IT and Business Insights for SMB Solution Providers

How to Successfully Transition to the MSP Model

Why VARs make the move and the steps they take to ensure success. By Dr. Prasad Akella

With the advent of cloud computing, many of the 80,000 to 120,000 VARs in North America are looking to change their business models and transform into managed service providers (MSPs). Unfortunately, fewer than 10 percent of them will make the successful transition. But why are VARs looking to become MSPs, and how they can successfully make the transition?

There are three main drivers motivating VARs to become MSPs:

1. Customer demand. Most organizations realize that they spend 80 percent of their IT budgets on keeping their basic infrastructure running, spent primarily on technology and resources for managing and upgrading hardware, software, security, and failover infrastructure for their email, website, and productivity/business applications.

Since the spend doesn't contribute to the growth of their businesses, CEOs (especially of cash and expertise strapped SMBs) see this as wasted money and are moving to reduce this spend by delegating tasks such as running their business/productivity applications and email service (including managing all the hardware, software, security and network required to run them) to MSPs who can perform these tasks more efficiently. Savings are ploughed back into more strategic IT projects or used in other parts of their business.

VARs typically sell and implement the aforementioned technologies, so hosting, supporting, and managing them is a natural extension to their business model. This customer-driven trend, according to MSP Mentor, has resulted in the top 100 MSP companies generating $1.04 billion in combined annual recurring revenue (ARR) for 2011, up 28 percent from 2010.

2. Predictable business model. Unlike the VAR business model, where the service provider makes money only when he or she sells a product to a customer, the MSP model delivers a recurring revenue stream. Forward revenue visibility makes the business more predictable and attractive.

3. Partner, rather than vendor. The expectation level of IT and its increased sophistication have driven IT complexity up significantly, putting SMBs at a disadvantage. Their IT budgets don't have enough room for the expertise and resources needed to properly deploy, manage, and monitor the comprehensive IT infrastructure needed to compete in the market. MSPs provide a cost-efficient way for SMBs to afford the IT infrastructure that so far has traditionally been accessible only to larger companies. Additionally, they tend to work 24x7 building customers' trust and developing relationships, ensuring that it is harder to displace them.

While these drivers make it very compelling for a VAR to become an MSP, the obstacles can be daunting. But using the following four strategies increases the odds of joining that elusive 10 percent club.
1. Minimize your startup and running costs. Building and running your own data center, with world-class security, 24x7 remote monitoring, scalability and redundancy, performance, and uptime requires significant ongoing investment in hardware, software, and personnel - costs that can price you out of the market and/or reduce your margins if not amortized across a large installed base.

Successful MSPs find a way to provide infrastructure with minimal upfront investment (so you can transition without needing to raise significant capital) and with minimal ongoing spend (so you can keep operating costs low). For example, a small VAR in the telecommunications space that wants to offer VOIP-as-a-service would have to buy upfront licenses of a PBX product and associated software; build a 24x7 infrastructure, and hire resources for a 24x7 support model. SMB VARs can become MSPs and offer VOIP-as-a-service without much upfront investment.

2. Sell multiple services. The entire premise of the MSP business model is to start a client relationship with one recurring service and then grow the revenue from that client over time by selling additional services. For example, customers are moving from having voice, data, and email running in different siloes to a unified communications model. So a client, who subscribes to hosted email services from an MSP today, would be interested in purchasing additional services from that MSP in the future, so they can integrate their email with voice and messaging.

Successful MSPs simultaneously add new high-margin products and services to the portfolio and the back end to manage, support, and bill these clients. They focus on both, because a bad customer experience with the service or the support negatively impacts their brand.

3. Provide better SLAs.
It is said that when you become an MSP you go from an 8x5 business to a 24x7 business. You will live and die by meeting the service levels you promise - service levels that continue to grow as established MSPs use their scale to consistently deliver high service levels at lower spend per customer.

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