Plugging In: Cash In On Managed Services

It's mid-December in San Francisco, and 15 or so solution providers toil in a downtown hotel to replicate a managed-services model projected on a screen. It's the first of many such events that Kaseya will be hosting in the coming year to sign up resellers to use its remote management systems and transform their own businesses from traditional VARs to managed-services providers (MSPs).

"We've done a very good job of selling into the nascent MSP community, but we want to show [partners] how to use our systems to transform IT once you get the infrastructure in place," says Kaseya CEO Gerald Blackie. "Our goal in the coming year is to use these seminars to show our partners how and what to sell in a way that customers understand and to get their IT staffs to change from being reactive and event-driven to more proactive."

Managed services are transforming the channel. Traditional VARs have adopted managed services to expand their business opportunities and offset shrinking margins in commoditized hardware and software. According to the 2006 VARBusiness State of the Market (SOM) survey, most solution providers are offering a service in some form or are planning to in the coming year. providers expanding beyond product sales earn, on average, nearly a quarter of their revenue from managed services.

So, what exactly is managed services? In a nutshell, it's the outsourcing of virtually any IT function that can be done in-house. The key is ensuring that managed services run with the same level of transparency that they would on-site. New services are popping up all the time and currently include desktop maintenance, patch management, network-performance monitoring, intrusion detection and prevention, remote backup and storage, spyware and adware prevention, customer relationship management and call-center administration. In short, anything that boosts an organization's productivity and off-loads the burden to a third party can be considered a managed service.

Properly implemented, managed services have the potential to create more consistent, higher-margin revenue streams for solution providers while streamlining business processes.

NEXT: Steep Learning Curve

But proper implementation is easier said than done. These days, just about any VAR can refer to itself as a service provider of some sort, but genuinely managed services aren't a cinch to build and implement.

"There probably are about 1,000 real MSPs in the market today that are leveraging remote management and monitoring services and doing it more proactively than reactively," says Mark Scott, president and CEO of N-able Technologies, another vendor that's helping transform service organizations into MSPs. "The rest are only doing 'SKU-able' managed services around products."

According to the SOM survey, most solution providers start with relatively easy network monitoring and administrative services. Adoption of other MSP offerings follows a curve of complexity; the more difficult to implement and maintain, the fewer VARs in the game.

Meanwhile, the value of the services market is expected to climb rapidly. IDC projects that it will reach $21.7 billion by 2007, and Gartner Research predicts an annual growth rate of 60 percent for the next several years. The SOM survey reveals that an overwhelming number of solution providers expect healthy or moderate managed-services growth in the coming year. What's more, the services portion of revenue has increased for most VARs as the margins on hardware and software shrink or disappear.

Those who decide to revamp their businesses to pursue a managed-services model may find that vendors such as Kaseya, N-able, SilverBack Technologies and Altiris--the service-provider enablers--will become equally integral partners as Cisco, IBM and Microsoft ever were.

Take AllConnected, a solution provider in Simi Valley, Calif., that was founded in 1993 and partners with Cisco, Microsoft, Citrix and some wireless and security vendors in traditional reselling arrangements. A few years ago, the company decided to get into the MSP arena, and perhaps one of its wisest choices was partnering with N-able.

"Their solutions are a critical component of our suite of services because they offer about 15 specific tools that we use to offer the services to our customers," says AllConnected president Alan McDonald.

For an initial cost of about $30,000, N-able supplies its partners with what they need to support roughly 25 users. (N-able also offers a lower-cost MSP start-up program that lets partners get into the space more gradually.)

The N-able Velocity System platform provides a technologically agnostic way to begin offering services and, more important, provides a framework around which partners can adjust their pricing models.

Dynasys, a systems integrator in Roswell, Ga., saw the value of teaming up with N-able as well.

"With managed services being so new, being able to lock in a recurring revenue stream was something N-able could do," says David Holliman, a network operating center manager at Dynasys. "As we were trying to streamline our business and cash flow, we also had to find a way to change our services from break-fix to preventive maintenance, because today any network downtime is unacceptable."

For VARs, the transition to MSP is a challenging enough proposition that often involves both a business and cultural shift in mind-set. Changing gears would be especially difficult without the proper help, and perhaps nobody knows that better than AllConnected.

"We talked to peers who have done it, and we had about 200 hours of internal discussion to identify our own best practices and to decide which partners to bring to the table," McDonald says. "You have to pick your vendor partners wisely. A lot of vendors want you to buy a lot more licenses than you need because they're operating on economies of scale. Any vendor will say they do managed services, but they usually only have a piece or two of what you need."

Adds Dan Atkinson, executive vice president of alliances at DirectPointe, a pure-play MSP in Lindon, Utah: "Companies like Cisco or CA that have a broad technology base have the potential to help us, but the question is how to bring it all together. There's some value in point solutions, but there's a lot more value in integrated systems, even if they have slightly less functionality."

On the flip side, vendors try to choose their partners cautiously, too. N-able, for example, runs applicants through an extensive evaluation based partly on Gartner's IT Maturity Model to see how much work they need to do to become true MSPs.

"A lot of pure-play VARs fall into the chaotic or reactive category," N-able's Scott says. "We take a business snapshot of what skill sets they have and what their customers look like, to see what they need to do to get up to speed. It's a pretty sophisticated process, so we do assessments of potential partners to see what it would take to get them into selling managed services, and we've had people who didn't sign with us because they realized it's not in the cards for them right now."

Kaseya is planning to go through a similar screening process with its seminars. All the attendees already have committed to using Kaseya's framework, but the classes help them figure out what level of MSP commitment is right for them. "Because our platform is so broad, we're looking for what the best practices are for their particular situation," Kaseya's Blackie says. "It's kind of like a boot camp. They work through exercises in real-time, and they can walk away with a good idea of how to deploy the right services in most situations."

