What is the profitability picture for solution
providers today? The answer depends on factors such as business model,
customer and technology focus, geography served and business execution.
By and large, however, solution providers with significant amounts of
recurring revenue report excellent profitability.
"It is strategic to increase recurring revenue," says Jane
Cage, COO of Heartland Technology Solutions, a solution provider with
multiple locations. "We have always looked to it as the foundation
of our profitability."
At Heartland and other solution providers around the country, managed
services are leading the way to new heights of recurring revenue -- not
only in volume, but in profitability. "It's much easier to run a
profitable business when you've got a predictable income stream, and managed
services offer that," says Ross Crane, senior VP and CFO, Ingram
Micro North America.
"The profitability of the managed services business is very good,"
agrees Joe Popper, president of Computer Gallery, a managed services provider
(MSP) focused on small business. "The recurring revenue allows you
to build a predictable and profitable business model, compared to the
reactive way of doing business, where you sit and wait for the phone to
"Our profitability is higher than most solution providers',"
says Steve Harper, president of Network Management Group, a solution provider
involved in several businesses, including managed services. "If you
don't have recurring revenue from services that create uptime for your
customers, you're not in a profitable business model.
Besides profitable recurring revenue, MSPs are finding that managed services
offer additional bottom-line benefits, such as:
- higher profits on product sales and projects
- greater ability to leverage technical resources
- more strategic customer relationships
Still, managed services represent a paradigm shift from the traditional
way solution providers do business. But MSP converts have found that the
recurring revenue and other pluses more than compensate for the difficulties
in making the shift -- as we'll see from those whose insights we share
here. (Also see Ingram Micro Channel Advisor, Dec. 2006, "Best
Practices in Managed Services."
Recurring Means Profits
Recurring revenue comes in many forms, such as maintenance contracts,
software subscriptions and support, and regular service visits -- all
good for the bottom line.
Harper first realized the power of recurring revenue from sales of e-mail
management software developed in-house. Annual maintenance and upgrade
fees started rolling in, and after a while "we had thousands of dollars
a month of recurring revenue that we didn't have to sell every year,"
he says. "It was already sold; we just had to renew it.
"That's what happens with managed services," Harper continues.
"If we do our job, if we make the customer happy, we sell it once
and reap the benefits."
The benefits focus on higher profitability, says Tommy Wald, president
of RIATA Technologies, a solution provider offering managed services for
several years. "After I get a managed services account, I comp my
sales guy only once, so to a certain extent my sales costs have dropped,
and the business keeps building from there," Wald says. "We
have found that the less of our gross margin we have to resell each month,
the more profitable we are."
Compare this with the typical reactive, project-based solution provider,
and the advantages are clear. Paul Dippell, CEO of Service Leadership,
a consulting firm to solution providers, notes the tedium of having to
continually sell project after project to grow the business. "Without
recurring revenue," he says, "if you want next year to be twice
as good as this year, you'll have to sell twice as many projects. Selling
both is the key."
Higher Quality Revenue
Dippell also points out the higher profit potential of the recurring revenue
from managed services, compared with revenue from recurring services,
such as sales of block service time or hardware maintenance.
With maintenance contracts, the solution provider offers the customer
an insurance-type contract, similar to managed services, where "the
customer is going to pay whether it needs the service this month or not,"
Dippell says. "But maintenance is a point solution and doesn't put
the solution provider in the role of being the virtual CIO, the trusted
advisor. Thus, the level of account control, indispensability, stickiness
-- whatever you call that special connection between the MSP and the customer
-- is not as high."
Block service time suggests a different issue. Although the revenue is
recurring, the service tends to mitigate against healthy profitability.
"Block time for a fixed fee encour ages the customer to call even
for minor problems, which can play havoc with your effective utilization
of service staff," Dippell says. "When you sell the customer
a service level with flat fee managed services, it's up to you to determine
how much work it will take. You've broken the bond between time and rate.
If you do it smarter with less work, you can boost both revenue and your
Becoming a Hybrid
How profitable can managed services be? Gross margins from managed services
are as high as 75 percent, MSPs report, far higher than from project work,
time and materials (T&M) services, and product sales. Yet few have become
pure MSPs. Instead, most embrace a hybrid model, where managed services
co-exist alongside a traditional VAR business.
This makes sense because existing customers may be happy with typical
VAR services -- it's easier to acquire new managed services customers
than to switch the regulars. And offering managed services along with
projects and products prevents an MSP's customers from seeking out other
solution providers when they need, for instance, a server upgrade or a
backup solution. Customers are likely to prefer a one-stop shop. "If
you're hiring a gardener to come every week," Dippell says, "you'll
probably ask him to plant the plants as well."
