When a solution provider asks, "Should I get into managed services?" perhaps a logical rejoinder is: "Why not?" Those with experience in the business think the time is right for a successful managed services practice. "I believe we are in a perfect-storm window for managed services," says Michael Drake, CEO and founder of masterIT, a managed services provider (MSP). "The demand, the price point and the ability of the channel to deliver managed services have all come together."

The demand is there because SMB clients are discovering that managed services can lessen downtime, and "Time is money, but downtime is big money," quips Drake. Clients also welcome the predictability of managed services subscriptions.

"Managed services change how you service a customer into a very SLA-driven process," says Justin Crotty, vice president, services, Ingram Micro North America. "You're not selling product; you're not selling software; you're not selling tools with a lot of blinky lights. You're selling peace of mind -- a repeatable and measurable service level that clients are willing to pay for."

Compared with traditional project-based or break-fix services, the business model has much to offer VARs:

• Predictable revenue from recurring service contracts
• Better gross margins, as high as 70 percent or better
• Higher utilization of billable resources across multiple clients
• Higher company valuation from recurring services revenue
• Closer client relationships with more margin touch points

Of course, such benefits won't accrue without changing your business model. Managed services must be proactive, contractual and repeatable; they require mastery of remote monitoring and management; and they change the nature of the VAR-client relationship. With managed services, an MSP's interests and the client's are aligned. If there's a problem, it's a problem for the MSP, not the client. These changes will profoundly affect the people, processes and technology in your business. VARs who have made the transition have, frankly, learned by making mistakes over time. They also have worked out the best practices presented here that, we trust, will help you in your managed services decision-making and execution. Read them and reap!

New Paradigm, New Processes
While managed-services discussions often turn to technology and tools, experts agree that business-process change presents a greater challenge.

"We've found that tire-kickers typically don't understand the commitment that the business-process change will require," Crotty says. "How do you sell a recurring SLA? How do you move from a reactive, project-based sales and technical force to one that is managed and proactive? This is more difficult than buying a tool, turning it on and thinking you're going to offer managed services."

The classic way of creating managed services processes is first to scope out the services clients need and then design processes that deliver those services. From there you can ascertain the needed skill sets and staff, as well as technology and tools. As varied as VARs and their customers are, there’s no one template to follow, says Paul Dippell, CEO of Service Leadership, a consulting firm to solution providers, but help is available:

• Databases of best practices for IT services management, such as the IT Infrastructure Library (ITIL), can be acquired, but they may need to be rightsized for SMBs.
• Managed services ISVs share process knowledge bases, templates and tutorials with their partners. Some may even provide online forums of MSPs, advisory personnel and peer groups for discussion.
• Ingram Micro's communities such as VentureTech Network (VTN) offer forums and networking for sharing best practices.
• Ingram Micro's Services Division offers the Ingram Micro Seismic Success Support Portal, a comprehensive database of MSP best practices.

Whatever help you receive, there's no substitute for doing it yourself. "Templates and discussion are very valuable to help you get started," Dippell says, "but ultimately you need to work out your own best practices and incorporate them into your operation."

Acquiring and Qualifying Customers
VARs-turned-MSPs report significant changes to their processes for customer acquisition. Converting existing clients can be hard because they "prefer their technician," says Drake of masterIT. "It takes education to show how they receive more value by seeing you less." Clients with whom you have a strong relationship may agree to serve as test beds for your budding services, offering valuable feedback on support processes and execution.

Acquiring new clients can be tricky, since often "the evil they know is better than the unknown," Drake says. Though everyone's money is green, experienced MSPs carefully qualify prospects as highly valuing IT -- else the "more-uptime" promise of managed services makes no sense. At RIATA Technologies, an MSP for 2.5 years, the client sweet spot is SMBs with 20 to 50 employees that are "ITdependent," says Tommy Wald, CEO. "This means that we can present a compelling business ROI for outsourcing all of their IT." RIATA offers a lower level of service for clients classified as "IT basic" and supplemental services for "IT-strategic" clients with their own IT staffs.

Micro Symplex, an MSP for five years, takes on only clients who are strongly committed to IT. To lessen risk in providing complete IT management, the company rejects three out of five prospects for lack of commitment, says Arun Patel, CEO. It rates prospects during a detailed assessment process using Ingram Micro's Technology Assessment Profile (TAP) software, assigning red flags to questionable items, such as obsolete equipment or an aversion to IT policies.

Even when prospects pass the test, Micro Symplex takes them on for a three-month trial period before committing to support them completely. "Gradually we get to know the needs and quirks of the client, and they get to know our capabilities," Patel says. "At the end of three months, if either of us is unhappy, we part ways."

It Starts With Your People
Radical process change begins at the top. Unless senior management tirelessly champions the new model, it won't work.

"To succeed as an MSP, VARs have to change from being chaotic and reactive to being proactive and managed," says Drake of masterIT. "Senior management must be passionate and fanatical about making this happen." Joe Oster, president of Structured Technologies, a storage specialist and MSP, agrees. "I'm just pounding it in there," he says. "This is how we do business, like it or leave it."

Despite aggressive pounding, many staffers do leave, or are pushed, during the transition to managed services. From sales to marketing to engineering, the roles and rewards are different.

Product- and technology-oriented VARs often find that salespeople are uncomfortable selling managed services, since the key is selling business value. Says Oster, "It's really more an owner-to-owner sale."

