How To Increase Your Profits As a Managed Service Provider


Companies spend 80 percent of their IT budgets on keeping their basic infrastructure running. However, that's dead money because it doesn't contribute to the growth of the business. That's why small and midsize businesses, with constrained IT budgets and limited internal IT expertise, are increasingly focusing on those IT initiatives that drive the value of the company and are delegating the remaining tasks to service providers who can perform these tasks more efficiently. Such tasks include managing networks, providing hosting services, running software applications and email services and delivering IT help desk support.

As a result, the managed service providers (MSPs) market, already around $55 billion in 2010, is poised to reach $86 billion by 2016 according to research firm Visiongain. The barriers to entry for becoming an MSP are low and many VARs and distributors in the technology and networking industry are looking to become MSPs to forge tighter relationship with their clients, as well as enjoy a continuous revenue stream. But most VARs and distributors struggle to make the transition, and many new entrants to the MSP business struggle to grow.

The key to becoming successful in the MSP business requires creating the right value added services that clients need and then having the operational capabilities to deliver them cost-effectively. All while meeting or exceeding contractually committed service levels. However, most MSPs don’t invest enough in their business processes to differentiate on one or more of more of these capabilities. In addition, while such proficiencies will enable an MSP to sustain existing customers and reduce churn, they still need to find a way to scale intelligently and profitably—to serve more customers, add new services or expand regionally, while managing costs and improving service levels. In this article, I will share a simple framework that shows how MSPs can leverage information technology to build differentiated operational capabilities that will help them to successfully compete and scale their business.

MSP Process Model

Let’s take a close look at the business process model for an MSP. The following schematic captures the core business processes for an MSP.

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The MSP first must identify and design its key service offerings. Then, it needs to build repeatable and effective process to market and sell their services to prospective clients. Once a contract is signed with a client, an overall plan for resources and delivery is created.

Typically the first step for the MSP in the delivery process is to transition the client’s internal systems to its own environment. For example, that may include auditing their current environment and identifying gaps such as lack of anti-virus on the PCs; taking over client’s existing systems such as Web site or email and hosting them on their servers, rationalizing some of their systems using consolidation and virtualization, and integrating the applications and systems with their remote systems monitoring and IT management technology.

Once the transition is completed, the MSP needs to have systems and capabilities to deliver the services with the right uptime; bill the customer accurately based on resources consumed, as well as the contract terms; and provide an environment to capture client issues and resolve them in a timely manner. Margins are thin in the MSP business. Ability to continuously measure everything, analyze the issues and use the information to improve business processes is critical to staying competitive and ahead of the pack.

By reviewing the process listed above, it becomes very clear that MSPs have to be masters of project management, service delivery and managing cash flow. However, many existing VARs, who are looking to become MSPs, are good at project management, but are newer to managing rigorous service level agreements under tight margins—they don’t have the systems and processes for service level management.

The challenge is not just limited to new entrants into this market. Many existing MSPs use multiple spreadsheets, stand-alone SFA and support systems and project management tools to manage these processes. Their customer and prospect database typically sits in separate spreadsheets. Their transition project schedules are created in a Microsoft Project (or Microsoft Excel) and typically reside in the engagement manager’s laptop. Client environment information may be captured in multiple spreadsheets and Word documents. The availability of consultants with the right skill sets to drive the transition from the client to MSP environment and ongoing service delivery is tracked in a separate spreadsheet. The billable non-people expenses associated with each project may be tracked in yet another spreadsheet. Billing becomes a nightmare in such situations. The customer issues are tracked in a standalone support system, creating a huge issue - sales reps, while trying to sell additional services into an account, many not have visibility into support issues in those accounts.

When a MSP is small, such manual methods and fragmented systems may just work. But, as the MSP grows and continues to use manual processes and fragmented systems, things begin to fall through the cracks, leading to missed deadlines, lower than planned service levels, inaccurate invoices and higher costs of operations. In an environment, where competition is thick and margins are thin, this may prove to be deadly for a MSP.