Those exercises weren't merely hypothetical either; attendees were connected to their companies' servers and were mounting actual services for actual customers. One of the attendees was Sam Rozenberg, president of PMV Technologies in Troy, Mich. PMV has been around since September 2004, the result of a joint venture between a 30-year-old IT equipment leasing firm and a 60-year-old accounting firm, and is now a services provider and IT outsourcing company. "For a first attempt at this kind of thing, it's as good as I've seen," he says. "It opens our eyes to what automation can bring in terms of increasing efficiencies, and it helps us see how that value will help us achieve our goals."

NEXT: Good Services Need Great People

The SOM survey also found that solution providers are turning to managed services because they offer new sales opportunities, response to customer demands and flexibility. Bringing an MSP to market isn't as much a technical process as it is a staffing challenge. Complex services require highly trained IT support staffs and competent salespeople who understand the value and benefit of services.

"With the managed-services model, customers are paying the same amount per month for the service no matter whether you spent 30 minutes or 30 hours working with them, so you have to be hiring the right people, because all the burden falls on the services provider," says Oli Thordarson, CEO of Alvaka Networks, an MSP in Huntington Beach, Calif.

Thordarson says staffing is especially crucial at the outset. He likens managed services to a business such as McDonald's, where highly paid chefs craft the menu at headquarters but teen-agers cook the food out in the field. "It's hardest to find the right people at first because you need really knowledgeable but pricey IT [staff] and salespeople," he says. "Getting the real pros is always difficult and costly, but once you get that done and have two or three people managing everything, you can go ahead and hire the lower-end people."

Hiring can be challenging at both the IT and sales levels, but experienced MSPs have learned a few tricks that keep the operations running smoothly. "We leverage people with expertise in various areas such as Microsoft Exchange, desktop applications, security and networking," DirectPointe's Atkinson says. "We do some cross-training, but we stay away from the jack-of-all-trades approach."

On the sales side, VARs-turned-MSPs may find that trusted methods and certain backgrounds don't work as well as hoped. "The greater personnel challenge is on the sales and marketing side," Atkinson says. "If you started as a traditional VAR, you aren't used to leading with a services approach, and you really have to dig in and understand the client's business and how services can help them."

N-able encourages MSP salespeople to do extensive client evaluations to make sure they're targeting the right type of customer, and a successful approach often involves showing a customer that's been through a network crisis how having services installed would have made a difference. "Managed services still are a very missionary sale, especially in the SMB space," Atkinson says. "It's more like selling insurance, where you have to educate the customer on why they need the services, often during or after an emergency situation."

Still, finding the people who can deliver this message is difficult, as AllConnected's McDonald has discovered. His company has about 150 customers, yet he still finds himself conducting mostly owner-to-owner sales calls. "I know I can't do it this way forever, and I have some concerns, because finding the right salesperson is critical," he says. "Most of them are used to selling widgets and tying them to deals that can be closed. I've found that copier salespeople--which sounds weird, because they're not very technical--understand and can sell maintenance contracts better than most other IT sales guys."

Making the Price Right

The migration to managed services is due, in part, to the higher margins. According to the SOM study, solution providers say managed services yield higher margins than software and other product sales.

Of course, healthy margins are possible only if the solution provider correctly packages and prices its services. That, in fact, is yet another way in which the MSP space requires a completely different approach than the traditional VAR market. Kaseya helps its MSPs in this regard by selling licenses ranging from 100 to 5,000 seats, but the MSPs are free to disperse them across numerous clients. "It gives the MSP the ability to make a small down payment plus the monthly fee," Blackie says. "They can upgrade or downgrade very easily, and it's a lot cheaper than a subscription model on a per-machine basis."

Perhaps the biggest mental shift new MSPs must make is in pricing a package higher than what they might intuitively expect it to be. "Pricing and packaging is one of the most important things an MSP does, but it's tricky, because you know what services the client needs much more than they do," says Alvaka's Thordarson. "You have to price it to value, not to cost. Selling managed services is not like reselling products that you buy for $100 and sell for $120. Even if it costs you only $40 per month to provide the service, you can sell it for $200. All the customer knows is that you're providing a service to them for less than what it would cost them to do it themselves."

One of the greatest challenges MSPs have is supporting heterogeneous IT environments. A shop with diverse equipment and applications is far more difficult to monitor and manage than a shop that uses equipment by one vendor or just a handful of them. DirectPointe insists that its clients have as homogeneous an environment as possible. "It's a lot easier to maintain that way; if you have a lot of disparate systems, [you] have to rebuild everything from the ground up," Atkinson says. "If they've just bought all new equipment, we'll keep the ones we can save and give them cash back on what we return, but we don't do forklift upgrades if we don't have to." He says Hewlett-Packard's commitment to addressing the life cycles of its products makes the vendor DirectPointe's preferred partner in this area.

The services model also makes it easier to form "stickier" relationships with clients by adding new services as they become available. "Once we have the framework in place and the customer knows we have to take care of everything, whatever services we can add to get another fixed cost, we're interested in doing," McDonald says.

Even AllConnected's transformation to a services model will be only partial, with about 25 percent of the VAR's revenue coming from its "sweet spot"--organizations with 10 to 60 users that use the solution provider's managed services. AllConnected expects that percentage to top out at about 50 percent--evidence that it's possible for traditional VARs to add an MSP element while maintaining their existing businesses.

As arduous as the transition to managed services can be, it's a good idea for resellers that want to make the commitment. N-able's Scott points out that if VARs don't capitalize on the trend, players such as Dell, ISPs or telcos, will. "Managed services are going to change how everyone views the IT value chain," he says. "And for once, the channel has a leg up on the rest of the industry."