5 Tips For Building A Scalable MSP

Tools Of The Trade

Waterstone Management Group, an advisory firm focused on serving the technology sector, said it is helping more and more companies make the jump to managed services. Solution providers turn to the firm to help them drive growth and build in capabilities for operating at scale in the new services model.

From its experience helping companies leverage the managed service provider model, Waterstone Management Group revealed five tips it gives to clients looking to break into the services model and quickly operate at scale.

1. Have Very Clear Customer Segmentation

Dhaval Moogimane, a partner at Waterstone Management Group, said that in order to set up a managed service provider to scale, the MSP has to establish clear customer segmentation, and then design offerings, SLAs and capabilities specific for each of those segments. It's a common problem they see at Waterstone, Neil Jain, another partner at the firm, said, where MSPs have individual offerings for each client. That's fine when you have 10, 15, even 50 customers, Jain said, but it quickly becomes difficult to support as the business scales larger. Margins will also become difficult to keep track of without a more structured and segmented program, Moogimane said.

"If you really want to scale you have to force-fit your offering -- 'here's what you get in this box.' There are varying degrees of freedom, but there are controlled degrees of freedom, otherwise you'll end up with a nightmare of complexity to support," Jain said.

2. Create An Incentive Structure

When moving from a reseller model to a more managed services-based model, it is important to shift the incentive structures and team structures for the sales team, Moogimane said. Managed services is much more of a consultative sell and it's about selling the potential client on the business value of the offering, Moogimane said, instead of the more traditional box-pushing model. The compensation model needs to shift to compensate the sales team for the both products and services, he said.

The problem if the model is not adjusted, Moogimane said, is that the sales force might be incentivized to sell more of one model than the other, to receive a better paycheck.

3. Service Delivery Model

Along with the incentive model, scaling MSPs have to prepare their business itself for handling the increase in services, Moogimane said. Depending on the nature of the services, Moogimane said businesses have to take at how they will support the services, for example with call centers, hosting capabilities, any third-party partners and more. While companies may have had some sort of support structure in place before, "it’s a different level of support that you need," Jain said.

4. Determine Operating Margin Expectation

Margins for products and services are obviously very different, Moogimane said. Because of that, businesses looking to break into managed services or scale up their managed services business have to establish new expectations for margins. Once that expectation is established, Moogimane said that the business could figure out how to structure its staff and align projects efficiently. He estimated that MSPs would have around 25 percent to 30 percent gross margin on their projects.

5. Determine And Measure Benchmarks

Once the business has an idea of its margins on managed services, it can establish benchmarks and make sure it is hitting its goals, Moogimane said. Jain suggested that the MSPs should implement profit-loss measures for the services segment of the business alone to measure renewals, meeting expectations and sales compensations. The important thing is to recognize that those benchmarks will be different when first launching services and when operating at scale, Moogimane said, so businesses should keep an eye on them and update as needed.