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Extreme Makeover

The 90-day guide to managed services

By Joseph C. Panettieri

Unlike many solutions providers, MJ Shoer doesn’t lose sleep about cash flow and falling hardware margins. As president of Jenaly Technology Group Inc., Shoer has successfully transformed his seven-person company from a VAR into a true managed services provider.

“We are a virtual outsourced IT services firm,” says Shoer. “We rarely use the term managed services, instead referring to it as ‘virtual IT services.’ We are our clients’ trusted IT partner and work as an extension of our clients’ organizations.”

That strategy is paying healthy dividends. The seven-person solutions provider, based in Portsmouth, N.H., generates 65 percent of its revenue via managed services. A mix of remote management tools allows Jenaly to add two to four new clients to its customer base each month. As a result, Jenaly’s revenue is growing roughly 35 percent a year, and most of the money arrives in predictable monthly intervals.

Jenaly’s rapid growth and regional expansion across rural New Hampshire wouldn’t have occurred under the company’s old break-fix model. When Jenaly was a traditional VAR, Shoer says, he “hated the notion of being a firefighter, waiting for the emergency bell to ring at a client site. That’s a tough way to run a business.”

These days, Shoer’s team can remotely monitor, manage and troubleshoot customer systems using managed services platforms from ConnectWise and Kaseya.

It’s no secret that thousands of VARs are hoping to emulate Jenaly’s transformation into a managed service provider. Traditional resellers simply can’t survive on razor-thin product margins and unpredictable consulting fees that can rise and fall with the economy.

Much like a cable service or a phone service, managed services generate predictable monthly revenue that protects VARs from economic downturns. Dozens of MSP platform providers–from Autotask Corp. to Zenith Infotech Ltd.—have empowered VARs with hosted applications that automate business processes and keep customers’ networks humming along.

Just ask Oli Thordarson, CEO of Alvaka Networks. The Irvine, Calif., company generates 60 to 80 percent of its revenue via a mix of managed services. And Alvaka, which leapt to managed services during the early years of the dot-com boom, has grown by more than 400 percent over the past decade, Thordarson estimates.

Crossing the Chasm

Still, the transformation from VAR to managed services provider is no small task. It typically requires an extreme business makeover that impacts every department – sales, consulting, customer service, accounting. Moreover, the transition requires VARs to overhaul how they compensate sales and IT professionals.

“This is the second major inflection point VARs have faced in less than a decade,” says Ed Golod, president of Revenue Accelerators Inc., a consulting firm in New York that focuses on technology sales. “In the late 1990s, thousands of VARs went out of business when they failed to make the transition from products to services. Now, thousands more will fail to make the leap from services to managed services. Those that successfully cross the chasm will reap big rewards.”

Two prime examples: Managed services can increase an organization’s billable hours by roughly 15 percent, Autotask estimates. And managed services providers will typically enjoy 20-percent revenue growth this year, compared to single-digit growth or flat results for traditional VARs, according to AMI-Partners Inc. of New York.

Like everything else in business, success requires careful planning and a laser-like focus on execution. Many solutions providers say the transition to managed services can require as little as 90 days.

“It’s like going on a diet,” says Golod. “You can see dramatic results in three months. But if you don’t stay focused, you can slip back to your old reseller habits and sabotage your transformation.” Ready to begin your 90-day transformation?

We interviewed more than a dozen MSP experts to help formulate your makeover. As a whole, they recommend spending at least 30 days researching the MSP market. During month two, our experts say, you’ll be able to formulate your plan, assess your staff and roll out an internal strategy to your team. By month three, you’ll be ready to beta test one managed service with a handful of customers—with the goal of converting them into paying MSP customers shortly thereafter. Here’s a deeper look at each step in your journey.

