Magazine Article | January 14, 2015

How Good Is The Managed Services Business? Damn Good.

MikeMonocello

By Mike Monocello

The results of Business Solutions’ latest survey of its managed services readers are in — and the data is compelling.

Why managed services? We’ve been writing about this type of business and its benefits for years. However, there are still plenty of solutions providers who’ve yet to either adopt or fully embrace the model. The fact is, the opportunity to have success with managed services has never been better.

However, maybe you don’t want to take my word for it. At the end of 2014, we surveyed a random selection of Business Solutions readers who indicated to us that at least part of their revenue comes from managed services. We asked them a series of questions to help us illustrate the business benefit of offering recurring revenuebased services. Additionally, while we had their attention, we asked them to share some of their personal stories of success and struggle so other readers might be able to accelerate their learning and either adopt or add managed services to their businesses.

By the time the survey period ended, we received responses from 127 solutions providers. After removing those who provided incomplete information or didn’t meet our criteria, we had 86 participants. (Refer to Figure 1 on page 13 to see a snapshot of the data.) In reviewing the results for this article, I was happy to see that the aggregate data paints a fair depiction of a typical solutions provider. It would do me — or you, the reader — no good to base my analysis on data from readers with $100,000,000 in annual revenue or ones that just opened for business last year. That said, we did have six participants with more than $20,000,000 in annual revenue and 16 with less than $500,000. Again, a good mix that provides relevant information. All totaled, our 86 respondents have a combined annual revenue of $367,000,000.

Benefits Of Managed Services
We’ve written about the benefits of offering managed services and monthly recurring revenue (MRR) for years now, but we wanted to see what our readers were experiencing for themselves. Perhaps the most significant value of monthly recurring revenue to respondents is increased stability from predictable cash flow. This makes perfect sense. Whereas traditional resellers start each month wondering where the bulk of their revenue will come from, those with MRR open their doors on day one of each month having a near-perfect idea of what their bank statement will look like over the next 30, 60, and even 365 days. A secondary benefit identified in the survey was the ability to create happier customers. This, too, makes sense. The idea of managed services is to provide proactive maintenance and support to customers in an attempt to prevent costly downtime and troubles. Breakfix means your customers call you when there’s a problem (i.e., a negative interaction), while managed services means customers don’t have to worry about calling ever.

Figure 1: Snapshot Of Respondent Data (86 qualified respondents)

When we dig a little deeper into the data, we can see what “increased stability from predictable cash flow” can really mean to a business. Consider how scary it is to invest in marketing or hire a new employee if you aren’t sure how your business is going to look month to month. Many respondents shared that MRR gives them the ability to grow their businesses and hire with little worry. Here’s what some respondents had to say:

“MRR allows us to think about the long term rather than always wondering where our next meal will come from,” says one MSP.

“A focus on services has improved the quality of our clients and reduced the chaos exponentially,” says another. This, in reference to the idea that clients who aren’t willing to pay for managed services don’t care much about their IT and aren’t good long-term customers for an MSP to have.

“My focus is now on client satisfaction and not hunting the next project. This has allowed me to take some time off and to focus on working ON the business and not IN the business. I no longer have any operational responsibilities,” says one business owner who used to double as a salesperson.

“Having MRR to fall back on allows us to be open to new ideas and lines of business, as well as focus on different verticals,” says another.

“A book of managed services business means my business is worth more than a break-fix company. Long term, I know that I can retire in style,” says one MSP.

One respondent had a simple, but powerful response: “Monthly recurring revenue allows me to sleep at night.”

