Hardware At Your Service

In a market where most MSPs earn their keep by monitoring and maintaining the hardware for which their customers ultimately carry the financial burden, Dellinger says he's made it financially feasible for MSPs to merge their customers' expensive new hardware purchases into their low, fixed, monthly managed services payments.

Emboldened by his own success in managed hardware services, the former president of LanCom Technologies, an MSP in Hickory, N.C, left his company and put all his chips on the table in a new venture called MSP On Demand, which aims to bring his Hardware-as-a-Service (HaaS) model to any MSP that wants to play.

This week Dellinger launches the come-one, come-all MSP On Demand program with backing from the eighth largest bank in the United States, National City Commercial Capital (NCCC), Cincinnati. By applying a unique financing formula that uses the long-term value of an MSP's customer contracts as collateral and lowers the administrative costs of underwriting credit, Dellinger said MSP On Demand should be able to empower practically any MSP to deliver HaaS.

"What MSP On Demand is all about is this: We are becoming an intermediary to deliver hardware as a service for resellers," said Dellinger. "We'll provide them a vehicle to finance HaaS and to protect their customers with a private label [so that] the service looks, feels, and smells like them."

Dellinger wants to see an increasing number of MSPs take a more responsible and comprehensive approach toward the hardware that resides in their customers' networks. Today, most MSPs are careful to craft customer contracts that leave the future cost of new hardware on the customer's shoulders. Before bringing on new customers, they inspect existing hardware warranties to ensure that older machines don't fall apart on their watch. They draw up MSP agreements that release them from liability for a piece of hardware if a customer doesn't act to replace it within a certain time frame after being told it's about to fail. In short, they distance themselves from hardware as much as they can. And why not? Remote monitoring and remediation of customer networks has proven to be lucrative—and an effective way to retain customers on fixed-rate, long-term contracts. Why get your hands dirty with hardware?

Because, says Dellinger, if done right, the benefits of embracing HaaS far outweigh the risks. In fact, when financed properly, factoring hardware into an MSP contract can further strengthen customer retention by giving MSPs complete control—or even ownership—of a customer's hardware. MSPs that finance so that they retain ownership of a customer's hardware will gain a mutually agreed-upon form of customer lock-in that can extend a contract indefinitely because of the high cost a customer would have to pay to buy back hardware purchased for them, he said.

"We have built an evolutionary model for [HaaS]," said Dellinger, "and this is where managed services are going to go."

Hardware To The Rescue
A financing service that helps massage hardware expenses into long-term MSP contracts was probably inevitable, as solution providers have been buying hardware for their customers and burying its cost into other services long before managed services ever came into vogue. As the cost of hardware fell over the past few years, solution providers caught on to how throwing in "freebie" equipment that was actually paid for on a separate line item helped close sales. It's the old "buy the network and we'll throw in the PCs for free" pitch. And it works on all different levels as a way to retain customers.

Take, for instance, Column Technologies, an eight-year-old solution provider in Chicago that specializes in full-service network management. Column Technologies recently faced a choice: Take charge of a valued customer's hardware needs or open the door to a competitor to do the same, said President Tim Yario. So, Column Technologies built an entire data center for the customer because it was a key account on the solution provider's books, said Yario.

"What it came down to was we either could just build it for them and keep them as a customer, paying off our expense over time, or take the chance of them outsourcing the project and possibly losing them all together," he said. Column Technologies shelled out $150,000 of its own money on the project, but it was the smart move, said Yario.

Besides, folding the cost of less expensive hardware into an MSP contract may actually save a solution provider money in the long run. TriLine Solutions, an MSP in Holland, Mich., already folds the cost of new VPN and firewall technology from Cisco Systems and SonicWall into the fixed costs of the services it provides to its MSP customers. Doing this gives TriLine the ability to standardize its monitoring connections with MSP customers, a move that also saves TriLine money, said Sean McTaggart, president.

But McTaggart has learned that trying to grow TriLine's MSP business to include more expensive HaaS options means running headlong into far more complex financing. Over the past several months, TriLine has been working on a new Guardian MSP service that McTaggart would like to see encompass a range of new services, including a way to subsidize more expensive HaaS deployments. TriLine has reached out to many lenders, but every option is drastically different. Some lenders want deals based on a customer's credit, others prefer them based on the credit of the MSP, while still others want a mixture of both, he said. The process has been complex as TriLine has worked to streamline and automate the new service.

