As value-added resellers (VARs) look to grow their businesses, one increasingly popular path is to add recurring revenue. In fact, 36 percent of VARs that responded to a ConnectWise-sponsored study reported that managed services account for 60 percent or more of their revenue.
The reasons are clear: Predictable income gives VARs the ability to better plan for their futures, improves long-term profitability, produces higher-margin revenue, and reduces customer churn. Income predictability also increases business valuation, giving VARs the confidence to either expand operations or promote their value to prospective buyers or investors.
So with all the potential benefits, one question remains: Why aren’t more VARs adding recurring revenue offerings to their repertoire?
The answer can often be found in four key roadblocks that stop even the most capable businesses in their journey to recurring revenue success.
Roadblock #1: Unprepared Sales Teams
Transforming salespeople to focus on long-term agreements and periodic payments is not easy. Remember, the goal of the legacy VAR sales team and the motivation behind traditional compensation plans is to close big one-off software, hardware, or implementation contracts quickly and then move on to the next big deal.
A recurring revenue model usually requires several significant changes for the sales team. One is the organization’s compensation plan, which is no easy undertaking. Another challenge is convincing sales team members that smaller recurring revenue deals ultimately will be more beneficial for them as well as for the company’s long-term success. Adopting this new mindset requires a significant shift in attitude, including an understanding of the importance of ongoing customer engagement in long-term contractual relationships. With one-off contracts, the sale cycle ends once a customer signs a quote. In situations where customers must pay monthly, the “sale” essentially begins with the signature. Recurring revenue sales teams must remain engaged if they are to maintain customer relationships from month to month to month.
Avoid the roadblock: Leadership must plan changes well in advance of implementation. In addition to developing a new compensation plan and being prepared to explain it in excruciating detail, senior management must share a solid business case that explains the benefits of recurring revenue. Equally important, those same leaders cannot be afraid to retrain, restructure, or even replace the sales team if its members are unwilling to adapt to a business model that benefits the company—and all its employees—in the long run.
Roadblock #2: Legacy Billing Systems
Traditional VAR billing is fairly straightforward: The sales team provides a quote, a contract is signed, and a bill is sent. Recurring revenue billing is quite different. It is highly transactional and more expensive to administer, requiring monthly or quarterly attention. Adding to the complexity is the fact that the amount billed each cycle may change because of variable fees, such as one-time charges or credits, usage-based billing amounts, multiple billing cycles, and more. This leads to greater room for invoice error, which can cause nonpayment situations and unhappy customers who can easily move their business elsewhere. Legacy VAR billing systems just can’t cut it.
Avoid the roadblock: To avoid potential billing disasters, a VAR needs to ensure it has automated back-end processes that support the new recurring revenue billing situation. The right system fully automates the recurring billing process for license- and usage-based accounts while it increases operational efficiency, cuts the risk and time associated with manual data entry, provides visibility into the services provided, eases collections, and improves customer service via the delivery of a single invoice.
Roadblock #3: Inadequate Cash Flow
A recurring revenue business model usually results in future profitability for a business, but the initial financial strain of adding these offerings can be challenging. It takes patience and enough reserved funds to bridge the cash-flow gap that occurs when transitioning from large one-off payouts to the incremental income associated with long-term, ongoing contracts. What many business owners don’t anticipate and plan for is the reality that cash flow will likely get worse before it gets better.
Avoid the roadblock: Successfully weathering this challenge requires building cash reserves in advance and conserving cash during the transition while waiting for the longer-term payoff. This can be done by slashing expenses, seeking better payment terms with a business’s own vendors, and getting tough about receivables. VARs also can ease cash-flow pain by embracing pricing flexibility as their as-a-service practice matures. This requires taking time to review profitability and break-even points for each client agreement, and then refining as needed. Also, asking for a first month’s up-front payment provides a buffer to help pay for any necessary hardware or software investment.
Roadblock #4: Lack of Expertise
One last-but-not-least reason many VARs fail in their bid to add recurring revenue offerings is a lack of in-house expertise. Instead of reactively responding to customer needs, a service-oriented business must refocus its efforts on ensuring customer success. This requires a proactive approach to supporting the customer through high-, low-, and tech-touch activities; staff who understand that monitoring for and solving customer problems—often before the customer even realizes a problem exists—are critical to business success; and ensuring that customers actually use the services they have bought and see a return on investment in terms of increased productivity and uptime. Many VARs just don’t have the people in place who fully understand this new customer dynamic or the software systems that allow them to provide the expected services.
Avoid the roadblock: One way to gain this critical expertise is to acquire an established MSP with its software systems and trained personnel. When this is not possible, a VAR must ensure that all back-end systems and automation software tools for tasks such as billing, remote monitoring and management, and other business management activities are in place, and that technicians are hired and trained before bringing on that first recurring revenue customer. Nothing will damage a managed IT service provider’s reputation faster than failing to provide fast, proactive responses to customer requests.
Don’t Give Up Too Soon
Too often, VARs that run into these four roadblocks give up rather than do the hard work to avoid them in the first place. This is a mistake in light of increasing competition and decreasing product margins. The fact is that for many businesses, their future survival may well depend on adding a select number of “as-a-service” offerings or even transitioning completely to a recurring revenue model.
As is the case for any business pivot, understanding what lies ahead and avoiding common roadblocks—including those involving sales teams, billing, cash flow, and internal expertise—is the smartest path to success.
CRAIG FULTON is chief customer success officer at ConnectWise.