A Reoccurring Revenue Strategy for the Modern VAR Business

By Interviewed George L. Koroneos
While the chorus reverberating from the Channel these past few years has been for VARs to move from a break/fix business model to a reoccurring revenue model, few companies are talking about the challenges inherent in restructuring a business from the ground up. Saying and doing are two different things, and the cost—both fiscally and mentally—to change the way a VAR runs a company is no easy task. However, the benefits often outweigh the pains of change.

Founded in 1991, FPA Technology Services is a solution provider that implements custom financial applications, e-commerce tools, and network infrastructure solutions for investment firms. Today, 90 percent of the company’s sales are through network infrastructure implementation with a small portion reserved for custom applications and web development, but it wasn’t always that way. Three years ago, CEO and founder Craig Pollack made the decision to transition from a traditional hardware VAR to a full-service solution provider. Here’s his story:

Would you call your company a VAR in the traditional sense?
We tend to think of ourselves as more of a consulting firm than a reseller, but that might just be the perception from the inside out. Maybe being a total solution provider is kind of coming full circle because that has always been our mindset. While we do sell hardware and software, we tend not to look at our top line revenue because it is so skewed by those numbers. We look at it more as a service-fee driver.   

Can you tell me a little bit about your offerings and what markets you sell to?
Our biggest vertical market is the investment advisor arena—registered investment advisors. Anybody who manages over $25 million in investments has to be registered with the SEC, so they have compliance issues. We also serve accountants and CPAs. Our third biggest market is manufacturers and distributors. The investment advisors and CPAs need specific vertical applications that we don’t necessarily resell, but we do support from the technology side. Today, we do a lot of preventative work using Level Platforms’ remote monitoring and management tools. We have a ton of scripts written and we push infrastructure updates through the system. In terms of cloud, probably the biggest push has been to replace in-house Exchange servers for e-mail with some form of hosted solution. We do a lot of VMware implementation, service, and support for companies with 75 to 150 users. We’ll do the whole infrastructure backbone.

How has the company changed over the years?
Three years ago, we were more vertical than horizontal. We had project teams from top to bottom, so a client would touch all the same people within a project team and then another client would touch different people within another project team. We didn’t have a NOC, and we provided remote support but it was based on who was available to pick up a call. There was no real flow chart process for how we responded to clients. Now, because of the layers of end-user support with our help desk and the NOC running the networks, all our clients will get serviced  [by the respective divisions]. All our clients deal with the remote support team and we have on-site teams for specific clients. This allows our staff to be much better at what they do. It allows us to offer better service, and we can retain staff better, because they aren’t being pulled in 20 different directions across 20 different clients. It also creates a growth path for staff so that if they want to, they can go from remote support, to the NOC, to on-site.

Was there a tipping point where you realized that you had to make a switch from a hardware model to a service-based business model?
We are always focused on service first, but we did make a cognoscente change about three and a half years ago to move towards managed services. Until then, everything we did was on an hourly basis. About four years ago, I made a push to developing a strategy to increase our fixed-fee revenue stream.

Was it a tough transition?
It was fairly painful. To go through that kind of change at the same time as the great recession is hitting, and people are pulling back on your time and materials, was rough. We certainly hit our speed bumps along the way, and I don’t think I’m out of the woods by any stretch of the imagination, but about a third of our revenue now comes from some sort of fixed-fee—So from zero to 33 percent in three years.

How have things changed at FPA?
[Moving to a reoccurring revenue model] has made us so much more profitable, and so much more scalable, and it’s so much easier to sell. Before this, we were just selling the nebulous unknown of “Trust us.” We’d have conversations with prospects that would ask, “How much is this going to cost?” and the answer would be, “It depends on how much you are going to use us.” It could be $1,000 a month or it could be $5,000 a month.

Now, we can walk in and show the client our plans, what they get for it, examples of how we can control costs, and what the processes look like. We even have case studies with clients that have moved into managed services. It’s significantly more explainable from the sales and marketing side of the business. The hard part was the transition. I think we are luckier than most, in that at we are at a size where we can absorb the pain a little better than other solution providers, but we definitely had to re-engineer our company top down. Right now, we have four dedicated NOC staff, we have five dedicated help desk staff, and another six project mangers and on-site people.

It’s no longer about fixing a problem, but about scaling a project so that we never see that problem again for that client, let alone for other clients. It’s really about  changing the mindset of the whole technical staff.

You have done a great job serving as both a VAR and an MSP. Do you think that’s the direction the industry is heading?
One of our taglines is “One Company. One Integrated Approach. One Call.” We’ve always positioned ourselves as not only being able to do the implementation, but be there to run it afterwards, and to provide ongoing strategy and consulting along the way. Our clients look to us for answers to everything. That doesn’t mean that we do everything—we don’t do our own cabling, we don’t do telecomm—but we will be the project manager and point person acting as the outsourced CTO. Having everything in-house means that we are the only people touching our client’s network. We don’t have third parties remoting in and touching their data, which helps from a compliance standpoint.  

What has the reaction from clients been?
We have clients that have been with us since we opened our doors 20 years ago, and we’ve gotten feedback saying that we are running better than we ever had. They see the difference and understand what the different roles are. If they need to call in with a question, they can call the help desk. If there is something up with the server, they can reach the NOC. I know the uptime and the amount of issues that we run into has gone down dramatically. We are the classic example of going from being the firefighter to proactively running a client’s network. It’s a night and day difference.

What are your recommendations to peers considering adding an MSP solution to their product offering?
If you are looking to build a business, there is no question that this is the way to go. Having fixed fee and reoccurring revenue is really the way to scale a business. Anything else is just you doing what you do, and as soon as you’re not busy, you’re not making money. It’s just not scalable at  the hourly rate. We position ourselves as more of a Nordstrom’s than a Wal-Mart. We don’t compete on price; we are trying not to be a commodity.