"We are still putting pieces of it together, wrapping what our price is for services and whatever additional hardware and software they need and meshing it together into one sheet, and that's why its been taking so long," said McTaggart.

HAAS Not So Hard
What's needed to take the financial onus of hardware off solution providers and speed the process of delivering HaaS, according to Dellinger, is a new financing option—one built and operated by former MSPs.

The idea for MSP On Demand hit Dellinger like a ton of bricks when he first heard about NCCC through CRN coverage of an MSP Alliance event in Orlando, Fla., in March. At that event, NCCC Vice President Terry Karageorges introduced NCCC's Managed Services Solutions, a HaaS financing service designed to use the value of an MSP's collective managed services contracts as collateral for hardware financing. NCCC can finance the cost of hardware and software sales in a way that keeps them in line with a customer's existing monthly services fee, said Karageorges. Interest rates and credit lines are based on the customer, not the MSP, he said. If an MSP's customer is a publicly traded company, the customer's earnings statements are analyzed to determine interest rates of the NCCC services. If the customer is a smaller private company, NCCC looks at the MSP contract and the customer's credit, he said. If an MSP's customer defaults, NCCC repossesses and resells any products purchased and pays off the debt, reducing the risk to the MSP.

There was only one problem: NCCC's services could only reach down so far into the midmarket, said Dellinger. "National City went and talked to one MSP who wanted to use their services and they almost had a heart attack when the MSP said he only needed about $4,000 in hardware financing because their cost of doing business really doesn't allow them to do anything under $50,000," said Dellinger.

Since Dellinger was already running a successful HaaS business at LanCom, he proposed to NCCC that it come in as an underwriter and become the back office for contractual paperwork needed to expedite financing for smaller MSPs. NCCC liked what it heard because now it had a way to open the door to HaaS financing for MSPs that were startups, or which even had less-than-stellar credit ratings, said Dellinger.

To keep processing costs low, MSP On Demand had to be simple. So Dellinger and NCCC developed an online kit that includes HaaS quoting tools, sample proposals, sales tips, sample commission structures and other tools. MSPs can use the online kit to develop HaaS contracts based on the type and number of hardware products needed and the number of applications expected to be supported. Interest rates and other details are all calculated based on the required duration of a HaaS deal. Once approved, the system spits out a contract that the MSP has the customer sign, funding takes place, and hardware is delivered. Options are available that allow an MSP's customer to make regular payments directly to NCCC, which takes its cut and passes the profit to the MSP. "If it's a $5,000 payment and $3,000 a month is for the hardware, a check for $2,000 will go into the reseller's account every month," said Dellinger.

An added perk is that MSPs using the service get extra commission based on the number of HaaS accounts they sign up and get financed, said Dellinger. Better hardware margins overall can be expected as well, he said. "Instead of getting their average 10 to 15 points, they are going to get 30 points from us. We have averaged 30 percent margins on our hardware for the last five years," said Dellinger.

Smart Management Needed
There is definitely room in the industry for a nontraditional lender to offer a hand to MSPs struggling with hardware costs, said Rob Pennoyer, lead consultant at the GG Group, a small, New York-based MSP staffed by less than 10 people that primarily offers remote monitoring services to very small companies. "Most small companies will just cut a check for hardware if we're talking only $4,000 or so, but when you get up in the range of $20,000, there is always a need for better financing options," he said.

But MSPs should be careful of how they use the MSP On Demand funding, said Perry Swaim, president of Voyss Solutions, Charlotte, N.C., which plans to use MSP On Demand. Swaim believes such an offering's time has come, but he said MSPs that aren't careful about managing the funding can find themselves in a world of financial hurt.

"It's a good program, and we are going to relabel it ourselves," said Swaim. "But you have to be careful. [Dellinger] has discovered some ways to deal with the financial markets to the point where they will fund [HaaS] in a certain way. But you have to be smart about how you manage it. Because the temptation is you get a check, for example, for $100,000 worth of hardware you sold, and on top of that you have an ongoing maintenance contract with that customer, and the temptation is that when that money comes in you infuse it into your business and you use it today. You really can't do that. You have to accrue it correctly." But as long as the MSP exercises some discipline over the monthly payment schedule, MSP On Demand is a solid proposition for MSPs and their customers, said Swaim. "For the customer, it's a great program. They are buying long-term services at today's dollars."

Besides, merging hardware expenses into a customer's MSP contract yields an extra benefit, said TriLine's McTaggart.

"The client doesn't feel like I'm just selling them more product and raking them over the coals," he said.