By Abby Sorensen, Chief Editor
Back when Channel Executive was named Business Solutions and VARinsights.com was BSMinfo.com, those publications used to host Channel Transitions conferences. The name of those events was quite literal – they were designed to help VARs in the IT channel transition to a managed services business model. Our brand names have changed, but we are still providing content to help break/fix VARs transition to the wonderful world of recurring revenue. I distinctly remember several panelists at Channel Transitions conferences advising audience members to tackle the VAR-to-MSP transition gradually: start with a small handful of customers, and only add more when your cash flow allows it.
In a nutshell, the advice was “you don’t have to become an MSP overnight.” Yet that’s exactly what CIO Solutions did – or rather, what the company was forced to do in order to survive. The story behind what made the company suddenly and unexpectedly shift to manage services couldn’t fit in the pages of our September 2018 cover story of Channel Executive magazine, so we’re sharing this unique example in a web-exclusive feature.
The Unfortunate Circumstances That Led to Managed Services
When CIO Solutions CEO Eric Egolf joined the company as a junior project engineer in 2004, the company was a VAR with just under 20 employees. Its revenue model was pretty straightforward: an engineer or two per client project, and no MRR. The shift to managed services was still in its infancy in the early 2000s, and CIO Solutions was in no particular hurry to be an early adopter. By 2005 Egolf started taking the initiative to learn about the managed services model, but the company didn’t have concrete plans to start transitioning to it. The CEO at the time knew becoming an MSP was the end-goal for the company, but no one knew how to get there.
Then, in 2006, three of its senior engineers departed and took two-thirds of the company’s customer base with them. For nearly two years, Egolf and the team did their best to stay above water. “We’re running around with our hair on fire, trying to keep these customers from going elsewhere,” Egolf remembers. “At that point, managed services represented some idea of creating stability and systems to support our customers. We thought if we kept inching towards this direction, eventually we’ll get some stability.”
Managing Cash Flow During the Transition
It’s easy to see why resellers would be strapped for cash when transitioning to a recurring revenue model. Fortunately for CIO Solutions, the company was in a good place financially when those engineers cut off its anchor. According to Egolf, the sudden need to transition turned out to be a life raft for the company instead. Cash is what kept the company afloat as it worked towards a new way of doing business.
Most of the company’s incoming cash was tied up in two large accounts. CIO Solutions was also debt-free at the time. Egolf describes the company as being disciplined in managing expenses. “When things are going well, and your service margins are good, companies have a tendency to overspend some expenses like voluntary benefits or rent,” he says. “Keeping those expenses down is what allows you to be nimble during times of high stress.”
Anticipate A Long Adjustment Period
Even though CIO Solutions was forced to start its transition to managed services abruptly, that didn’t mean the company could skip its learning curve. “This was a six-year adjustment period for us as we slowly moved the operations forward,” Egolf explains. “You have to have a mix of a crystal-clear long-term vision morphed with the reality of what you are able to do with the staff you have. That’s like having one foot in both worlds for a period of time.” Egolf’s partner Russ Levanway, CEO of MSP TekTegrity that recently merged with CIO Solutions, describes this as winning both the air battle and the ground battle.
The first step towards winning those battles was finding the company’s first dedicated help desk person. CIO Solutions was able to find that first person but scaling the help desk team and finding the second person proved to be difficult. Egolf admits the company made a few wrong hires before learning what qualities it needed for its help desk team. The company realized it takes more than a good people and communication skills to build out this team. It’s also important to find people who are willing and able to learn and manage the wide range of monitoring tools and applications MSPs need to be successful.
Despite the initial shock and uncertainty that came when CIO Solutions when its engineers departed and forced the company to rethink its business model, Egolf knows it was a blessing in disguise. “The best thing that ever happened to us in our market was those engineers leaving. It allowed us to loosen up the control that those engineers had and change our commission plans to align the company with the goal of managed services.”
If you’re a reseller thinking about starting you transition, you have an advantage of timing that Egolf and his team didn’t have. Managing your cash and your expectations are key for you to find the same level of success CIO Solutions is now enjoying as an MSP.