The main benefit of the hybrid model, however, relates to the potential
of becoming a customer's trusted advisor. Once this status is achieved,
products and project revenue often increase alongside the recurring revenue,
with gross margins not seen in a long time. Says Dippell, "Benchmarking
shows pretty clearly that when you get a managed services customer, you
get more projects and product sales than you would if you tried to sell
Revenue: How Ingram Micro Helps
Managed services and maintenance contract renewals are promising
ways to boost recurring revenue. Ingram Micro offers valuable resources
in both areas: the Ingram Micro Seismic Platform of managed services
offerings and the Reseller Services Portal.
"Ingram Micro is committed to helping solution providers improve
their profitability," says Ross Crane, senior VP and CFO of
Ingram Micro North America. "Both Seismic and the Reseller
Services Portal provide tools to help you generate a recurring,
consistent stream of income."
Seismic for Managed Services
The Seismic platform offers fast and easy access to remote monitoring
and management capabilities from Level Platforms Inc. (LPI), a leading
managed services software provider. LPI's Managed Workplace software
is available in traditional license form, or in a fully managed
and hosted model. "We believe we can help point VARs toward
success in managed services, offering them the tools and support
they need without a huge up-front investment," says Justin
Crotty, VP of Ingram Micro's North American Services Division.
To ease the transition to the MSP business model, Seismic customers
gain access to the Ingram Micro Seismic Success Support Portal,
a knowledge base of proven business processes, advice and reference
material. The portal features a questionnaire with customized resource-delivery
logic that allows solution providers to receive the right mix of
resources and best practices according to their current stage in
the managed services evolution. In addition, the portal will feature
a tool to analyze customers' IT performance metrics from LPI and
suggest solutions to improve the environment.
Seismic also offers the Virtual Services Warehouse, a repository
of managed services offerings in areas such as financial management,
security and application management, which Ingram Micro will offer
"The Ingram Micro Seismic Platform and Virtual Services Warehouse
simplify what many consider a complex and costintensive services
delivery model," says Arlin Sorenson, president of Heartland
Technologies. "By lowering the barrier to entry and reducing
the risk, Ingram Micro is making managed services a viable service
delivery model for VARs of all sizes and capabilities."
To learn more about Ingram Micro Seismic, call the Ingram Micro
Services team at (800) 705-7057 or e-mail email@example.com.
Cashing in on Maintenance Contracts
Selling maintenance contracts is routine for most solution providers.
Customers are well served by the protection, and the recurring revenue
boosts the bottom line. Yet, the full benefits accrue only when
contracts are renewed as they expire. "Without an efficient
process for renewals, solution providers leave a lot of money on
the table," says Christine Syvertson, senior manager of services
marketing at Ingram Micro.
Enter Ingram Micro's Reseller Services Portal. By automating contract
management, this web-enabled application makes it easy to track
maintenance contracts, warranties and leases on hardware and software,
ensuring maximum service revenue.
Drawing on sales-out information from products purchased through
Ingram Micro from major manufacturers, the portal automatically
organizes and lists customer service contracts by expiration status
-- 30, 60 or 90 days -- along with the Ingram Micro SKU for reordering.
To alert you to renewal opportunities, the portal provides automatic
e-mail notification of expiring contracts on an opt-in basis. If
you choose, customers can view their services portfolios through
"Ingram Micro's Reseller Services Portal is a smart and affordable
way to manage and sell service renewals," says Brian Stora,
manager e-business, En Pointe Technologies. "The tracking and
e-mail notification tools help remind our sales team about service
renewal contracts and enable us to take a more proactive approach
to servicing our customers."
The portal also boosts service attach rates by listing customer
assets not covered by service contracts. Historical data associated
with customer purchases alerts you when older systems need to be
refreshed. And a search and filtering capability provides a powerful
tool for managing customer contracts and IT assets.
For more details, Ingram Micro customers can visit the Ingram Micro
Services section at www.ingrammicro.com,
or contact firstname.lastname@example.org,
The Trusted Advisor
MSPs working the hybrid model confirm this benefit. By leading with managed
services, they more easily pick up additional, high-margin sales.
"As an MSP, we are becoming the IT department of many smaller businesses,
their trusted advisor, and we are active in their long-term, infrastructure
lifecycle planning," says Scott Goemmel, partner at PMV Technologies,
a solution provider who leads with services. "This positions us to
be integral to their product acquisition process."
Goemmel notes that because of the close relationship, many customers
award product sales to PMV without bids, leading to above-average gross
margins. "Our customers realize that they have many options for product
procurement," he says, "but choose to work with our firm because
they trust our judgment and clearly recognize that in an MSP arrangement,
our mutual success is highly correlated."