Fortunately, integrated software packages for service providers are available and they support end-to-end business processes of a MSP and address the issues listed above. The full scope of capabilities covered by such packaged solutions includes:

  • Design: Ability to grow their footprint within a client by providing new and innovative services in a cost effective manner is core to any MSPs long term growth. A software solution for MSPs supports such capabilities, which includes project and document collaboration, as well as ability to analyze unstructured feedback from customers (in the support process) to identify new business opportunities.

  • Market and Sell: MSPs need to have an effective go-to-market process covering prospect segmentation and targeting, campaign management, lead management, pipeline management, proposals, contracts/SLAs and close. Such a process enables an MSP to reduce new customer acquisition costs, bringing client profitability forward. Software solutions for MSPs support such capabilities.

  • Plan: Project planning is a key part of the delivery process and requires capabilities such as project schedule planning, project resourcing and project expense planning. The packaged software solution for MSPs addresses all these requirements.

  • Transition and Deliver: These are the processes where ‘the rubber meets the road’ and should be a core capability of any MSP. A comprehensive software package for MSP includes project and document collaboration and project reporting.

  • Bill: Ability to capture time and expense, and support various types of billing including time and material, fixed price, milestone and deliverables-based are core capabilities in a software solution for MSPs. Such features enable an MSP to support multiple pricing models and become easier to do business with.

  • Support: MSPs should have the ability to capture support issues, route to the right support analyst, escalate and/or close them and report of time-to-resolution vs. SLA. A comprehensive MSP software solution supports such capabilities.

  • Analyze: An MSP solution should have comprehensive reporting and analytics capability, so management always has visibility into all key metrics of the business such as backlog, liquidity/cash flow, utilization, profitability by project/customer/service etc.

    In addition, systems should contain critical back-office capabilities to manage business:

  • Account and Report: MSP is a very thin margin, monthly payments driven business. Good management of cash-flow and visibility into all revenue and cost sources is a key success factor. Hence, a comprehensive MSP solution covers all accounting back office functions such as receivables, payables and reporting. In addition, MSPs often procure equipment (such as hardware, software etc.) and contractors for a specific client, as a part of their contract. Ability to track and allocate all expenses (including depreciation of equipment) at the project and client level is also core to MSP business. As a result, project accounting is an important requirement for MSPs.

  • Manage Skills: The core value proposition of any MSP is that they have the expertise to deliver value at a cost lower than what it would cost the company if they were to do it themselves. Employee skills tracking/ management as well as medium to long term resource planning are core capabilities needed in these systems.

  • Procure: Since an MSP often purchases material, equipment and resources for a client, integrated procurement capability with client tracking is a core requirement of an MSP business. A software package for an MSP supports such capabilities.

    Such software packages are integrated, so information, once entered, is visible to all stakeholders. They also combine the capabilities of Professional Services Automation (PSA), which addresses project management, resource management and billing with the typical ERP capabilities including back office accounting; procurement; human resources; sales and marketing; and analytics to provide a comprehensive solution for running the business of an MSP. As a result, issues such as incorrect billing; transition plans that are not resourced well; support issues that don’t get addressed within the SLA timeframes because they fall through the cracks; and continued poor pricing because management lacks visibility into profitability of a service simply disappear.

    These software packages are available from the cloud in a Software-as-a-Service (SaaS) model, so an MSP does not need to buy any hardware or software to run these software solutions. Because they are very cost-effective to implement and are available on a monthly/quarterly subscription fee, they are the right solutions for growing MSPs, because of their thin margins and a very cash flow driven business model. With such solutions in place, MSPs can deliver services in a cost effective manner, meet/exceed contractually committed service levels, continuously improve margins, build a foundation for scaling their business, grow sales pipeline and improve client satisfaction.

    Organizations that are either transitioning their business model from a VAR/distributor to a MSP, or are just getting started as a MSP can leverage such solutions to build the operational capabilities they need to succeed and win in this very competitive and cut-throat market.

    Managed service providers can expect a boom in business during the next few years. As more enterprises opt to concentrate on their core competencies, MSPs can pick up business keeping their customers' basic enterprises running, and they can cut costs with remote management capabilities. Sweetman is senior director of solutions marketing for SAP Business ByDesign and is responsible for the professional services segment. Here are his tips for running a successful managed services business.—Jennifer Bosavage, editor