, even where vendors aren’t yet supporting them with an MSP partnering model. They need to hurry up.
“Our challenge is to get the vendor on board or take up part of the risk to go to market. A [consumption] roadmap is a must for us,” says Xistouris. “We’re happy to wear the risk in the interests of time and by being early adopters, but please catch up – we don’t want to be left holding the baby.”
Lenovo is one vendor recasting its channel program for the MSP market, says solutions group director Joe Screnci. In March, Lenovo launched its MSP program, which provides access to technologies including System X and storage, discounts, support and 120-day finance.
“MSPs have good opportunities across their desks but they can’t meet the cost of that investment,” Screnci says. “If you have to drop $100,000 of capital on the floor, that is a lot of cash flow, and one customer might not use all of it but you need that equipment to deliver the solution.”
Lenovo has two staff to manage its program and a dozen around Australia training and talking to MSPs.
6. Be the safe pair of hands (because others aren’t)
Fast-growing markets with low barriers to entry attract cowboys that need to be stamped out.
“We’ve talked about that as an organisation and we have certification processes in place for our solutions,” says Sokol. Groups such as the US non-profit trade association CompTIA now setting up in Australia do a “decent job of education” and providing customers with confidence in their IT provider, he says.
Conetix’s Andrews says MSP industry growth reminds him of the early days of e-commerce on the web. “The cowboys come in and they have the gift of the gab and they charge a lot for nothing. We’re seeing a lot of it: they say, I can spin up a server for $40 and put 20 clients on it and try to make money – and they can’t bill or fix it. The guys who are very green, we try not to engage them very much.”
Writing in CRN last year, Ben Corbett from Adelaide-based LeetGeek – a previous winner of the CRN Fast50 – made a similar point. “I’ve seen overstretched IT engineers at MSP firms wrestling with a platform they don’t understand how to use.
“We have inherited some environments supposedly managed by a fixed-fee MSP model and they were an absolute disgrace. One site had backups that had been failing for months and the customer hadn’t even been notified.”
7. Build, buy or hire? (The thorny question)
Fifteen years ago, MSPs had to build their own solutions and infrastructure. But is this still the best way?
“That’s a philosophical argument,” says ConnectWise’s Sokol. He advises holding on to the helpdesk “because that builds relationships. Customers feel like it is part of their organisation.”
Speaking on a panel hosted by CRN editor Steven Kiernan at last year’s Microsoft Australian Partner Conference, Dave Stevens, managing director of Brennan IT, said: “The issue with running your own infrastructure right now around the cloud world is that the boat has almost sailed.
“We do the numbers constantly on, ‘Is it more cost effective to own this stuff or is it more cost effective to, say, buy wholesale off Azure?’ Right now it’s more cost effective to own it, but it won’t be for long. If you don’t get it to scale, if you don’t get critical mass of revenue on it, then you’re never going to get a return,” said Stevens.
HTG’s Applegate says this is the “big debate” for MSPs. “What concerns me is building their own infrastructure has a big capital cost and an ongoing technology refresh cost. For a small MSP to play against the giants of Microsoft and AWS is nearly impossible.”
Andrews specialises in providing infrastructure that small IT providers such as web developers can white label for their customers. “We’re the MSP of MSPs providing services to smaller telcos.
“Some of the smaller MSPs who can’t finance deals, we’re brokering in the middle on our infrastructure. We end up better than the bigger guys like AWS.”
Next: Disrupt yourself
8. Eat your business (disrupting yourself)
How do you manage decline while building a bridge to managed services? Maybe launch a start-up free of the baggage, says Applegate.
“They have to leapfrog the traditional MSP model; reinvent the business to align with the cloud. That’s not a gentle transition.
“They need to restructure, to re-divisionalise the business. The traditional model would have to wind down because there’s not a place for break-fix – they would have to start up a new entity and get the right people and the right mindset.”
9. From services to products (commercialise your own IP)
It might be counterintuitive, but your managed services could become a saleable product, says eNerds’ Warner.
“When I started 15 years ago at the age of 22 straight out of uni, it was an ad hoc model selling support packs. I realised after 12 months that wasn’t sustainable. We went to managed services charging monthly fees without the tools to do that. And we used physical labour to check things,” Warner says.
He says there weren’t any SaaS affordable ticketing systems out there, so eNerds built its own.
“There’s no doubt in my mind you’ll struggle unless you get some IP [intellectual property] to get more than a six-times multiple to sell your business.”
This is the same model that market leader ConnectWise followed way back in the early days of managed services. Brothers David and Arnie Bellini founded ConnectWise as an MSP in 1982 and after searching for a software solution that would help them better run their company, none cleanly matched the unique requirements of their growing business model, so they developed their own. The company now has more than 100,000 users and claims to have around 65 percent of the world’s MSPs as customers.
Building out your own IP also makes a company a more attractive acquisition target, according to Brennan IT’s Dave Stevens.
At last year’s Microsoft APC, he said: “There are only a few reasons why we’d want to make an acquisition: to get into new areas of technology; to get some intellectual property; or acquire a profit. Most of the businesses in Australia are not going to have intellectual property, unless you’re in Nintex or someone like that.”
10. Become a virtual CIO (The ultimate trusted client advisor)
As customers start to rely more on their MSP for daily business activities, there’s scope to expand what was a transactional relationship into a strategic one, going so far as to become the customer’s CIO or CTO, says HTG’s Applegate.
“If you’re going to be a virtual CIO, you have to deliver to your client then make sure you have relationships with cloud vendors. That’s where vendors have to support the channel.”
It’s not a model that will suit all MSPs, he warns, because a “virtual CIO has to be incredibly well structured and organised”.
A MSP could even become a mentor to their client, flipping the power dynamic. “That’s a big part of the future. There are resellers doing that consciously and naturally. But I don’t think they’re doing a good job explaining what they’re doing for their clients and putting a price on it.”
-1.jpg&w=100&c=1&s=0)
.png&w=100&c=1&s=0)
