'Margins were slowly declining in what we did'

As part of CRN's Rising Stars report highlighting the most disruptive, most profitable and fastest-growing firms in the channel, Computerworld MD John Armstrong talks about the firm's transition from VAR to MSP

Bristolian VAR Computerworld is aiming to generate 50 per cent of its revenues from services by 2021 as it reinvents itself as a managed services provider, and was highlighted as one of seven firms pushing the boundary in CRN's Rising Stars report. MD John Armstrong, who led an MBO of the firm in May 2018, opens up on the challenges his firm is encountering on its MSP journey.

Partner: Computerworld

VAR 300 ranking: 214th

Pushing the boundary in: Transitioning from VAR to MSP

Can you give us a flavour of how your revenue mix is changing?

Historically, we're very much a capital-based reseller. Pretty much 80 to 85 per cent of our revenue is based on starting the month and selling solutions into our customer base, which is typically 150 to 3,000 users. That led to some interesting peaks and troughs, as I'm sure many of the other VARs will know about. We started to build out a number of enterprise-focused, as-a-service products in 2017-18, and our growth plan for financial year 2021 is that 50 per cent of our overhead will be covered on the first of each month by recurring monthly margins.

What was the rationale for the change?

We were seeing margins slowly declining in what we do in capital. We were really only focused on providing support services - the third and fourth line of vendor escalation - but we started to look at how we could expand to put some compelling services in front of customers that would allow them to tackle something like lack of resource. They are demanding more from less resource in their IT team.

How tough has it been to get your staff to follow you on that journey?

That remains the major challenge. Is it just a question of making some products available and then the rest will just happen? No! Some of the team embraced it and could see ‘I'm on a capital-based number so if I can start the month with X amount in the pot in recurring revenue, that's got to be good for me'. But it didn't really put the control in the hands of the business, as we were still targeting them on a capital-based number of which recurring margin was a component. So we've now changed the commission scheme and also created a strategic sales team layer in the organisation, which is an overlay. We are starting to see some success, but it's a bit early to conclude that's all we'll need to do.

It is enriching the quality of your business, in terms of profits?

We're not seeing it manifest itself to quite the level we'd like, but are making the right movement in that direction and are seeing the margins starting to grow. Our primary alliance is with Dell, and profitability and predictability are two of the points in their strapline, which has definitely helped to stabilise our capital margins - and we are actually on track for a record year in terms of growth of turnover, but also underlying profitability. But we won't quite hit our target this year for recurring margin.

What tips would you have for resellers starting out on this journey?

It's a culture change. CRN ran an article that talked about how the capital sale is like crack cocaine for sales guys. How do you get them to embrace a model that is better for the stability of the business? Regarding the commission plan, we rolled up our recurring margins into a pot and paid a commission on that total amount, so they could still enjoy the feeling of doing a capital sale. And it's also about getting training and education behind the team so they can tell the story of the customer.

You spearheaded an MBO of Computerworld last year. What are your ambitions for the firm?

From a commercial objective, we're looking to completely transition from a VAR to an MSP. The market we represent will still very much be the mid-size to enterprise space. We are looking at what Computerworld.next looks like at the moment - is it an Azure play; is it a specialism in IoT? The commercial goal is looking at 15 per cent growth and stability in the P&L that will come from a stronger play in our recurring margins.

A link to the full Rising Stars report can be found here.

All the data from the Rising Stars report was drawn from VAR 300, which is available exclusively to CRN Essential subscribers.