Why harp on managed services model basics?

Some resellers are not getting the potential and importance of managed services provision, says Larry Walsh

Last week I gave a keynote at the GFI MAX partner conference about the mechanics and evolution of the managed services sales model. Today, my colleague Chris Gonsalves is in London to deliver the same presentation.

He asked the somewhat rhetorical question: "If these guys are already MSPs, shouldn't they get this? Why do we have to explain it to them?"

The answer is simple: just because VARs have implemented managed services as part of their business model doesn't mean they've incorporated it fully into the way they operate.

In many cases, providers are undervaluing managed services as a revenue driver and mistaking the initial success in recurring revenue as "good enough".

Over the last decade, managed services have become pervasive in the channel. Seventy per cent of channel providers offer some kind of managed services to their customers.

And managed services, according to our research, produces the highest sustained margins (profit) of the five major channel offerings - hardware, software, professional, cloud and managed services.

Here's why we - and the industry at large - continue to revisit the managed services basics. It's not that the model isn't defined, it's just not used to its optimum potential.

Technology is important to managed services, for certain. But sales and customer relations are more important. The three elements to achieving true success in managed services are the continual addition of new accounts, continual horizontal sales to existing accounts, and retention of customers.

Let's start with customer acquisition. If a reseller earns an average $1,000 (£616) per month from delivering managed services and has 50 active customers, annual revenue is $600,000.

The importance of continual account acquisition is a matter of compounding that revenue. Every 10 new customers increase revenue by 20 per cent.

Let's skip to account retention, another important factor in generating and maintaining revenue. If a provider is losing customers faster than it's adding them, it won't grow.

But the problem is actually worse than it appears. The managed services magic is about predictability. If an MSP has no confidence in the loyalty of its existing customers, it will won't be able to predict how much revenue will accrue mid- and long- term.

Growth isn't just a matter of adding new accounts; it's also possible through horizontal sales or by selling more products and services that increase recurring revenue per account.

Even if a provider doesn't add new accounts but expands the existing yield per account by 20 per cent, it will have the same net effect of adding 10 new customers.

Which factor is most important? All of them. However, most resellers stop selling when they feel they've reached critical mass versus their capacity. Or, worse, they perceive a low rate of customer acquisition or account expansion as good. Neither is true.

Managed services is evolving rapidly. Savvy VARs are expanding the types of technologies they offer as a service, providing more automation services, building platforms for application delivery and, in some cases, becoming business process outsourcers (BPOs).

They're evolving because they generate enough cash through strong sales models to reinvest in their business capabilities.

Consider that providers have told us that an acceptable annual growth rate is 26 per cent. In 2012, most grew between 11 and 15 per cent. On the surface, any growth appears good. The real question is whether the previous success is enough to facilitate further growth.

Our shows that 85 per cent of the channel pays for routine operations out of cash flow. Ninety per cent of providers say they're paying for growth using the same cash flow.

To put this in concrete terms, a $1 million reseller that grows 10 per cent goes to $1.1 million - a net gain of $100,000 before taxes and other obligations. After the bills are paid, the effective net gain is only about $50,000.

If the overall business is running effective net margins of 40 percent, the net profit for the year is $440,000.

Now this might sound like a lot of money, but it's not. Rarely does all that cash come in and sit in the bank account at any one time. And providers must contend with annual inflation impact - salary increases, infrastructure replacement, licence renewals, real estate expenses, taxes, and -- in the US at least -- healthcare costs.

Revenue ebbs and flows. There isn't necessarily a lot of cash on hand for new net investments.

They only way to ensure viability is to grow the managed services business faster than the rest of the market. This means a managed services provider must make account acquisition, horizontal sales and customer retention a top priority to ensure revenues are sustainable and growing.

This is why we, and many in the channel, continue to harp on about the basics of the managed services model.

Larry Walsh is chief executive officer and president of Channelnomics

As part of our special editorial partnership, CRN is republishing this article from Channelnomics