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It costs a small fortune — $100,000 or more — to become a managed service provider. At least, that’s what some folks claim. Truth is, there are lots of ways to get started as an MSP without mortgaging your house or maxing out your business’s line of credit.
First, let’s start with some myths: Why do newcomers think they’ll need a big checkbook to become an MSP? Part of the problem involves market research, and the resulting editorial coverage. Here’s a prime example.
The Institute for Partner Education Development (IPED), owned by Everything Channel (formerly the CMP Channel Group), recently released a report stating that:
“managed services currently account for 11.5 percent of the North American channel’s total revenue, representing a $42.9 billion market. That’s up from 9.3 percent of total revenue or $31.31 billion just two years ago. And IPED predicts managed services will grow to 14 percent of total channel revenue or $57.16 billion in two years.”
Overall, IPED and Everything Channel basically stated that the MSP market is growing very nicely, but many VARs and solutions providers remain wary of the MSP market. Plus, the potential transition to an MSP model can be difficult. I agree. Fully.
Myth Alert
Now for the problem. Everything Channel spreads fear, uncertainty and doubt about managed services by offering up the following solution provider quote:
“I don’t want to invest hundreds of thousands of dollars and have these guys [Dell and HP] come in in six months and say, ‘Here you go.’ How would we recoup our expenses?”
VARs and solutions providers are entitled to their opinions. But there are two flaws to the Everything Channel story.
- Dell ain’t going fully direct: There’s a real risk of Dell and other manufacturers taking their MSP solutions fully direct. But I don’t see it happening. Wall Street is mad at Dell for several years of lousy stock performance. The only way to lift shareholder value, profits and sales is through the channel.
- It doesn’t have to cost $100,000 (or more) to become an MSP: It just doesn’t!
Kick the Tires
Everything Channel should have pointed out that there are several cost-effective ways to transition into managed services, without breaking the bank.
During our June 12 Webcast, our three guest speakers (Scott Goemmel of PMV Technologies; Nick Vossburg of TechAssist and Jim Alves of Kaseya) all offered the same advice:
“Try before you buy.”
Vossburg actually tested a range of platforms head-to-head for a few months before deciding to license one.
Mastering the Market
Another option is to sign up with a so-called Master MSP. In this model, you leverage managed services hosted by somebody else. Instead of paying a big lump-sum licensing fee, you pay a lower monthly service fee, and mark it up at a premium to your customers.
Lots of companies — Do IT Smarter, Ingram Micro Seismic, Jamcracker, Symantec Protection Network, Secure My Company, and dozens more — offer a range of Master MSP options (though offerings vary greatly from company to company).
Now here’s the biggest irony of all: The main challenge facing MSPs isn’t platform price. Rather, 44 percent of MSPs say their biggest challenge is marketing and PR, and only about 10 percent point to platform considerations as their biggest issue, according to a real-time attendee survey from our June 12 Webcast.
Yes, VARs need to watch every penny — especially during these tough economic times. And you can spend big bucks building a NOC and licensing software. That’s perfectly reasonable if your business model supports that type of financial investment.
But don’t use the $100,000 myth as an excuse to delay your journey toward managed services.
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Tags: CRN | Everything Channel | Institute for Partner Education Development | IPED | Managed Services | MSPmentor
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Mark
Joe,
There are alternatives to spending $100K, such as Master MSPs but you sacrifice gross margins. If you after capturing as much of the revenue stream for yourself as possible then upfront capital is going to be required and depending on the size of your customer base it can hit $100K and higher.
A strategy for some MSPs maybe to start in flexible Master MSP agreements to introduce the service to their base and learn proper service delivery methods and then begin building out their own infrastructure client by client through cash flow investments.
I would have to say that margin is not an issue when leveraging a Master MSP. As an example help desk services that costs from $15-$25 per seat from a Master MSP can be sold for $35-$50 a seat, NOC services that costs from $35-$70 a device from a Masteter MSP can be sold for $150 - $250. The markup for either of these scenarios is greater than 100%.
Aside from the costs savings, the true value proposition from a Master MSP to an MSP is exactly the same as the one for an MSP to an end customer.
“Leverage your internal IT resources (billable engineers) to focus on your business and let us (the MSP or Master MSP) take care of the rest.”
This really comes down to time and focus. If your engineers are focused on supporting your internal infrastructure your customer service will suffer. If they are focused on your customers your infrastructure will suffer.
Gents:
This is a great conversation.
I don’t think there is any question that there are a number of models out there to allow people to “get started” with managed services without having to lay down a significant chunk of change out of the box. As the article very accurately points out, the major issue tends to be on the business side rather than the technical. That is, how do you align your organization behind the new model, and how do you position, price, market and sell your offering. This is the big nut to crack.
Those looking to become MSP’s need to ensure that whatever option they choose, they get the necessary business and technical support — you will need both to succeed.
You may find that the best option is to go with with someone who has a comprehensive business support option, and who offers low entry points via SaaS software soltuions. This provies the critical business support out of the box, the power of a mainstream MSP platform, and the option to upgrade or exit depending on your success.
Lane and Rob have it nailed. The costs to offer managed services are negligible when you understand the margin potential for the VAR.
