MSPs: Chasing the monthly recurring revenue stream 22 August, 2008 By Erin Bell

There are many different types of managed services in the IT world, but the key definition is that of proactive, ongoing management of something, whether it's an application, server, desktop, firewall, router, switch or hub.

For VARs, the obvious advantage to providing managed services to customers is that it's predictable revenue.

"Having stable, contractually bound revenue that you know is going to come in month after month as long as you're doing your job is very appealing," said Charles Weaver, president, MSP Alliance. "It gives a tremendous amount of security for those VARs and system integrators who spent the 1990s chasing project revenue."

Managed services also provide VARs with higher-margin revenue. According to Weaver, even a poorly run managed services firm should be able to garner 30 to 35 percent gross profit margin, with the more organized and process-driven companies capable of higher margins.

It's also much easier to transition into managed services now than it was 10 years ago, when the investment was between $500,000 to $1 million due to expensive platform software licensing, building network operations centers, staffing, integration work, and expensive tools.

These days, according to Weaver, software is cheaper, more accessible, and available in different grades from enterprise-level down to mid-market and small-to-medium businesses. As well, security, storage and automation vendors like AutoTap, ConnectWise, HEAT and Tigerpaw are making technologies available specifically for managed services.

"Tools are becoming more commoditized, and that's very, very good for the MSPs because it means shorter time to recoup their investment," said Weaver. He estimates it will typically take VARs between six and 12 months to transition into managed services, and companies should start to turn a profit at some point during that time period.

The level of education and dialogue available about managed services has quadrupled in the last three or four years, according to Weaver, and the increase in information and answers has also made an impact on helping MSPs get into the profession.

VARs should be able to transition into managed services without needing to hire additional employees, although Weaver cautions that break-fix technicians used to being on the road don't always adapt smoothly into the new role of managed services technician, which involves working from a desk to fix problems remotely.

"A field person who is used to being out there on their own doing work at the client premises typically makes a very poor managed services technician because they're just used to doing business in a different way," explained Weaver. "It's the human element that's difficult for a lot of companies that are making the transition, but it's not about having to hire three times more head count to be in managed services - in fact, it really should be the opposite."

If a VAR is considering moving into managed services, the first thing they should do is make a plan in writing so that they avoid heading down the wrong path and buying tools that they don't need.

It's also important for VARs to ally themselves with partners who can complement their managed services offering. If the business is providing managed services to banks, for example, then it would be beneficial to have a partner that understands penetration testing since regulations restrict MSPs who monitor the internal network of a bank from also doing penetration testing.

In terms of billing, many managed service providers used the fixed-fee method because it's easy for customers to understand.

"What gets the MSPs into trouble is not defining the services that will be delivered in exchange for that fixed fee per month," said Weaver. "Having a well-defined, well-written service level contract will make a huge difference in how you deliver and price your service. If you're promising your clients the whole world, you'd better be pricing it accordingly so that you don't go out of business."

According to Weaver, the biggest advantage VARs as managed service providers have over "big boys" like Dell, Lenovo and Office Depot is that VARs are neutral in their representation. In other words, they don't have any financial incentive to sell customers products they don't need, or to favor one manufacturer over another.

"As a customer, I don't want someone who is merely an extension of a vendor. I want someone who is going to represent my interests," said Weaver."VARs are incented to give me the best advice possible because that's how they make their money."