Plugging Hidden Money Drains in Channel Business Models
MSPs and other channel partners follow changes in IT closely — not only to evaluate what their customers need next, but also to shape their own businesses and discover new revenue streams.
As the IT industry moved to the cloud, so did many MSPs and other partners. Channel business models steadily reshaped into something more akin to reseller or broker of cloud services. Their reward for making the shift was steady money every month, known as monthly recurring revenue (MRR), from the cloud providers they represented. But while those deals seem sweet at the outset, they’re already proving problematic over time, especially when a partner wants to sell their business.
A new whitepaper by Enterprise Strategy Group (ESG) warns of revenue and value erosion in from changing terms in channel relationships that aren’t immediately recognized as harmful. MSPs are advised to regularly evaluate their business models and channel relationships in at least an annual checkup to ensure money isn’t lost to hidden money drains.
“In a healthy model, incremental margin that would otherwise benefit the cloud provider is transferred to the partner when they deliver the service themselves using their own people, infrastructure and dedicated data center. Importantly, the MSP also retains the ability to evolve and adapt the right services/pricing/margin mix to serve their markets and customers, protecting them from margin erosion over time due to matters outside of their control,” write the analysts who authored the paper.
So how does an MSP, or any partner for that matter, lose money from MRR and channel agreements? One way money can be siphoned away is in a reduced price for the business.
“Many MSPs these days have been in business for a long time and are now looking to unload their business in the next three to five years or sooner,” said Eran Farajun, executive vice president at Asigra, the cloud backup and recovery company.
MSPs looking to sell their businesses soon want to get the highest price they can. But Farajun says that many soon discover the underlying vendors for the services they brokered take those customers and move them to a different broker.
“It’s very easy for the end customer to stop their service and move to a different broker or even move to a different technology. They’re just not as sticky,” Farajun said.
“The buyer of their business then has to expend a lot of energy and effort and money to keep those customers. And that gets taken out of the purchase price. So instead of the MSP getting $100 a contract, just using a number to make a point, they’ll just get $30 a customer contract,” Farajun added.
That’s a near instant deflation of value for MSPs at the point of selling their business. And make no mistake, most MSPs are exposed to taking such a hit. According to Datto’s 2019 State of the MSP report, 44% of respondents said more than half of their revenue is a result of recurring services.
Another way money drains away from an MSP is through the recalculations of margins typically brought about by the same or merger of the vendor.
“For example, maybe a private equity firm wants that margin in their pockets after a vendor acquisition,” Farajun explained. “So they turn to the partners and say, ‘Look, last year you sold $100 … $200 … $500,000 worth of our cloud service, whatever that service was, monitoring, backups, security, VoIP, and so on. And you’ll be getting your 25-30% margin. Next year, if you want to keep that margin, you’ve got to sell 150% of what you sold last year. And if you don’t, well sorry, we’re going to knock your margin down to 17%, 18%, 20%.”
Partners can plug these money drains by …