Month 1: Become An MSP Expert

There are dozens of ways to define the managed services market. But the safest way to get started is to understand customer demand for managed services. The top five managed services in terms of customer interest, according to research from the Computing Technology Industry Association Inc. (CompTIA), are:

Security
Storage, backup and disaster recovery
Web and e-mail hosting
Network monitoring and administration
Hosted applications (i.e. software as a service)

Now for the complicated part: In each of those five categories, dozens of companies now pitch MSP capabilities to VARs. And dozens of new solutions are surfacing each quarter.

Not sure where to start? The first logical choice is to reach out to your existing partners. Channel-friendly companies such as Cisco Systems Inc., Ingram Micro Corp., Seagate LLC, Symantec Corp., Tech Data Corp. and dozens more are launching or evaluating managed services programs for their VARs.

Distributors have been particularly active in the MSP market this year. Ingram, for instance, offers VARs an online managed services platform called the Seismic Virtual Services Warehouse. The system includes:

Seismic Managed NOC, which gives VARs an outsourcing platform for routine network monitoring and desktop maintenance
Seismic Managed Help Desk for 24×7 remote support services
Seismic Professional Services Automation Software, which is powered by Autotask’s managed services platform
Seismic E-mail and Web Defense Services, which are powered by MX Logic

Meanwhile, Tech Data has made two MSP-related moves. Most recently, the distributor agreed to offer Trend Micro Inc.’s security solutions on a pay-as-you-go subscription model to VARs. Tech Data has also partnered with N-able Technologies Inc. to help VARs offer managed services to small and midsize customers.

As you seek to educate yourself, remember that MSP solutions can typically be organized into three categories:

Remote monitoring, desktop and server management. This is the domain of MSP platform providers such as Kaseya and N-able.
Business process management: Here, companies like Autotask design hosted software that enables VARs to automate their internal business processes. The systems offer project management, CRM, contract administration, time tracking, billing, reporting and business analytics.
Vendor-driven solutions: Here, traditional software companies such as Symantec and Trend Micro are transforming their solutions into managed services for VARs to offer to customers.

Fortunately, many of these solutions are designed to work with one another. Autotask’s platform, for instance, includes APIs (application programming interfaces) that connect with remote monitoring solutions from Kaseya, N-able and others.

“You can be up and running in 30 days with our system,” says Bob Godgart, CEO of Autotask. “And it will give you visibility into each of your customer engagements.”

For instance, say your organization has five customers that are each paying your company $2,000 a month for managed services. “What if you’re burning 100 hours a month on one customer and only 50 hours a month on another customer,” notes Godgart. “Your company needs that type of visibility in order to identify your most profitable engagements and potentially re-negotiate the less profitable deals.”

To see these and other MSP platform capabilities first-hand, attend a few conferences or trade shows focused on managed services. Popular options include the MSP Alliance Fall Conference, CompTIA Breakaway and CMP Xchange conferences, which increasingly include MSP tracks.

Again, the options can be overwhelming: Instead of beta testing numerous services, start with the basics. At Jenaly, Shoer initially offered basic server-side monitoring and maintenance services before pushing into desktop services.

“About three years ago, we invested heavily in new tools that allowed us to extend that model down to the desktop and mobile user,” Shoer says. “The main advice I would offer is to develop strong confidence in your offering and be sure you project that confidence to your client. Otherwise, customers will not understand why it is beneficial for them to transition into this model.”

Month Two: Selling Your Staff on Managed Services

Once you get a feel for your MSP platform options, the hard work really begins: It’s time to zero in on your staff and determine if they can transition from a VAR to an MSP mindset. Many employees can surely make the transition. But some won’t.

“I ran into a situation where my break-fix heroes couldn’t get their arms around managed services,” says the CEO of a 15-person VAR in Dallas. He requested anonymity because he had to dismiss five staff members in 2006. “A break-fix hero is someone who loves to go onsite and receive praise from customers for fixing a downed server or for repairing an executive’s laptop.”

But the entire point of managed services, the CEO notes, is to avoid such technical setbacks in the first place. “The break-fix heroes worried about their on-site utilization rates rather than worrying about managing networks over remote connections. I had to let them go.”

