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Service Models Like HPE GreenLake Can 'Double' MSP Valuations, Exec Says

'Want to double your valuation? Become an as-a-service vendor. As-a-service vendors typically get a 6x multiplier versus a 3x multiplier for product only solution services, even in small organization,' says Scott Herman, director of North American distribution for HPE-owned Aruba Networks, at XChange 2020.

If managed services providers want to embrace the future and increase their valuations, they should embrace the as-a-service model that offerings like HPE GreenLake provide.

That's according to Scott Herman, director of North American distribution for Aruba Networks, the networking vendor owned by Hewlett Packard Enterprise. Speaking to an audience of MSPs at The Channel Company's XChange 2020 in San Antonio, Texas, on Monday, Herman was making a pitch for Aruba's HPE GreenLake offering that launched last year.

[Related: ProLiant Server Chief David Gaston: HPE Silicon Root of Trust Is Security Game Changer]

In his talk, Herman painted as-a-service as an imperative for MSPs that will help them embrace changing customer buying behaviors and make bank in the process. He cited an IDC report starting that more than 75 percent of edge infrastructure and more than half of data center infrastructure will be consumer or operated via an as-a-service model by 2024.

"Want to double your valuation? Become an as-a-service vendor," Herman, who was presenting in partnership with distributor Synnex, said. "As-a-service vendors typically get a 6x multiplier versus a 3x multiplier for product only solution services, even in small organization."

The shift to an as-a-service model for MSPs is happening as other industries follow a similar path, according to Herman. For instance, he said, the automotive industry has gone from selling individual discrete parts to selling complete vehicles to selling consumption-based services like Zipcar.

"We changed our world as well to be a component-to-solution sell. That's where we are today," Herman said. "Where we are tomorrow is taking the same step the car companies have done and taking the car and making it a service."

With the as-a-service model, MSPs can take the same revenue stream they traditionally had with the sales of products and solutions and "expand it over multiple quarters so that you have guaranteed linearity," according to Herman. The key is to shift to an annual recurring revenue model, which is akin to how insurance salespeople have made their living, he added.

"Those guys have nice houses, because they know they keep going on annuity that keeps on growing year after year," Herman said. "They sell the one and they get paid for life. That's the same opportunity we have in the as a service model."

For MSPs to make that transition, they need to consider the sales model they currently use and what they need to change to transition to as-a-service, according to Herman. Most solution providers currently operate under a standard managed services model where they sell IT solutions to customers and run a network operations center, or NOC, to manage those solutions.

The risks associated with the standard managed services provider model is when the customer or the MSP owns the IT assets because of the upfront costs involved, according to Herman. They also face risk with the high upfront costs of standing up a fully staffed NOC.

"Your full-fledged NOC is difficult because your day-one cost for your NOC is going to exceed the day one cost for your sale," he said.

But with the as-a-service model, such as the one offered with HPE GreenLake, MSPs can lower their upfront costs and create annual recurring revenue streams in two ways: they can have the vendor own and manage the assets and handle the monthly billing or they can sell the assets for an upfront sale to the vendor, which will then lease and manage for the customer, according to Herman. The former is called a "through partner model" while the latter is called a "with partner model."

"This gives you an opportunity to take that managed service very easily, day one, into your customer base and not have any additional Investments you need to use nor does it make you take asset ownership of inventory that you don't want to carry," Herman said.

Tom Blandford, president and CEO of eTrepid, a Waldorf, Md.- based MSP, said his company is looking at how it can transition to an as-a-service model as trends like bring-your-own-device and 5G become more prevalent.

"This makes a very viable solution where we can still provide that infrastructure as a service, wrap our services around it and still not have the financial risk of carrying all that equipment as inventory," he said.

The challenge with such a transition is that "customers tend to want to own their own thing," according to Blandford, but by bringing the vendor to the forefront of the relationship, it can allay such concerns.

"This model, because they can sell it to the customer and they bill the customer directly, and we can get a residual, means that we can still keep our margin and move the customer in that direction with them having the perception that they still own the equipment themselves," he said.

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