Master MSP’s, like Ingram Micro Seismic, allow VARs to make huge margins while investing very little upfront. Many of the services are “pay-as-you-go” in nature requiring no upfront or forward expenditures.
Anybody arguing that vars should build their own infrastructure and spend hundreds of thousands of dollars are simply not being logical. I completely disagree that the margin opportunity is signficantly larger to build it yourself - the data simply does not exist to support this argument. Furthermore, the expense and potential difficulties to build and maintain individual infrastructures are going to wipe out any theoretical margin advantage anyway.
The fact is, the gear and infrastructure are NOT where the margin is. The margin is in the brand of the VAR and the value-added services and customer support that a VAR can deliver. The total solution that the var can deliver is where they differentiate themselves, keep customers happy, and make their profits.
Name a single efficient market that does not rely on shared infrastructure - telecom, airlines, product distribution, the list goes on. The reason? These markets have figured out that building and duplicating infrastructure is not advantageous and that the margin and differentiation come from a companies brand promise, service quality, and customer experience.
Justin, I agree with you. The margin argument seems kinda faulty if you are only paying as you go. In fact, you can argue the margin is higher by marking up someone else’s technology and selling it since you have zero invested in the technology yourself (less upfront fees to set up that is). The economics of it are that its a very low fixed cost (overhead) and low but manageable variable cost (cost per seat you pay for the service prior to markup). That’s a good model to make some $$ if you ask me. That’s how you run a profitable business that’s lean and mean…..
My apologies, let me be specific. I am not advising a MSP to develop a MSP platform or the infrastructure necessary to support it. There are plenty of providers that offer excellent SaaS solutions that offer an economic advantage over a custom solution.
However, the $100K in question does not necessarily equate to an investment in infrastructure. It could be additional labor and expertise necessary to create a service desk environment. It could be recruiting expenses for the typical high turnover of staff transitioning from a T+M basis to Managed Services. It could also be the loss in revenue from abandoning clients that do not fit your new service model.
The fact is unless your starting a new business, the transition from a traditional T+M line of business to Managed Services (speaking about support and management, not monthly “patching and monitoring”) is going to require a significant capital, management, time, and resource expense. This expense can easily reach over $100K when you factor everything into the equation.
Is it worth it? Absolutely!! Why? Because you wont have a customer base to sell to in a few years if you don’t make the transition. Im sure the fabled buggy whip manufactures were nervous about making the investment needed to change their line of business, I would bet the ones who did survived longer than the ones who didn’t.
Whether working with an Master MSP or other outsourced provider makes sense is dependant on a large number of variables including your long term business plans. size of your customer base, your service model delivery methods, market pricing conditions, etc. If you are not ready to make the transition on your own, then working with a Master MSP maybe the right choice.
We’ve found for our business that when you scale to a certain size it becomes more economical and beneficial for a business to retain its own support staff and delivery of services. If you do choose to go the outsourcing route you can create significant barriers from leaving that model.
What happens to your business when you have 100 clients and you’ve outsourced your service desk? How do you build the expertise internally to deliver the services on your own? How do you wean your business off the provider’s services?
Again, there are many providers that offer excellent solutions to MSPs. I only advise that MSPs think long term about where they want to be and how they will scale their business.
Thanks for keeping a great discussion going Joe! We’re looking forward to the next exchange.
Thanks for all the thoughts, everyone.
I think the key point here is: There’s more than one way to get into the MSP market … And I don’t want to suggest that any one path is best. Rather, consider all the possible paths before making a move.
1. Ask vendors for trial software that you can test for a few months;
2. Check in with multiple master MSPs to see what platforms they host, how their branding works (and how you can re-brand), what it costs, how you can potentially generate margin, etc.
3. Weigh the master MSP model vs. owning the software and NOC yourself. Do you really have the financial pockets, time and staff to build/manage/maintain a NOC?
4. Partner up with a neighboring MSP. Most of the major platform providers, especially professional services automation software (Autotask, ConnectWise, etc.), are introducing new ways to help MSPs and VARs coordinate outsourcing arrangements among themselves
5. Don’t get locked into ONE mindset. My suggestions above are only a few of the paths you can select.
Becoming an MSP is similar to deciding what type of home or apartment you want: You can rent, you can buy, you can sublease, you can pay all cash, you can find financing.
Don’t let anyone tell you that one model is best. Each MSP/VAR has their own business, finance and tech considerations to weigh.
Note to Nick @1 and @6: I wanted to thank you for taking the time to point out your personal experiences.
And your points about additional costs — people, training, loss of clients who don’t make the transition — are key considerations I didn’t mention in my original blog post.
We’re always glad when people like you — a truly successful MSP — offer your real-world experiences. As a journalist, I can only write about what I see and hear. But as an MSP, you do a great job of telling our readers what you’ve actually experienced.
Thanks again.
I agree with all of these comments but let’s take this discussion one step further…the Master MSP model can and should be a long term relationship if structured properly i.e. a joint venture agreement where the Master MSP provides the NOC and HD staff, infrastructure and the ongoing management of the (in RTDS case offshore) operations.
An MSP can be “up and running” 24×7 with a very small funding committment and have very cost-effective staff available to support their operations exclusively. This options creates a “win-win” for both parties.
Jim