Alvaka Networks’ Thordarson faced a different staffing challenge. When he moved his company into managed services, he leveraged existing staff for selected functions like sales, marketing and management. “For actual service delivery, such as NOC [network operating center] monitoring staff, we hired new dedicated personnel,” recalls Thordarson.

Even if your staff embraces managed services, you may have to sell them on a new compensation program. “Instead of measuring staff utilization rates and basing compensation on that, you really need to focus on the big picture going forward – which is revenue per employee and net profit,” says Jim Alves, executive VP of product marketing and strategy at Kaseya.

For many VARs, net profit is the key measure of success in the MSP world. During the jump to managed services, Shoer adjusted the rules of the game by implementing a quarterly bonus plan. Each person’s bonus, representing a portion of the company’s quarterly net profit, is based on four equally weighted measurements:

The person’s utilization rate
Individual compliance with company business processes (for example, filing time sheets on time)
Customer satisfaction ratings
Value as a team player

“Two of the measurements are concrete and two are subjective,” says Shoer. “But overall, the plan motivates our staff to work together in the best interest of our clients.” Since the bonus plan is based on profits, Shoer is only obligated to pay bonuses if the company is in the black – which would suggest that customers are re-upping for managed services.

When prepping staff for managed services, you’ll also have to help them adjust their daily schedules. “Communication cannot be understated,” says Shoer. “Transitioning to managed services will very likely mean less face time with each customer, so communication and pre-defined meetings become critical.”

Month Three: Selling Customers on Managed Services

Your first 60 days are done. You’ve investigated MSP platforms. You’ve sold your staff on the concept. You’ve started to weed out staff members who can’t make the transition. You’ve begun the search for additional pros who truly understand the MSP mindset; and you’ve begun to investigate potential compensation plans for team members who excel in the MSP world.

Now, it’s time to sell your customers on the MSP model. For Janely’s Shoer, that meant practicing the MSP pitch before visiting customers. “You have to have conviction in your message to your clients,” he says. “The only customers who gave me pushback were the ones who didn’t receive my strongest, clearest pitch.”

Shoer refined and simplified his message. He had offered remote server support for several years to his customers. He simply told that customer base it was time to extend those capabilities to their desktops and laptops. He also crafted a letter to all clients informing them of the new managed services Jenaly planned to introduce.

In a particularly savvy move, Shoer developed a comparison chart that showed the value of proactive managed services vs. reactive break-fix services. “The visual list of benefits was easy for customers to grasp,” he recalls. “We were basically saying ‘help us to help you more efficiently.’”

One skeptical client was convinced that Shoer was “trying to squeeze more revenue out of him,” but after a few months that client signed up for the service and now praises it, Shoer says. Shoer now sells customers on the predictable costs of managed services. “My customers are thrilled because they know their monthly IT nut, and they know that fee covers upgrades to desktops, servers and network infrastructure.”

Naturally, some customers may become skeptical of managed services because they’re paying for certain services – such as security – that they never really see. To address such skepticism, Shoer develops monthly reports that show customers how many worms, viruses and pieces of spam are blocked by his managed services.

Another way to get customers onboard: Evangelize a managed service from a familiar brand. For example, customers that use Symantec’s desktop and server software are natural candidates for Symantec’s new Protection Network – a managed services platform that will ultimately offer backup, security and other information management capabilities. The service, in beta test now, is scheduled to debut late this summer or in early fall.

“There are a lot of small startups in the MSP space,” concedes Andy Honi, senior manager for global SMB, Industry and Partner Marketing at Symantec. “But we’ve got a brand name behind us. We’re giving VARs an opportunity to go back to their installed base and potentially up-sell them to managed services. Our beta testers are very comfortable with that approach.”

The Beta Test

Somewhere in the third month of your makeover, you’ve got to bite the bullet and begin a customer beta test. Assuming you’ve carefully researched your platform and prepped your staff, the actual beta test should go smoothly.

