It seems every channel company likes to use the MSP moniker as a description of their business model. Understandable, since business valuations for MSPs tend to be higher than more traditional VARs. This identity crisis can cause big problems. I must first acknowledge that the VAR model is still very successful, and profitable, for many channel players. Why attempt to fix something if it’s not broken? However, a schizophrenic business is more often than not, a poorly performing one. It divides opinion, sows the seeds of confusion and instead of building a fly-wheel, can create a horrible doom-loop.
If you are undergoing a transition to a service provider model, how do you determine if you are in tune with the music? As we head towards the end of another year it’s worth taking stock and reviewing your progress.
One obvious measure is your percentage of recurring revenue business versus transactional business. If its not more than 50% of revenues, can you call yourself an MSP? The best performers don’t include vendor contracts, such as vendor software support or third-party maintenance. In our book, they should be classed as VAR-type business, part of a resell model.
Painting by numbers can be a bit one-dimensional, so we thought to compile a list of non-obvious, telltale signs you are hitting the high notes. If you’re guilty of too many of the following, it doesn’t mean you have a bad business, just that it’s likely you are still in the foothills of your journey to XaaS.
When visiting IT channel companies anywhere in the world, I can tell the type of business they are as soon as I walk into the reception area. The bigger the VAR, the bigger the vanity wall of vendor plaques and trophies. Immediately, these companies have defined themselves by their vendor allegiances. Laying out your wares in this way, like some IT department store, can you be surprised if your margins suffer from persistent erosion?
I’m not saying don’t invest in training and accreditation. On the contrary, you should go technically deep into the technology to trust it enough to base your service offerings on it. You build the knowledge because it’s essential to maintain long-term relationships with clients. That’s very different from having a huge array of vendors on your roster, in the hope that you can appeal to somebody; like some Venus tech fly trap. I’m all for diversity but an MSP builds diversity to protect their supply chain, not to increase their customer appeal.
Which business metrics or KPIs do you use? If your top metrics are landed revenue, or profit for the quarter, chances are, you’re still a VAR. Profit is essential to pay the bills and to invest in improving the business but for a successful MSP, it should be a lagging indicator. Most notably it lags the more important metrics, such as Net Promoter Score (NPS), retention rates or customer lifetime value (CLV).
The cadence of a successful MSP is very different to that of a VAR. A VAR’s rhythm is led by their vendors, who in turn are led by shareholders to deliver solid numbers every quarter. Most channel companies are not required to file quarterly returns, yet I bet you are heavily influenced by the vendors who are. The big tech companies, Dell, HP and IBM right now are gearing up for their usual end of quarter, or end of year, hockey-stick sales dash. How many calls will you get from your vendor rep in the next two to three weeks?
Look at your invoicing pattern over the year and if you see a clear saw pattern, with the peaks at the end of each quarter, you guessed it, you are a VAR.
It’s only natural for us all to be tech neophiles, to be obsessed with the shiny new thing. Tech companies like Apple rely on our basic urge to not get left behind. When I first joined the IT industry, UK channel chiefs would visit Comdex, Las Vegas, in the hope of discovering the next big thing, securing exclusive distribution rights to lock down healthy margins for several years. Who gets exclusive rights these days?
FOMO drives many channel chiefs to sign up new, venture-capital backed, disruptive tech vendors. Old habits die hard but ask yourself if you are guilty of always hunting for greener pastures.
Successful service providers have, if not neophobia, at least a healthy dose of scepticism. They know its just as important to focus on how to deliver amazing customer service. Have a look at how you spend your time in management meetings. Is the majority spent discussing tech, or service?
Every successful VAR I know has at some point had a great sales culture, sales director and sales team. In the channel, sales teams are the fuel which accelerate businesses. The marketing burden falls mainly on the OEM vendor, leaving the VAR to focus on demand generation and bid management.
Problems can occur when selling services is added to the mix. Its common and understandable for VAR sales directors to want to protect the resell business and the existing customer base. So, they add a new overlay team of services-only sales people. They can be perceived as the “cuckoos-in-the-nest” and are often pushed out of core accounts or relegated to a subservient role. It’s a hard gig and all too often they fail, citing lack of cooperation from the core sales team. The remaining sales team think “there but for the grace of god” and continue doing what they have always done.
If you really want to grow your recurring revenue business, you might want to consider removing your foot from first base, so to speak.
Summary
If you look like a duck, swim like a duck and sing like a duck, then you’re probably a duck. I am a huge admirer of value-add resellers. In fact, I saw a recent piece of financial analysis which pointed out that the UK’s top VARs had a higher valuation multiple than many well-known systems integrators and service providers. Success in business is as much about playing to your strengths and knowing who you are. For many, the best course of action could be to double-down on the reseller model and not get distracted by becoming something you’re not.
If you are intent on accelerating your evolution to MSP, then these five telltale signs might just help you assess your progress in 2019.
Have a happy Christmas and everyone at Predatar hopes your business is on song in 2020.
