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AUGUST 2004
The long term profit strategy
Several years ago Geoffrey Moore was invited to speak at the Cisco Partner Summit in Las Vegas. At the time, his message seemed impossible. Resellers where working hard to figure out how to increase project gross profit by creating a more balanced ratio of services to product revenue. Resellers where focused on installation services and larger project business, but Moore urged resellers to balance their portfolio with monthly reoccurring revenue (MRR). It might be time to reconsider how to do this.
Creating long term financial stability through Managed Services (MS)
Emerging market technology solutions are important because they create differentiation. Companies looking for a unique competitive advantage will often find them in the emerging technology category. However, trying to build a long term business on emerging market solutions can be challenging. It requires a significant investment to bring in new technology, train engineers, and produce the marketing collateral and sales force required to drive profitable deals. During the ramp up, keeping utilization high can also be a challenge. Geoffrey Moore's message provides the answer to creating stability while providing the funding to reinvent your business; its the message of building managed service (MS) offerings. In this letter I offer up a few points to consider:
1. MS creates a "trusted advisor" status
Stephen Heiman wrote, in his book, New Conceptual Selling, "When you start to work with your customers - you always end up with more control, both in the individual sales call and in terms of future business, than you had when you relied on sales technique.” The goal of every engagement should be to establish yourself as the trusted advisor - a consultant rather than a sales person or vendor. Many solution providers have failed to grow the services and solutions aspect of their business simply because they are viewed as product VARs (Value Added Resellers).
A managed service offering opens the door for VARs to become consultants. When we speak of managed services we are referring to systems and tools that monitor and help manage a customer's information assets. Managing information technology and security, optimizing operations, managing risk, and improving availability through proactive services. With insight into the heartbeat of your customer's computing environment, you have the information you need to leadership and guidance. It is at this point that VARs replace installation services with high impact consulting.
2. How hard is it to get started?
Geoffrey Moore's message was largely ignored by the average reseller as they watched large service providers investing millions of dollars in bomb-proof security operations centers (SOCs), space age network operation centers (NOCs), and state of the art hot site facilities. Service providers were convinced that their customers needed all of this before they would sign up. The end result was a very expensive MS facility - unaffordable by the average reseller and too expensive for many customers.
This industry is changing. Many potential customers, particularly in the SMB market, are willing to give up state of the art facilities in return for a reasonable monthly price. The bottom line; resellers can create a managed services platform in-house using products like N-able (www.N-able.com) to offer a low cost solution to their customer base. With an investment as low as $25,000 spread over a year, some additions to the sales strategy, and a marketing plan, a company can be up and running in a month or two. Take Kemper Brown, CEO of The Electronic Office in Asheville, NC as an example. He recently commented, "We were able to move nine of our current customers to a proactive monitoring service in the first month of operation. This offering has provided a higher level of customer service than we have ever had, while also providing our company with the stability of monthly reoccurring revenue".
3. How profitable is this?
I once read an article that stated, "man's greatest downfall is his inability to understand the exponential function". While this is probably not true and MRR is not truly exponential, there is an application here. There are at least three ways to impact profitability with managed services:
- Compounded growth
- Monthly reoccurring revenue (MRR)
- Incremental business
Priced correctly, the revenue per deal may be low, but the GP will be high. Using automation and an efficient sales strategy, this should lead to steady compounded growth month after month. The first month may be $2000 (a conservative sales plan), but after 12 months the MRR might be $24,000 (run rate per month) or $156,000 year to date. Given renewals go well, you are starting your new year with $288,000 dollars in contracts (12 months at $24,000).
MRR means that once the sale is complete, the cost of goods sold (COGS) goes away and what is left continues to produce month after month, compounding each month. The $288,000 in MRR provides a stream of GP that can fund future growth. MRR also carries the company during the down months.
Incremental business means that you now have tremendous insight into the customer's computing environment with the ability to provide proactive support as needs arise. In Kemper Brown's case he found that, "managed service reporting gives us a real opportunity to know our client's systems and convey the picture to the client. In turn, it allows us to be more strategic so that IT can actually become a "driver" for their business." These events translate into billable support projects or retainer contracts. The key here is in getting the financial metrics right early in the offering, creating an efficient sales model, and steamlining the delivery to minimize manpower requirements.
4. Who is the competition?
The good news is that resellers did not follow Geoffrey Moore's advice. Most of the managed service offerings are owned by large integrators using expensive facilities. This means the cost of buying the service is high. As Midsize companies look for solutions to comply with security policies, support disaster recovery plans, and decrease the cost of operating their data centers, there is an opportunity to build inexpensive managed service solutions to monitor, manage, and protect your customers digital assets.
5. Where to go from here
Here are some steps to begin the process:
- MRR can come from 7 by 24 monitoring services, but it can also come from creating periodic maintenance offerings, follow up assessment work, system and storage optimization and tuning, etc. While the goal is to automate, figure out where you can begin, and create an offering.
- Begin looking at products that can by hosted or installed in your office to monitor your customer's firewalls, servers, and network devices. These devices offer a canned solution to managed services at an affordable price.
- Begin asking your customers if they would benefit from continuous monitoring. For example, if the email hard drive is running out of space, or last night's backup did not occur, would it be helpful to know that?
- Consider security offerings: Can your customers detect an intrusion (malicious code or hacking attempts) and stop the intruder before digital assets are compromised? After calling on many organizations over the past two years I was surprised that even the most sophisticated financial institutions were not able to do this.
- If you are small, look for a way to resell a partners service using your brand. Many times you can actually provide the management through the tool set run by your partner, providing the same proactive services at a slightly reduced margin. Its a step in the right direction.
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