In my previous post, I wrote about the reasons value-added resellers (VARs) who make the transformation into Managed Services Providers (MSPs) might take market share away from those VARs who don’t make the shift. As I mentioned, customers are looking for more standard technology environments. As this market demand grows, an MSP will be able to leverage offerings across multiple companies/end users, utilizing the same Network Operations Center (NOC), the same tool sets and the same skill sets. That means you can grow your business exponentially without needing to make massive investments for each new customer, and your company becomes more valuable.
I like to look at it from the viewpoint of what Private Equity firms are purchasing. Many are buying undervalued VARs that have customer contacts and merging them into MSPs. They can buy a VAR at a low multiple because, as I mentioned in my previous post, the value multiples of a company with reoccurring contracted revenues is greater. Therefore, a VAR just selling product is likely to be worth 1.5 to 2 times EBITDA, whereas an MSP is worth 5-7 times EBITDA. The investor can then add managed services, leveraging the existing customer contacts and getting to market faster with those accounts.
Despite that, there is still some hesitancy from some VARs about managed services. When I encounter this hesitation, I like to outline the four paths a VAR can take in today’s world:
1. Stay as a VAR and ride it forever: Maybe you don’t want to grow, take the risk, or make the investment. These VARs will continue to sell just products and maybe some professional services.
2. Build your own NOC, grow your own technology and overlay managed services. This is an incredibly expensive route to take, if you do it correctly. Remember, you can never build one big enough and have enough diversity to meet all of your clients’ requirements. No matter what you build, you will need something more.
3. Become a reseller of services and managed services and layer your own value-added services on top of it. In this scenario, you would buy white-label services and resell managed services from a NOC and remote management perspective, but layer your own value-added managed services on top of that. You may offer on-site visits at the customer location once a month to do upgrades or fine-tuning, for example. The “drag through” of added-value services can be extensive and provides higher gross profits (30% +). In the Comstor model, VARs resell white-label services to allow the VAR more intimacy with the client. The client intimacy is the differentiator that cannot easily be replaced.
4. Hybrid: Build your own and add other suppliers as needed or “cobble” together a solution that may not be designed to grow as the industry / technology transitions.
After assessing what path a VAR wants to take, we then look at what they have already in-house and what they would need to change or grow in order to be successful as an MSP:
Sales Force: Do your account managers have consultative selling skills and do they understand the business relevance of managed services?
Sales Management: Does your sales management team have the tool sets in place to manage as a services sell, not just a product sell? Do you have a pipeline tool that offers visibility into where sales are in a longer sales cycle? Can your sales management manage the salesforce correctly, remembering that as an MSP, the philosophy must shift to an account management philosophy, rather than just an opportunity philosophy?
Executive Management: Are you really committed to the MSP business? Do you realize that if you decide you are going to build a NOC, you need a $3- to $6-million investment and be prepared to pay it off in the next five years? If you are going the reseller route, do you realize that you are going to have to invest in new tools and commit to higher-level executive relationships focusing on business outcomes and growth with your customers?
Delivery Operations: This is the big one. If you decide to invest in a NOC, are you ready to staff it and create career planning and training for engineers? Are you ready for the upkeep and investment you will need to make in the facility? If you are going to resell, you still will need to have some delivery organization in place for quarterly business reviews, event correlation, etc. However, this approach is much less costly and in most cases, resources can be hired to match cash flow.
Business Operations: Are you able to bill on a monthly basis and not have to create a manual invoice every month? Do you have the right Master Services agreement in place to mitigate your company’s risk around limits of liability, cancellation, security, etc.? If you are running your own NOC, you are going to have to pay people every two weeks, but you are going to be paid on a monthly basis. Are you prepared to be in a continual negative cash flow position for this business?
Obviously, transforming into an MSP requires a different type of business mindset. It’s no longer about the product that you sell, but it has morphed into a higher level, bigger picture view to include the entirety of the customer’s business and how you can add business value through technology.
In the MSP space, your focus will shift to ensuring you can schedule resources that will support the business, mitigate risk and positively impact cash flow. When you can talk that talk with your customer and back it up with consistent and impeccable support, you are ready to move into managed services.