If those stories don’t compel you to embrace services, I’m not sure what will.Subscribe to Business Solutions magazine

Obstacles & Challenges Of Managed Services
If you’re still on the fence about diving head-first into services or making it a bigger part of your business, you’ve probably got a handful of concerns that are causing you to hesitate. We asked our readers to share what challenges they had to overcome in the first six months of offering managed services. I want to share these with you so you realize that you aren’t unique. If you read our managed services articles and think, “That might work for him, but we’re different,” you’re flat-out wrong. Common initial obstacles shared by respondents include:

  • Not having strong internal beliefs in the managed services offering. If you’re a leader in your business, you must have conviction about the switch to services and be able to get employees on board.
  • Converting customers from break-fix to managed services. You don’t have to offer managed services to all customers. Maybe an easier path would be to offer them only to new customers.
  • Cash flow challenges. Some MSPs had cash reserves to quickly adopt services while others had to manage cash flow challenges by offering only a handful of managed services deals a month.
  • Lack of sales and marketing expertise.
  • Lack of understanding about pricing and bundling.
  • Difficulty in finding and selecting the right tools for managed services. Business Solutions has reviewed all the major PSA (professional services automation), RMM (remote monitoring and management), and business continuity tools to give you a shortcut to making such decisions.

Figure 2: What’s Preventing More Of Your Revenue From Being Recurring?

In addition, according to respondents, the challenges don’t disappear after six months. Recall that the median respondent has been offering some sort of managed service for six years to 50 percent of their customers and that the average percent of annual revenue from managed services is 44 percent. It’s clear that there’s room for growth. However, Figure 2 above lists the obstacles that are preventing survey respondents from making more of their revenue recurring.

Established MSPs will tell you that there’s no one right way to move into services, so the way you handle the above obstacles will depend on your unique situation. The key is to realize that these obstacles can be overcome if you’re willing to make the effort.

The Business Case For Getting Close To Your Business
If you want to be successful in your managed services endeavors, you have to get close to your business. That is, you need to follow the key metrics that drive your business’ profitability. This, again, is something we’ve preached for a long time. Our survey data actually proves this point.

PSA tools are an integral part of every MSP’s business. They provide timekeeping, reporting, billing, CRM functionality, ticketing, and more. We commonly hear wannabe MSPs say that they use separate software packages to handle those functions. Thus, a PSA is an unnecessary investment and expense. Wrong. In looking at survey respondents who use a PSA tool to its fullest extent, their annual revenue was four times that of respondents who don’t use a PSA (see Figure 3).

One of the benefits of a PSA is the ability to easily track KPIs that are so important to running an efficient business. We asked respondents if they track KPIs (key performance indicators) for their businesses. Those who don’t use KPIs have a median annual revenue of $400,000. Those who track a few key KPIs have a median annual revenue of $1,000,000. Finally, and most impressively, those who track every KPI and metric they can are well above average with a median annual revenue of $2,500,000. Clearly, it pays to keep a close eye on your business.

Figure 3: The Benefit Of Business Metrics

We also looked at whether respondents were utilizing business plans to ensure growth and stability. Of those who do use a business plan, the majority review it quarterly (some monthly) and have a median annual revenue of $1,500,000. Those who don’t have a business plan? Well, they’re down at $500,000 in annual revenue.

Peer groups are pretty common in the managed services world. Those solutions providers who do business in other industries might question the value in participating in such a thing. I’ve heard readers scoff at the notion that their 30+ years in business aren’t enough to make good decisions and lead their companies. The fact is, peer groups bring structure and accountability to a business leader who is usually focused more on day-to-day tasks than long-term strategy. Regardless of what I say, respondents once again proved the value of peer groups. The median annual revenue of respondents who don’t use peer groups is $750,000. Those who use peer groups are double that.

Conclusion
The data and information shared by respondents is compelling. Managed services and other offerings that provide MRR make better businesses, create stability, give owners peace of mind, and are worth more when it’s time to sell. Perhaps one final statistic from the survey would be helpful. If you’re struggling to increase your break-fix revenue or continue to eke away on hardware and software margins, MSPs continue to grow their recurring revenue by leaps and bounds. Of our respondents, only 5 percent experienced a decline in managed services revenue in 2014. Nearly 30 percent experienced an increase between 25 percent and 100 percent, while 7 percent increased their managed services revenue by more than 100 percent. Show me another opportunity with such growth potential that deserves your immediate attention.