At RIATA Technologies, Wald describes managed services as a springboard
to profitable product and project sales, which still account for the larger
part of his revenue. "As a trusted advisor, you own the IT, and you
become deeply involved with the technology refresh cycle and the strategic
planning," he says. "Before, we were just reacting to projects,
but now we're driving the process. And margins are better because we're
not really competing on price."
Wald notes that RIATA used to have to sell products at a 4 percent to
5 percent gross margin to get anyone's attention, but now he's consistently
getting 10 percent to 12 percent because customers appreciate the value
proposition of managed services. "They don't want to shop; they'd
rather have someone like us take care of it for them."
Customers may be more willing to trust their MSP for project work because
of the alignment of interests. "Managed services puts us on the same
side as the customer, sharing the risk," says Steve Feldman, president
of Graphtech Systems, an MSP who also does project work. "Even if
the customer requests it, we're not going to put in an e-mail server that
could cause problems, and they appreciate that."
Research benchmarks from Service Leadership confirm aboveaverage profitability
for hybrid MSPs, especially as the percentage of revenue from managed
services rises over time.
- The average solution provider with 50 percent revenue from products,
40 percent from pro jects and T&M services, and 10 percent from managed
services achieves an average pretax profit of 4.5 percent; best-in-class
is around 13 percent.
- After a few years in managed services, revenue from products drops
to 30 percent, revenue from projects and T&M services stays at 40 percent,
and managed services bring in 30 percent. Average pretax profit rises
to 7.8 percent and best in class to approximately 16.5 percent.
- Mature MSPs in business from three to five years bring in around 22
percent to 25 percent of revenue from products, 22 percent to 25 percent
from projects and T&M services, and the rest from managed services.
Average pretax profit rises to 11 percent, with best in class earning
about 21 percent to 22 percent.
Mastering the Model
The key to such heady profits, of course, is mastering the MSP business
model -- leveraging technology to the max and managing personnel by rewarding
team efficiency rather than billable hours. "If you can add more
customers without adding more employees," Wald says, "you really
start driving revenue to the bottom line."
Remote monitoring and management tools play a crucial role. "In
the past, you could expect an engineer to support, maybe, 100 desktops,
but with automated management tools he or she could support 1,500 desktops,"
Feldman says. "As we move the customers from a model where we make
money when they have problems, to one where we are more profitable when
they don't, we have to become more efficient and effective."
This contrasts sharply with the traditional way of servicing customers
"In the old way, which provides a bad level of service, you get into
a situation where only Tony is familiar with the account, so you can only
send Tony, and they only want Tony," says Popper of Computer Gallery.
"That's a problem."
Instead, MSPs promise their customers a result -- such as an available,
productive network -- so they focus more on business processes and team
effort. "We've had to work very hard on the team approach and the
communication," Popper says. "We don't have the cowboy-type
employee anymore, and communication ensures that everyone knows what's
going on at a particular account. We also try to make the customers more
help desk-driven, training them not to expect to see a body whenever there's
Goemmel of PMV Technologies seconds this team-oriented approach. "The
MSP model is about working smart," he says. "I value a staff
member who can work efficiently and in tight alignment with our core purpose
and values more than I value someone who feels that individual workload
is more important than team productivity." Naturally, the nature
of individuals hired and compensation incentives must reflect efficiency
and commitment to the team.
Making the Hybrid Model Work
As challenging as the managed services business is, the large measure
of profitable recurring revenue makes it worth the effort. MSPs who have
been there advise a number of steps to ease the transition to the new
- Be prepared for organizational changes and hard choices. "This
new way of delivering services can be a difficult transition,"
Wald says. "Not everyone is going to understand it or want to come
along for the ride." Some solution providers have segmented their
MSP business from projects and products, assigning different staff to
each business group.
- Gain perspective and advice by joining an industry peer group, such
as the True
Profit Group or Ingram Micro's VentureTech Network (VTN). Such groups
routinely share lessons learned, best practices and profitability guidelines
that make managing easier.
- Consider third parties to comp lement your own capabilities. Network
Management Group, for instance, uses Ingram Micro's 24/7 post-sales
technical support. "If we're on-site and we can't solve a problem
in 15 minutes, we're calling Ingram Micro," Harper says. Also consider
joining Ingram Micro's Seismic program for access to remote monitoring
and management capabilities, as well as a knowledge base of best practices.
(For more details, see above)
- Don't be afraid to shoot for the moon. "Once I realized that
a solution provider could put 10 percent to 20 percent of revenue on
the bottom line, that became my goal," Harper says. "It's
a whole lot more fun when you're in that range."