How to Add Managed Services to Your VAR Business
By Julie Ritzer Ross
Just as customers in all verticals continue to seek new means of lowering costs and expenses, VARs remain set on finding ways to offset steadily declining hardware and software margins while simultaneously distinguishing themselves from the competition. Incorporating managed services into the business model—becoming a managed services provider (MSP)—ranks high among effective options for achieving this goal.
Research by the Computer Technology Industry Association (CompTIA) (www.comptia.org) signals a definitive move toward managed services. According to CompTIA’s Trends in Managed Services study, conducted during the summer of 2011, such services have “ushered in the ‘Holy Grail of Recurring Revenue’” for “many in the IT channel.” Nearly half of all study participants that sold managed services at the time the study was executed said the managed services portion of their business accounted for 50 to 75 percent of revenues generated during the previous 12 months. Planned investments in managed services by resellers and end-users alike proved to be on an upswing as well: Roughly seven in 10 end-user organizations claimed to contract with a managed services provider for some or all of their technology needs, compared with 29 percent that handle all IT on their own. Even more telling is the fact that of companies in these two groups, a collective 62 percent cited plans to increase their IT spend on managed services over the next two years, with a far more modest 35 percent intending to remain at current levels.
A predictable, steady income stream—and, by some estimates, gross margins of up to 70 percent higher than attainable under a traditional reseller model—makes managed services attractive to many channel players, but there are other benefits. Just ask VAR Larry Schwartz, president and CEO of Midnight Blue Technology Services (www.midnightbluetech.com), Pittsburgh. Midnight Blue’s managed service revenues were up by 23 percent this year over last; its hardware revenues, by 40 percent. “Our existing customers are buying SANs, they’re buying VMware (www.vmware.com) and they’re making other large investments that they neither want to manage nor monitor,” Schwartz says. “Managed services get our foot in the door for these sales.”
It also keeps it that foot in the door and beyond, forging symbiotic VAR/customer partnerships from which the latter see no reason extricate themselves. In the MSP world, deep relationships develop where clients can’t function without you and, to a large extent, vice versa. And when that happens, they view the VAR as extension of their own business, notes Chris Bradley, president, ProTech Systems Group (www.psgi.net), Memphis. Schwartz agrees, stating that 60 percent to 70 percent of Midnight Blue’s overall annual revenues are now generated by managed services projects.
These benefits, of course, cannot be fully reaped without adhering to a few best practices, which to a significant degree help VARs to overcome the potential challenges of assuming an MSP role. Marshalling the proper technology staff and technology resources ranks among them.
Some solution providers utilize third-party managed services tools and platforms from vendors like Level Platforms (www.levelplatforms.com) and Kaseya (www.kaseya.com), while others find a hybrid model an easier option. Computer Solutions Group (www.cgsupport.net), Los Angeles, leverages the Seismic Managed Help Desk offering from Ingram Micro (www.ingrammicro.com) to handle some of its customer service needs and brings in contract employees to pick up some of the slack. This, says Scott Spiro, president, allows CSG to run lean and mean without turning customers away. To balance out the uneven workload in the managed services cycle—e.g., a large portion of work when customers first sign on, to set up their accounts and create management templates, and less work later after most if not all processes have been automated—managed services work is supplemented with self-contained IT projects and application development.
Meanwhile, ProTech Systems Group maintains its own cadre of engineers, all of whom, notes Bradley, have considerable experience with Citrix (www.citrix.com) and the like. But whether or not outsourcing is part of the MSP equation, technology must be chosen with an eye toward quality. “Vendors themselves need to bring something to the table,” Schwartz asserts. In Midnight Blue’s case, it was a “blueprint for success”—including training, suggestions pertaining to pricing and ongoing support—that sold the VAR on one of its major technology partners.
Just as significant to a successful move into the MSP space is getting in gear where sales are concerned. Persuading sales staff to accept the cultural change inherent in adopting a managed services stance can admittedly be difficult. For one thing, certain individuals may initially be unhappy about sacrificing the more sizeable commissions they receive when signing large deals up front. Offering incentives for sales staff to continually attempt to generate new business and strive to maintain existing clients may help. Some experts advocate paying sales personnel a monthly commission throughout the life of the contract. Bonus rewards for meeting metrics that support the goal of cultivating customer loyalty may be added such metrics might include recruitment of reference customers and maintaining low attrition rates.
Moreover, some salespeople have difficulty with the changeover from promoting products and, if applicable, break-fix packages, to touting the advantages of managed services. This is where careful training enters the picture. Specifically, sales staff must be conditioned to avoid any talk of products during initial negotiations with customers, as well as going forward, and to instead focus on the value clients will receive with their managed services plan. At Midnight Blue, staff learns to emphasize, for example, that it is far better to pay the VAR to be “constantly on the lookout for problems, before there are smoke and flames and expensive damage to deal with,” Schwartz explains.
At TechSquad (www.techsquadit.com), a Waukesha, Wis.-based VAR and provider of managed services, hosted solutions, virtualization, Hardware as a Service, and more, customer proposals include in addition to a breakdown of cost per user, a complete soup-to-nuts list of the services clients receive at an all-inclusive price. As a result, communicating the value proposition becomes easier and less time-consuming, asserts Chris Wiser, founder and CEO.
Sweetening the pot with other associated value-adds that can be used as leverage not only to facilitate the customer boarding process, but also to prevent attrition, is advisable as well. For instance, VARs might create a service level agreement (SLA) that addresses typical customer objections and fears about making an initial foray into managed service. Such an agreement should provide minimum guarantees related to delivery metrics, among them system uptime, performance and scalability.
Many clients can be swayed—and won over—by the promise of regular in-person or written briefings through which VARs share detailed managed service reports and logs that document monitoring and other activities. Details can encompass how problems were quickly resolved, and how glitches were averted. In addition to hastening the sales cycle and reinforcing the value proposition, these methods can open doors for adding to clients’ technology packages. Customers may also appreciate being given access to vehicles for conveying their own perceived service needs and problems (for instance, online), thereby preventing small issues from turning into big ones and adding yet another element of value.
THE PRICE IS RIGHT
The final imperative in transitioning to an MSP model is proper pricing. While service must be priced to ensure a consistent, sufficient cash flow, putting an unusually high price tag on services provided under an MSP umbrella only serves to alienate customers. Sources say a majority of successful MSPs employ one of two pricing structures, charging clients by number of users/endpoints or the volume of monitoring and management performed with
a particular solution—typically, whichever is larger.
In putting together a pricing structure, Bradley and his colleagues researched the prices being charged by other VARs in the MSP space for unlimited, on-site, remote monitoring and mediation. They also queried engineers about the average maintenance time required per endpoint, figuring their hourly rate into the equation, and consulted with TruMethods (www.trumethods.com), a Moorestown, N.J.-based MSP consulting organization, to ensure that it was on the right pricing track.
“The numbers were all in the same ballpark, so we knew we were going in the proper direction,” Bradley states. “If you have that, your staff and your vendors right, you can definitely make managed services work.”