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Three Ways to Increase Managed Services Profitability

By Mitch Morgan and Chris Ryne, Partners, Growth Achievement Partners

One of the most common questions we are asked by office equipment dealers today is “How can I increase the profitability of my MS business unit?”  Numerous dealers have entered the market and have made investments in people, process, technology, partnerships, marketing, sales incentives, and sometimes, acquisition to get there.  Most of those dealers have found that they can, in fact, deliver quality service as good or even better than on the traditional office equipment and are satisfying their clients.  Many dealers are seeing a level of consistent sales success, however nearly everyone wants more of the “right” deals, and rightfully so.  But some are not seeing the level of profitability they seek from the MS business yet.  This short article will provide you with detail on the following 3 key items you can address today to help you get closer:

  •  Adherence to the Business Model Critical Success Factors
  • An effective Land-and-Expand strategy for adding next generation products & services to your existing Managed Services Accounts
  • Proper selection and development of your vCIO, the key to the Land-and-Expand strategy

We see many MSP financial statements and do detailed review of their operations in our Mergers & Acquisition work, as we have helped 11 Office Equipment Dealers acquire Managed Service Providers (MSPs). The Managed Services Business, and the Business Model that supports it, have both come a long way over the last few years.  Today, the business can be characterized as simple, but not easy.  Basically, the business is a collection of contracts managed by a collection of people.  We know that an MSP with 35 contracts, for example, should produce $1.5 million in revenue, and should have a revenue mix of 50%/30%/20% between Monthly Contracted Recurring, Hardware/Software, and Hourly Billing (project) Revenue. Further, it should have approximately 6 people, and should produce a double digit Operating Income.  In terms of pricing, we are not seeing per seat prices come down. In fact, our client group is seeing them increase.  The reason is a combination of factors including the addition of services, the ability to move “up-market” beyond the smaller accounts (and/or accounts that are looking at your program as a first-time budget expense), and an increasingly educated buyer that views technology as strategic as well as operational.

Critical Success Factors

As we in the Office Equipment industry well know, adherence to a business model to drive profitability is a matter of the right key metrics, discipline, and sound accounting.  When working with our client base or doing MSP M&A, we first look at 10 Critical Success Factors: Revenue Mix, Average Seats Per Contract, Revenue Per Seat, Seats Managed Per Technical Resource, Traditional IT Service/Support Revenue Per Technical Resource, Pre-Labor Margin, Post-Labor Margin, HW/SW Margin, Sales Expense, and Admin Expense.  Creating a dashboard and managing to these will help you see where to focus your efforts.

Next Generation Products & Services

Going forward, the success of your Managed Services business should extend beyond monitoring and updating on premise servers and providing end-user support.  In fact, those items are often the most high-touch / low-margin services an MSP provides.  Your customers want and will increasingly require more comprehensive services, and you have an opportunity to incorporate them into your existing MS client base. You need to carefully select the correct offerings, and can achieve low-touch / high-margin recurring services.  We are helping clients add profitable Hosted VoIP/UC, email, virtual desktop, big data analytics, and security services to their portfolios to increase profitability and client retention.  You should be looking to do the same.

vCIO Development

We believe the most important element in a successful Managed Services business is a high caliber vCIO that acts as the trusted adviser your clients are seeking. We have noted a significant increase in the importance of technology to all businesses, particularly over the last 12 months. Through the vCIO, our clients deliver an on-going technology roadmap that supports achievement of business goals through technology.  We specialize in turning technical personnel into trusted advisors, ensuring our clients have a competitive advantage against other MSPs. One of the main goals of our consulting practice is to create the best vCIOs in the industry, which becomes a significant differentiator in the market for our clients.

We will be providing answers and actionable strategies to these 3 key topics and more, as well as sharing insights into MSP M&A trends, valuations, and successful tactics for getting a deal done during our upcoming BTA Managed Services Workshop, scheduled for February 7 -8, 2018 in Phoenix, AZ.  For more information visit the BTA website or click here.

 

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