For the original value-added resellers, professional services were a means to sell more product. In some cases, product-attach services were even given away to facilitate closing large infrastructure deals. The customer was saying, “look, you want to sell us this stuff, so you should be here when it arrives. Oh and while your here you can install it”. The margin was in the resale of the product, so it was the equivalent of a car salesman throwing in a set of foot mats; a closing tactic.
As margins in product resale have declined, VARs have been on a journey to monetise their technical expertise. The journey started with professional services and progressed to managed services in a bid to build recurring income. Whenever business models change, there are unintended consequences. These require board-level decisions about how best to structure and operate the business.
For example, if VARs want to place their star technical engineers into a profit centre, should that extend to charging for presales work? If the VAR is more reseller than service provider, should the presales fee be waived to help win a big deal? With the introduction of managed services what is their relationship with the professional services team? Who should own the primary contact with the customer?
Let’s look at four areas where the VAR must adapt to meet the challenge of becoming an MSP: Organisation Structure, HR, Billing and Scaling-Up.
Organisation Structure
Originally, technical engineers were aligned to the sales division as presales engineers. When services needed to be commercialised, a new and separate division was created, then another, just for managed services. Each division had its own incentives and goals, as well as different business tools to help them do their job. This division of labour was great for making everyone accountable but not so good for presenting a unified experience with the customer.
The general trend in the channel today is one towards a flattening hierarchy so that data and information about customers can be shared across the business. As revenues flow from product sales to managed services, technical teams may have the most customer touch points. When this happens, who should own the primary relationship with the customer?
The increasing adoption of SaaS computing models has seen a hollowing out of the sales function into new business functions. One team “lands” the deal while another, customer success, is responsible for on-boarding, adoption and renewal. As the VAR becomes more MSP-like, the model is less about product-attach services and more about long-term operational run.
Breaking down organisation silos is tough but imperative if you are to compete in a world of increasing automation and AI.
Services Billing
In the cloud era, especially in B2C, many services are free to the user. Subscribers who pay for a service certainly don’t expect to be charged for set up and configuration. In the B2B enterprise world, channel CEOs expect a return on highly-paid technical engineers, so they install professional services software to track their utilisation. Time must be accounted for, so every day is billed on a time and materials basis.
There is a customer backlash against this as they increasingly expect to be billed on value and outcomes, not time. More progressive channel players, confident in their capability, are turning to fixed price contracts. CSPs like Google and Amazon Web Services go one step further, they never mention the cost of labour. Their massive scale is achieved through automation, propelled by artificial intelligence and machine learning.
Like Uber, who could never control millions of taxi drivers with a room full of people armed with 2-way radios, IT services will be increasingly automated. Every successful company is now a technology company, regardless of industry.
The managed services model with outcome based, pay-as-you-use billing, is more aligned with the needs of customers who want to align IT expenditure with value and measurable ROI.
Scale and Efficiency
One of the great things about professional services is the amount of trust and understanding which can be built between the VAR and its customers. When a client feels confident you really know their environment they are less likely to shop around. In that regard, a great professional services team can build tight relationships and foster loyalty.
On the downside the people with both the technical and consulting skills are in high demand, causing wage inflation. Neither can they be everywhere at once and are most often placed on the highest producing accounts. As an organisation adds consulting resource, revenue can grow, but only linearly. Onsite visits build close links, but travel time limits the reach and efficiency of the team.
A managed service model is a different dynamic. The people who deliver the service are often remote which can make it hard to build such tight relationships. However, if modern communications can bridge the relationship divide, then the economic model for an MSP can be much more scalable. Shared resources, both people and infrastructure, help service providers achieve much greater economies of scale, as well as geographic reach. Revenues can grow exponentially.
Using this model MSPs and CSPs disrupt the status quo and put consult-heavy organisations at an economic disadvantage. Most of the world’s largest outsourcers are currently shedding staff.
Training and Human Resources
With employer demand for tech talent routinely outstripping supply, companies with ambitious growth plans need to pay attention to the most efficient organisation models. A growing managed service team requires multiple roles and can be a great training ground for new talent. Platforms which can capture knowledge and diffuse it around a team can really help to accelerate skills development.
Whilst professional services are often very bespoke, managed services are built on processes and platforms. The difference between a small pizza delivery business and Dominoes is the process used and process is driven by technology. If you want to scale your managed services business, you need to design the right process first.
It’s important to realise that the successful transformation from VAR to MSP requires executives to make decisions about organisational structure, business focus and revenue models. Predatar provides great software on which to build your managed services portfolio as well as consultancy to guide you through the transformation.
To find out more please drop us a line at info@predatar.com
