The majority of MSPs are offering hybrid IT services, but for many it’s by accident, which leads to unpredictable income and lower profit margins.
If you’re an IT channel company that’s just starting out, you’re likely to accept any customer that can help pay the bills, whether it’s project-based (e.g., break-fix) work or managed services. In time, however, most IT companies prefer the steady, monthly recurring revenue of managed services over the unpredictable alternative.
Every IT channel company falls somewhere on the continuum between pure break-fix at one extreme and pure managed services at the other end. In fact, a 2017 report from the 2112 Group, “State of North America Managed Services,” found that the average channel partner — whether they call themselves VARs, MSPs or cloud service providers — earns up to 30 percent of its profits from recurring revenue. Those identifying as MSPs earn between 51 percent and 60 percent of their gross margins from managed services, compared to just 10 percent for those calling themselves VARs.
The vast majority of IT channel companies are providing hybrid IT services — a mix of some project-based or break-fix work and some recurring revenue-based work. While that isn’t a big revelation, it is noteworthy that hybrid IT providers can be further divided into two subcategories: “hybrid by design” and “hybrid by accident.” The majority of channel companies fall into the latter category, where they’re still in the start-up mindset of accepting whatever business comes their way.
“Hybrid by design” companies, on the other hand, recognize that they need a certain amount of project-based work while they’re getting started selling managed services. But, over time, as managed services contracts build up enough to cover their monthly expenses, they pursue new managed services deals while minimizing project-based and break-fix deals.
For “hybrid by accident” companies, this transition doesn’t happen as quickly — if at all — for a few reasons, all of which can shortchange business growth and sustainability. Following is a list of the symptoms of a “hybrid by accident” company and tips for transitioning to “hybrid by design.”
Your Sales Compensation Model Is One-Sided
Generally, salespeople focus on opportunities that lead to the largest and most immediate rewards. Given the choice between selling a managed services contract and a network upgrade project, the latter will win out every time, and your company will never move into a healthier balance where recurring revenue becomes the dominant source of income.
To avoid this pitfall, consider new ways to incentivize salespeople to promote managed services, including revamping your sales commission model to include a special bonus for landing managed services deals. It’s also important to educate your salespeople about the larger overall commission they can earn by selling managed services.
Your Hiring Strategy Is Shortsighted
If you’re not intentionally focused on building up your recurring revenue, it’s easy to fall into the trap of hiring project-based engineers and technicians to help put out fires or take on more projects. If you’re thinking about the more profitable long-term picture, however, you should be looking to hire consultative salespeople who can sell managed services, as well as hiring engineers and technicians who prefer working in a NOC environment and remotely monitoring and troubleshooting problems as opposed to traveling to different locations and setting up computers and servers or solving IT emergencies.
You Have a Conflict of Interest
While every channel company will inevitably have a mix of project-based and recurring revenue, it’s important to keep in mind that there’s a conflict of interest with the two models. With project-based work, your company makes money when your customer experiences problems. If they have a server crash, for example, great — you’re going to be able to bill several days’ worth of labor procuring new equipment, installing software and drivers, and restoring data (assuming they’ve been backing up their data).
With managed services, the opposite is true: You’re paid to keep the customer up and running and safe, so you’re naturally going to want to invest time and resources educating and training clients about best practices for security, backup and disaster recovery. And, you’ll be incentivized to implement the best solutions and automate as many processes as possible.
Project-based work and break-fix may always be a part of an MSP’s business because most customers still have some on-premises equipment that needs to be updated from time to time. And, as much as you try to prevent IT problems, sometimes things break. However, being a “hybrid by design” MSP will help you move more quickly into the managed services side of the spectrum where profits are higher, stressful IT emergencies are fewer, and you’re rewarded for keeping customers happy — not just fixing their disasters.
Brian Babineau is Senior Vice President and General Manager for Barracuda MSP. In this role, he is responsible for the company’s managed services business, a dedicated team focused on enabling partners to easily deliver affordable IT solutions to customers.
This guest blog is part of a Channel Futures sponsorship.