At RIATA, principals Wald and Tony Williams, vice president, do all the selling, as they are best qualified to talk SMB-owner to SMB-owner. "We're dealing more at the C-level," Wald says, "and we resonate more with that level of customer, as opposed to a salesperson who wants to sell servers or VoIP."

Principal-based selling meant a shakeup in RIATA's marketing department. Wald and Williams are backed by a team that does nothing but cold calling to set up appointments. "They're pure hunters," Wald says, "and we compensate them for finding opportunities that turn into managed services deals."

Engineering Impact
Engineering staffers, too, have to adjust. While many are used to being the face of the organization in servicing accounts, managed services entail more recurring processes and team-oriented work. "Your good engineer a few years ago had to be a bit of a cowboy, someone who could think on his or her own," says Adam Eiseman, CEO of Lloyd Group, an MSP targeting distinct vertical markets. "With managed services, you need an engineer who's less involved in the moment of being a champion, one who's more team- and process-oriented, more involved in adding value to the client's business on an ongoing basis."

To develop such personnel for its vertical-market teams, Lloyd Group screens candidates with a mix of profiles, interviewing technique and situational role playing. The company also recruits more than half its staff through a college referral and internship program -- no bad habits, and management can observe candidates at work before hiring them.

Engineer compensation, no longer based on utilization or billable hours, is tied to efficiency -- the ability to leverage technology and processes to keep clients up and running. Lloyd Group compensates its teams according to an efficiency number based on an overall healthy business for itself and the client. Says Eiseman, "The more efficiently the teams operate with fewer people -- the more they leverage their brains, our technology and our processes -- the more money they make."

Another take on this comes from Ron Cook, chairman of Connecting Point of Las Vegas. In managed services for two years, Cook is devising compensation based on a simple concept: no unscheduled downtime. "I want to come up with the number of emergency hours we spend on clients, reduce those and compensate on that," Cook says. "In other words, we'll be compensating for what engineers don't do, rather than what they do."

Technology: A Tool, Not an End
MSPs agree that technology tools are essential to helping them move beyond reactive service delivery. They help VARs implement proactive services that align their interests with those of their clients.

"Before buying the platform, we had to wait for a phone call from the client when something went wrong," says Ethan Simmons, partner at NetTeks Technology Consultants, an MSP for two years. "Once we added the remote monitoring and management platform, it gave us better insight into what the client was doing, allowing us to be proactive and to better guarantee uptime."

Some MSPs invest in customer relationship management (CRM) software to give managed services teams an integrated view of the customer, while others rely on the built-in capabilities of the monitoring and management platform. "Operational efficiency requires seamless integration, from the service desk to the help desk, ticketing, billing and reporting," says Drake of masterIT. "We recommend a system that is client-centric with one database -- all notes, tickets and reports can be found in the client record."

The software's documentation and reporting capabilities help demonstrate the value that managed services deliver. "We joke all the time: When was the last time you heard a client say, 'Gee, thanks for not coming here?' " Drake says. "You have to be very intentional in terms of demonstrating value to the client."

Regular client meetings address this -- "wellness visits," Drake calls them -- where MSPs share detailed management reports and logs with clients to document disasters averted and problems solved. Connecting these to the business costs of downtime helps clients understand the value of proactive services. Says Drake, "At the end of the day, we're trying to communicate that we're removing the operational hassle of technology, so clients can focus on their core business and customers."

Such meetings can present sales opportunities. "If a server went down, and we brought it up within eight hours, we might say, 'Next time our goal is to do it in two hours, but to do that we need to buy this software'," says Patel of Micro Symplex. Clients who are shown the business implications of the operational reports often agree to major IT upgrades and enhancements.

The Cost of Managed Services
Managed services capability doesn't come cheap. Though costs are coming down, SMB-focused MSPs invest $242,700 on average on software tools, hardware to run the tools, labor and infrastructure to build out a network operations center (NOC), according to recent research by Service Leadership. There's also the considerable cost of developing service-delivery processes, and the marketing collateral and staff training to support them.

MSPs also must consider the cost of infrastructure required by team-oriented managed services. With less "windshield time" and more staff at the office working on help desks and remote management, a larger space may be required. And some MSPs bring prospects into an executive-class demo room to experience the technology.

To help offset these costs, some savvy VARs are using a managed services tool in reactive services while they build out their complete managed services offering. Remote monitoring and management helps them service clients more efficiently and increase billable hours. In addition, a managed services tool can reduce the labor and speed turnaround of initial client assessments.

Whether you plunge in 100 percent or add managed services incrementally, commitment is the key. "Managed services can be a big investment, but if you do it halfway, you're not going to please your customers, and you won't make any money doing it," says Simmons of NetTeks. "The more up-front work you do, the more profitable you'll be going forward."

Most VARs-turned-MSPs share this optimism. After some trial and error, they're satisfied with the business model and the volume of recurring, profitable revenue. They also sound a warning for generalist VARs targeting SMBs, especially those selling reactive, break/fixtype services. "These VARs will always find a market, but they'll be bottom-feeding on accounts that don't want to spend money on IT," says Wald of RIATA. "They'll be drinking downstream from the herd, I like to say, where the water isn't very good. We prefer to drink upstream, where there are better accounts that understand the strategic value of IT and our role in helping them realize it."