Innovation and a Better IT Service Business: Why Managed Services?- Part 2

This is the second part of my commentary, “Why Managed Services.”  In the last article, I examined the reasons that managed services are good for the SMB end customer.  In this piece I will discuss why managed services mean better business for the solution provider.

Every once and a while, I step back and marvel at the way IT has changed my life. Thanks to constant innovation, my house is a veritable museum of advances in IT.  In one corner of my house, my CD collection sits gathering dust, never to be touched again, thanks to the ubiquitous instant access to music of all kinds through my computers, phone, and MP3 player. In another section of my house sits a collection of roadmaps and atlases long made obsolete by GPS and hand held wireless devices that can give me instant directions to wherever I want to go. In another part of my home sits an old television set. It’s amusing when I turn it on and marvel at the terrible picture, wondering how I could watch sporting events on something with such poor picture quality.  We could spend all day in this technology museum of mine reminiscing about the past that brought us things like watches, cassette players, VCRs, and fax machines. What changes left these things behind? The answer is innovation – better technology or ways of doing things that pushed these items into obsolescence. Managed services is, quite simply, a better way of providing IT services and it’s transforming the channel and making old ways of providing service obsolete. What are the business drivers behind this transformation for the MSP? They are business fundamentals, SLAs, aligned customer interests and recurring revenue.

Let’s examine these business drivers in detail.

Business Fundamentals – Managed services are a more profitable way of providing service to the SMB end customer.  Consider a recent MSP Partners research study that found that in 2009 the average MSP was earning a respectable 36.7% gross margin. When you narrow the boundaries of this study to best in class MSPs (top 20%), gross margin jump to a whopping 65%! Furthermore, when compared to all other service delivery models, managed services are consistently the most profitable to offer. This should be reason enough for solution providers to take a close look at the benefits of managed services.  In short – it’s better business.

The Service Level Agreement (SLA) – The SLA is an agreement between a service provider and a customer’s company, guaranteeing a certain level of service. Because managed services are offered under an SLA, it frees the MSP to focus on the service value provided, rather than the time spent servicing the customer. With this new focus, an MSP is rewarded for providing cost effective service.  Furthermore, their business is now more scalable, since growth is not tied to maximizing their utilization of an expensive bench of technicians but on optimizing service delivery to more customers.  In short – it’s better business.

Aligned Interests –Consider a break fix business – where your best month is your customer’s worst and your worst month is your customer’s best. It is a naturally adversarial relationship. Managed services align your interests with your customer’s. Clients want stable IT when running their business and you strive for the same goal to manage your service delivery costs. Customers want predictable, low-cost IT and you want the same thing. The client looks to you as a strategic partner in the success of their business now, and that aligns perfectly with your goal to be that strategic partner.  Their win is your win, and vice-versa. In short – it’s better business.

Recurring Revenues – Because managed services are sold on an SLA, your services are provided via long-term contracts with regular billing, rather than the short ‘burst’ billing that is characteristic of a break fix service model.  A long term SLA contract makes your customers ‘sticky,’ allowing you to ride out short-term difficulties and focus on a long term relationship. Predictable revenue allows you to plan and build your business infrastructure. As revenue stabilizes, you are able to fund and invest in your business with the confidence that you will have the revenue to pay for it in the future. Finally, when it comes time to exit the business, multiple long-term customer contracts are an attractive asset that will allow you to sell your business for top dollar. In short – it’s better business.

As I nostalgically look at my house’s museum of IT innovation, I do so without any sense of loss. While I enjoyed all of these technologies when it was their time, they have been replaced with much better solutions today. Managed services are simply a better way of doing business for both the MSP and the SMB customer. As the channel transformation to managed services continues, I’m sure we’ll look back at other service delivery models with the same sense of nostalgia, and without a sense of loss. In short, managed services are simply better business.