How To Increase Your Profits As a Managed Service Provider

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.

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.

Related: How To Use E-Mail Marketing to Grow Your Managed Service Practice.

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.

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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.

Click image for full-sized view.

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: