Vendor Pacts Can Make Or Break The MSP


Editor&'s Note: The following guest commentary represents the latest in an ongoing series of submissions from solution providers working with managed services practices. CRN accepts guest columns from solution providers on topics of interest to the readership. Please limit to no more than 550 words. Send suggestions to CRN Editor Heather Clancy at hclancy@cmp.com.

The contracts, billing and licensing associated with running a managed services practice can be daunting barriers.

Many vendors have made strides in these areas with help from early managed service providers, but other vendors have just begun to play. Their historical strategies are typically driven by the need to realize immediate return, and they may have little or no capabilities to bill in a recurring manner. Their sales and even executive compensation models weren&'t structured to deal with the related change in revenue realization that the MSP world brings to the table. Their models won&'t tolerate breaking down annualized contracts into monthly and transferable licensing, and their sales professionals and stockholders are reticent to wait for the long-term return.

Many vendors have long-term agreements with software, hardware and service providers that don&'t consider the MSP model. They are driven by the “bring-it-this-quarter mentality,” high-volume purchase contracts, SKUs and other functions that just won&'t work under the MSP model. In order for these vendors to comply with what you need as an MSP, they often will have to renegotiate their own agreements and have frank conversations with their stockholders. This can be and has been a significant delay factor in the development of vendor policies appropriate for the MSP model. What seems simple to the VAR, who ostensibly can move on a dime, is not simple for a larger or public company to pull off and can take many quarters to achieve. It takes nearly complete re-alignment from the top down and frankly might even require significant executive changes.

The fact is, you will need to help vendors find the model that works. Be prepared to walk away from a multitude of good products and services due to these issues. Above all, remember it is about profit and risk management, not the coolest tool or the highest imagined margins. Margins do not necessarily mean profit, especially if you are required to make large up-front investments and carry commitments that are based on unproven revenue projections.

What do you need from your vendors? Whether it is an appliance with services or software used to deliver your services, you need monthly billing with limited long-term obligation, the ability to transfer a license from one client to another, demonstration capabilities and soft commitments. You need to be sure that future releases, support, warranties and other factors are carefully considered.

You must be able to articulate how vendor ROI will outweigh revenue deferment. To sign long-term, hard commitments without knowing what you can sell and support increases your own potential for failure. A perceived soft commitment can, however, make it more difficult to obtain margin-rich pricing from a vendor.

Another major issue is client ownership. It is critical that you protect your client retention and benefits from clients that renew. The first way is to be sure you are adding value, but solid agreements can work to close most doors to a vendor that chooses to solicit or accept direct business from your customers.

Finally, requiring transparency can cause issues. While Alvaka always pushes its own brand, it can be complicated and risky to hide your vendors. The MSP model is a real opportunity to become truly integrated partners with your vendors and not simply a sales force. But remember to protect yourself.

KEVIN MCDONALD is vice president of Alvaka Networks, Huntington Beach, Calif., which transitioned into the MSP world from its network VAR roots. He can be reached at kmcdonald@alvaka.net.