It's Saturday night and I am in a windowless conference room in Los Angeles crammed with 50 techies who are trying to figure out the holy grail of IT -- building recurring revenue streams.
Everyone here has a bit of Saturday night fever on the eve of the Oscars. They have gathered for late-night lectures and conversation about how to move beyond single transactions of technology goods and services to annuity sales with customers that span weeks, months and years. The attendees realize the stakes are high because if they don't transition their businesses to more margin-rich recurring revenue streams they probably won't survive long term.
TruMethods President Gary Pica preaches that the qualities of building a world-class managed services provider revolve around four key concepts that include, in his words, not selling technology; selling "your company way;" raising your prices; and focusing on sales. The core of Pica's belief is embodied in his familiar statement: "In order to effectively sell the idea of managed services to your customers, it is important to focus on the end result of your support offering rather than the bits and bytes of how you deliver it."
He is also fond of using the acronym ATDIYPBA in presentations as a wake-up call for solution provider business owners and managers who want to build out their managed services business to better serve their customers. It stands for "After tax dollars in your personal bank account" and it never fails to get a good laugh from those in the audience. But Pica's use of that acronym is no laughing matter because it puts into perspective the reality of trying to generate 70 percent of sales from recurring revenue. He uses a workbook example of what it will take to generate an additional $75,000 in monthly recurring revenue over three years with metrics for sales productivity, new customer engagements and packaging of services.
"If you are in the recurring revenue business, don't have a goal of less than $25,000 a month," he told those gathered.
But for solution providers moving to managed services or growing their existing services base, this is no easy task. Pica tells those gathered that they need to develop a sales pipeline that puts them in front of two target prospects every week. The sales process here is relentless. He warned those here that they must have a carefully thought out business plan. "Some people have a goal; others have a dream or hope," he said. It is all about solution providers getting in front of first-time customers because Pica warns that close ratios will only be 15 percent to 20 percent. Bottom line: Generating a managed services business is hard work and the solution providers gathered here know it. But as Pica's numbers show, the hard work might just make them rich or allow themto run a prosperous company.
As Pica's Saturday night story unfolds, he is peppered with questions along the way. Attendees want clarification on the optimal number of customers to manage, how to compensate salespeople or how to build a healthy sales pipeline. If the partners gathered here can refine their business models, they can best average for a 12-employee MSP, Pica said. An average firm of that size or business unit will generate $1.2 million, but a best-in-class operation can generate $1.5 million with a world-class one producing $1.8 million.
Clearly, this was no ordinary Saturday night. Following Pica's presentation were perspectives from vendors including Microsoft, Intacct, AireSpring, IntelePeer and WTG, which were all intent on convincing partners that their products and services can help solution providers bolster their managed services.
Taylor Macdonald, who oversees channels for accounting software supplier Intacct, said moving to a managed services model is about making hard choices about what business you should keep or exit. He flashed a well-known quote during his presentation that summed up what solution providers face moving into managed services. "Change is hard because people overestimate the value of what they have and underestimate the value of what they may gain by giving that up."
Robert C. DeMarzo is the senior vice president of strategic content for The Channel Company. A former CRN and VARBusiness editor he oversees content for The Channel Company's events.