IT Project vs. Recurring Services Revenue: Which Is Better?
In our continual effort to bring conversation and debate to the blogosphere, we thought we would explore two different types of IT revenue — project and recurring – and, of course, define which is better.
In this business, solution providers, system integrators and value-added resellers (VARs) can pursue two types of revenue:
- Project revenue derived from short-term service delivery and value-add services, such as professional installation of equipment and integration of advanced solutions.
- Recurring revenue known as subscription or retainer fees for ongoing services, such as hosted clouds, email, telephony or virtual network management.
Project revenue comes from limited engagements. When the work is done, the provider gets paid; that’s it. The provider needs to find, and often move on to the next big project with another company. Project revenue comes in big chunks and is immediately recognized on the books. Good thing, right? Maybe.
Recurring revenue is, in a word, smaller. Because it’s typically attached to an ongoing service and structured like a subscription, recurring revenue comes in smaller chunks spread over the course of the engagement. The incremental payments, in and of themselves, do not significantly impact the books. However, the cumulative total of recurring revenue across multiple clients and engagements can get very interesting.
Choosing Sides
Which revenue is better? It’s easy to say recurring … because it is. Recurring revenue isn’t just a predictable stream that accumulates more value over time; it’s also based on scaled services that have lower operating costs and are less labor intense. Businesses with a large volume of recurring revenue typically have lower overhead and fewer long-term operational costs. This combination makes for a highly profitable and valuable business.
Does that mean project revenue is bad? Based on this logic it would be easy to say yes, but that wouldn’t be right. Project revenue is a necessity, and the work that drives project revenue can be an ideal entry point to recurring revenue engagements or vice-versa. You can’t automate everything, or turn everything into a scalable service. And, let’s face it: Project revenue is necessary.
Your Strategy
What solution providers’ need is a good mix of both. More importantly, though, they need superior IT operations and controls to maintain profitability and quality.
Break down your IT operations – from administration, to service delivery, help desk, infrastructure management, network and cloud operations – which areas do you excel at, and which areas need improvement? Solution providers can capture immediate economies-of-scale when they engage with the right service provider to support their business, strategically. NOC service providers and simple remote monitoring and management tools alone won’t generate scale and higher profitability. They may address certain pain points, and could potentially create others. There are better ways to free up your current IT team and add the competencies you need to grow a recurring revenue business at a faster clip.
The final analysis: Project and recurring revenue are both good for IT businesses. Solution providers have the opportunity to add recurring revenue sources to augment their project-based business. And, MSPs have a chance to add project-based services with technologies such as cloud computing, virtualized servers and unified communications. Both will create healthy, profitable and valuable service-based businesses within the IT channel.
P.S. Want to find out how to easily add more recurring revenue to your business? Check out C’mon Man?! Don’t Do IT All Yourself, our recent webcast on ways to avoid common MSP pitfalls and grow your business faster.
Justin Crotty is senior VP and GM of NetEnrich, which provides closet to cloud services for MSPs. Monthly guest blogs such as this one are Talkin’ Cloud’s annual platinum sponsorship.
