What To Do If You Are Not Achieving Your Managed IT Services Targets27 Jan, 2016 By: Mitch Morgan; Chris Ryne, Growth Achievement Partners (GAP)
Critical Success Factors For Success
Over the years we have closely observed, and actively participated in, the IT Services business. We have studied the Managed Service Provider (MSP) business model, to include standalone MSP businesses and MSP activities that are inside of the MFP dealerships.
I sold my first Network Services contract in 1990. As a consultant, I analyzed my first Managed Services Pipeline Report from a client in 2009. Since then, we have held a Managed Services Sales Huddle every other Friday with Managed Services Specialists throughout the country. We have used Big Data analytics to “score” over a thousand Managed Services deals. We have co-authored a Managed Services Business Model with Continuum, the largest and most sophisticated Master MSP in the world. By managing nearly 700,000 network devices they have access to unprecedented operational data. All of this has allowed us to develop a very clear understanding of the Strategic, Operational, and Sales & Marketing critical success factors for the business.
An increasing focus over the last three years for our consulting work has been helping our clients acquire MSP’s. Last year, we announced a strategic relationship with Mike Dudek and Rich Wyzinski of Zygoquest, the pre-eminent M&A firm in our industry. Together, we have advised on many transactions, providing us the opportunity to closely analyze the critical success factors for an MSP. Over the last 18-24 months these success factors have become very clear. Much like our industry, it is repeatable, understandable, and profitable.
Based on our experience, this article will provide strategies, as well as some of the Critical Success Factors for a Successful MSP Business. We will also be highlighting these critical success factors in detail at ITEX 2016 (Tuesday, March 8, 3:00 PM).
Its Getting Late
If your Managed IT Services business is not on a solid path to profitability and is not trending toward a meaningful revenue stream in 2016, you are behind. The market has arrived. Customers are seeking these services. There is a great value to incumbency, and quality MSPs have a very high retention rate. Chances are good that your traditional MFP competitors are building their Managed Services business as well. As SMB customers migrate from break/fix to managed services, this segment of the industry is growing at more than 30% per year.
Annuity based revenue builds slowly. With the traditional MFP business, you get equipment revenue and the recurring revenue associated with a maintenance agreement when you close a deal. With Managed IT Services contracts you don’t get the up front equipment revenue. The contracts are larger, but it does take time to build the business. The revenue tends to be sticky, and upon reaching critical mass the returns can be very satisfactory.
Unlike equipment maintenance agreements, you should anticipate additional Project Revenue, Hardware/Software sales, and growth in contract revenue through additional services. In terms of revenue mix, monthly recurring revenue (MRR) should be at least 50%, with the balance of the revenue split between Project Services and Hardware/Software. Your Managed Services Contracts should grow by more than 20% per year through additional cloud/managed services.
Having the Right Strategy is Important
When we talk to a dealer that is not meeting their expectations in managed services it is often due to a flawed strategy. There are some that are attempting to implement a “rip & replace” strategy that requires replacing all the client technology before accepting the contract. Do not expect to close more than 4 or 5 contracts per year with this strategy. This works well for a boutique MSP that has achieved enough recurring revenue to be profitable, markets by referral, and only has expectations of incremental growth. This strategy will frustrate your sales organization, and you will not build the business as quickly as you want.
Others have contracted the outsourced NOC/Helpdesk at a very high cost. This forces them to a very high go-to-market price point, or an unacceptable profit margin on the service. You should target a competitive street price, and also achieve 65% pre-labor Service Margin, and 48% to 52% post-labor Margins.
When starting this business, many dealers allow themselves to accept accounts that are the wrong size. As a rule, the under-10 user account does not fit for you, or for them. Equipment reps will consistently serve up this type of lead. Analyze your pipeline and make sure you have a very small percentage of under-10 users. Look at the average users by dividing total endpoints by number of contracts. If it is less than 15, you will have a difficult time achieving your profit margins. Ideally, it should be more than 20.
The Best Answer May Be an Acquisition
We have successfully sourced, solicited, negotiated, and integrated MSP acquisitions for our clients when they seek to achieve rapid growth. We have developed an ideal profile, a process that works, and our Critical Success Factors (and Business Model metrics) provide the guidance to evaluate and value these businesses.
We recommend that you do not look for bargains, and you should be careful about seeking an acquisition that has not completely migrated to the MSP model. Seek a quality operation, pay a fair price, and bring their leadership into your leadership team to seek rapid growth in this important strategic area. If you are considering an acquisition of a local MSP, we have included some considerations next to this article that can assist.
Critical Success Factors
If you are considering an acquisition or growing the business organically, our Critical Success Factors (CSF) can help guide your success. Many of the CSF’s have been discussed in this article.
· Average Seats Per Contract
· Revenue Per Seat
· Seats Managed Per Engineer
· Revenue Mix (MRR/Project Services/Hardware & Software)
· Hardware/Software Margin
· Service Margins (Pre-Labor and Post-Labor)
· Revenue Growth
· MRR Growth
· Admin Expense %
· Sales Expense %
· Pipeline Metrics and Conversion Rates
These metrics can (and should) be used to evaluate the performance of your Managed Services business, or can be used to evaluate acquisition opportunities. It is our belief that 2016 is the year to make significant progress in Managed IT Services by employing the right strategies, focusing on Critical Success Factors, and considering the benefit of an investment by way of a MSP acquisition to accelerate.
MSP Acquisition Factors
There is a strong interest in the MSP acquisition space. We have seen a significant increase in M&A activity, and anticipate this will continue. This represents a strategic investment for many Office Technology companies.
In 2015, Zygoquest (led by Mike Dudek) and Growth Achievement Partners (GAP) (led by Mitch Morgan) formed a strategic alliance focused to Mergers and Acquisition work in the MSP space. Zygoquest has facilitated and advised on hundreds of M&A transactions; GAP brings a deep understanding of the strategies and operations of the MSP business.
We have advised on numerous transactions involving an Office Technology company acquiring a local MSP, to accelerate entry into this lucrative adjacent market. These acquisitions are different than acquiring a traditional MFP dealership. For Office Technology companies, some important Buyer and Seller dynamics need to be considered in order to successfully execute on this strategy:
· The seller can anticipate continued growth without being acquired, likely 20% CAGR.
· The growth is not as rapid as tying into a customer base and sales engine the buyer provides. The growth should be approximately 2 times the CAGR described above (i.e.: 40% vs. 20%).
· The seller brings the market credibility, technical capabilities, processes (hopefully) that allows scale, and a track record of satisfying customers.
· The buyer brings market presence, capital, customers, direct sales, back-office services such as Accounting and HR, etc.
· The seller has to determine if they are better off by selling.
· The ideal seller has a desire to run the largest MSP in the city.
· The ideal buyer has the same desire, and is seeking a management team and platform company to get there.
· The ideal situation for the seller is to be able to grow faster than they could on their own, take their risk off the table by putting money in their pocket, and continuing to participate in the growth.
· The buyer intends to achieve growth “with or without” the seller, but recognizes they could get there faster by combining.
We tell our clients that these businesses are attractive in the acquisitions market today. Valuations are high, although if the growth targets can be achieved the returns can be quite satisfactory.
Mitch Morgan & Chris Ryne are Co-Founders/Principals of Growth Achievement Partners (GAP). At http://www.growthachievementpartners.com. They will present at ITEX Expo 2016 in March in Ft. Lauderdale, FL. For event information visit www.itexshow.com