Inability to balance product resale and services revenue, inability to adjust to a customer-centric approach and inability to align recurring and non-recurring revenues are severely holding back the MSPs. Since 2008 Techaisle has been conducting managed services studies, both demand side within SMB & Midmarket segments and supply-side within the VARs, MSPs, SIs, SPs, Consultants offering managed services. Each year Techaisle (latest report deliverables are here) has been quantifying what separates the successful and unsuccessful managed services channel partners. And there are several data-evinced barriers to entry and success factors. To understand barriers to entry, it is important to first define the characteristics that are important to success as an MSP. There are many but let us discuss three that always percolate to the top:
- The ability to sell services independently from product sales (while maintaining the ability to sell products to customers as well).
- The ability to package and efficiently deliver standardized services to multiple customers, growing by expanding portfolios of discrete services rather than by simply agreeing to address sprawling customer requirements on a ‘one-off’ basis.
- The ability to align internal processes and costs/cash flow with a recurring revenue (rather than transactional) approach to the business.
Techaisle research substantiates the importance of each of these key characteristics.
The ability to sell services independently, while maintaining product resale capabilities
There is a misperception that MSPs focus strictly on supply of services to customers. Data drawn from numerous Techaisle research studies shows that this is not the case; MSPs encounter demand for both products and services, and as entrepreneurial businesses, they respond to both.
What distinguishes firms that are successful in building MSP businesses is the extent to which they lead with services, and the resulting ratio of services to product revenues. There is a clear distinction: successful MSPs lead with services, while channel businesses that are not successful at selling managed services lead with and derive the greatest proportion of their revenue from product resale. Techaisle research shows that Very successful MSPs have a revenue mix of 48% product resale and 52% services revenue. The revenue is also divided as 59% services-led contracts and 41% product-led contracts.
The ability to package and efficiently deliver standardized services to multiple customers
A focus on refining and delivering tightly-defined, standardized services is one of the attributes that differentiates MSPs (and SPs) from other channel businesses. Many channel firms, including VARs, SIs and consultants, tend to deliver a flexible range of services to meet the overall needs of a client, rather than focusing on discrete services that address only a single requirement.
The difficulty in adjusting to a service-centric rather than customer-centric approach is evident in data which finds that an inability to change internal support processes is the most onerous constraint to developing managed services businesses for both “successful” and “unsuccessful” managed services providers within the channel. 55% of unsuccessful MSPs are unable to change their internal support processes as compared to 42% of very successful MSPs.
The ability to aligning with recurring revenue
Most channel firms are not set up to recognize revenue in small monthly payments over a relatively long period of time. Both channel firms that are primarily engaged in product sales and project-based services firms recognize revenue at the conclusion of a transaction or on a milestone basis keyed to delivery of a system or project. This poses a tremendous barrier to entry into a recurring-revenue model like managed services. Recurring revenue business models require that management change the metrics it uses to understand the business; it requires that finance operate (very) differently; it demands that sales change its compensation model…in short, it requires new operational norms throughout the channel business. Lured by the prospect of improved margins, most existing channel firms want to increase managed services income. However, many struggle to adopt these new operating norms if/as managed services becomes a bigger part of the overall income stream.
Beyond the difficulty in changing services-related processes, the data highlights channel difficulties in developing SLAs (another requirement of “package and deliver standardized services”), of finding sales staff who can articulate the managed services value proposition and sales force training/compensation (essential to aligning with recurring revenue), and meeting “unrealistic” customer demands and demonstrating value to SMBs (inherent in the challenge of positioning services to these clients) as top challenges in offering managed services to the SMB market.