Since managed services platforms are hosted on the Web, they’re often easy to deploy. Corporate Network Services Inc., for one, quickly transitioned more than a dozen companies to a profitable managed services platform, says Jason Tierney, VP of consulting services at the Poolesville, Md., company.

As CNS began to research MSP platforms, the company discovered some solutions required new hardware deployments at each customer site. Other platforms relied on proprietary code that didn’t interact well with mainstream security software.

By mid-2006, CNS had heard positive buzz about Kaseya’s managed services platform for remote monitoring. By the close of 2006, CNS began testing Kaseya—and the results were startling. “It’s a phenomenal solution that improves customer satisfaction and enhances our own brand,” says Tierney.

During the first quarter of 2007, CNS transitioned more than a dozen customers to the managed services platform. Today, CNS remotely manages more than 450 desktops and servers, with dozens more coming online each week. CNS’s success sounds easy to emulate. But despite all the hype, it’s still early in the MSP game. Fewer than 5 percent of all VARs have made the transition to true managed services, Autotask estimates.

Many VARs will fail to make the MSP transition because of cultural or staff issues or customer pushback. But those that have completed the transition say the journey is worth pursuing — especially if you can do it in 90 days.

20 Steps to Managed Services Success

Follow these planning and business process recommendations for a successful transformation from VAR to MSP

Have a clearly defined strategy for outbound business development
Develop a frictionless system for processing your inquiries/leads
Mine your existing customer data to identify new business opportunities
Tie your VOIP system in with your service management solution
Create reusable project templates for frequently occurring projects
Include your clients in the projects you do for them
Check the status of every project on a daily basis
Use a unified project schedule and provide your techs with real-time mobile access
Set up multiple entry points for service requests and support data to flow into your system
Create recurring tickets for ongoing maintenance contracts
Integrate your service management solution with your monitoring tools
Review similar contracts before bringing on a new client so you can gauge the potential risk and value
Include “No Charge” items on your customer invoices
Schedule monthly client meetings to demonstrate and reinforce your value
Regularly monitor your contracts, and make adjustments as necessary
Set up your billing process to be as painless as possible
Enter time at the time the work is done
Run resource utilization reports regularly to identify opportunities to improve efficiency
Create reusable time entry templates
Define clear workflows, and map them to your service management solution

Source: Autotask, TechIQ research

Six Challenges Awaiting MSPs

You May Need to Abandon Utilization Rates: This radical but thought-provoking suggestion comes from Jim Alves, executive VP of product marketing and strategy at Kaseya. Instead of measuring utilization rates, MSPs should focus on revenue per employee as a true measure of success.
You’re Never Done Diversifying: Over the long haul, your business can’t survive on one managed service. Over time, you’ll need to build out a portfolio of services to differentiate yourself. J. Michael Drake, CEO of MasterIT, notes that his firm is using three MSP platforms—N-able, Autotask and EVault—to deliver comprehensive management, monitoring and storage solutions to customers.
Big Rivals Await You: You will eventually compete with telephone and cable companies, which will ultimately become MSPs, according to N-able. But personal relationships with regional customers can keep you one step ahead of big, bureaucratic service providers.
You’ll Need to Open Your Wallet: In some cases, an MSP platform can cost more than your current annual revenue. But Chuck Lennon, president of TeamLogicIT—a VAR-turned-MSP—concedes that his biggest mistake was attempting to save money by building his own MSP platform. One of his internal technical experts strongly advised him to change course and buy a platform. He eventually embraced that advice, and that platform paid for itself in only a few months.
You’ll Need to Fire Some Customers: On the one hand, you’ll need to evangelize managed services to your existing customers. But you’ll also need to walk away from some customers because they may decline to upgrade their desktops and software to your minimum recommended standards for monthly support.
You May Need to Fire Some Staff: Several successful MSPs say they found it difficult—but necessary—to let go of “break/fix heroes” who simply couldn’t embrace the managed services concept. Those heroes looked like champions when they rescued a down server or desktop. But the point of managed services is to avoid such outages in the first place.

Source: TechIQ Research, CompTIA Managed Services Summit