Justin Crotty, Vice President of Services, Ingram Micro North America, was responsible for the launch of Ingram Micro's brand-new Seismic offering of hosted managed services. The Channel Advisor team recently sat down with Justin to get some expert insights into the business proposition behind managed services.

Are your VARs embracing managed services?

Without question, movement is increasing each month. Specifically, there is strong interest in hosted offerings for their ease of use, low cost-of-entry and low-risk profile. We are seeing great interest from our VARs in the Ingram Micro solution, since the Seismic solution protects the VAR’s account ownership and allows the VAR to manage and control the delivery of the service.

Is the market in danger of becoming saturated?

Saturated in what sense? In the vendor space -- tool providers and potential offerings -- it is getting competitive, but not saturated. In the VAR space, there still is a very small minority that is actually offering MSP services. We are still early in the mass-adoption phase and big opportunity remains for VARs to develop these offerings.

What are the best managed services opportunities for 2007?

Remote monitoring and management is the core, or table-stake offering that VARs must deploy to begin the MSP transition. In addition, antivirus and spam offerings, patch management, remote and online backup, content filtering, and professional service applications like Autotask or ConnectWise are all enjoying good demand. We will be rolling many of these offering into the Seismic platform in the coming months.

What is the best pricing model for managed services?

There is not just one pricing strategy to enter this market. What the VAR charges is really totally up to the VAR. Typically, VARs are making upwards of 50-percent margins, sometimes much higher, on managed services. Do not undersell this capability. Your ability to price and profit from these services is about as varied as your creativity in presenting the value proposition to your customers. Some VARs have flat-fee rates, some have tiered pricing, etc. In general, in any tiered-pricing methodology, you must ensure that at each level of pricing, the benefits -- or value -- of that level are clearly articulated and differ from the other levels. If you have Gold, Silver, and Bronze pricing levels, it is critical that a customer who chooses Silver or Bronze instead of Gold understands very clearly what value or benefits they are giving up to get the lower price. That sacrifice must be clearly communicated to the customer and clearly delineated in terms of the priority and support you provide across your customer base. You make less money on customers who pay lower prices, so you need to ensure that their utilization of your organization's resources are appropriate for what they are paying.

Does a VAR have to move to managed services all at once?

No. Most VARs who have been successful with managed services have done it step by step. First they introduce remote monitoring to one or two very good current customers to test it out and get comfortable with it. Once they understand how it works, they start to expand the number of customers they leverage it with. As they get better at selling and marketing it, they add more services, etc.

You don't need to sacrifice current sales while implementing managed services. A different value-sell must be presented to customers, but, typically, the value they perceive they are getting from a more effective IT support justifies the service.

How can VARs move clients from the break/fix model to a fixed price SLA without losing money?

The key here is what service level the customer is expecting for the new, flat rate, and whether you can make money with that SLA (Service Level Agreement) at that rate. If the customer wants traditional service levels at a lower monthly cost, you need to deliver those services in the most cost-effective manner possible.

The best approach is to clearly articulate to the customer the service levels you are providing to them today at the current price point, and the levels they can expect for the new price point they are asking for, and how those two service levels differ. Don't give the customer the same service level for a new, lower price -- you have just evaporated your value and undersold yourself.

If they want a lower monthly rate, they have to give something up to get it. Longer response times, less on-site presence, longer time-to-fix, or something like that. Also, your ability to be more proactive by using Seismic and pre-scheduling on-site time at that customer will lower your costs, because you'll be able to choose which technical resources to deploy and when to do it. You will also be able to stabilize the customer's network with tools like Managed Workplace, which will reduce your costs to support that infrastructure.

How long does it take for a managed services offering to become profitable?

You can look at this like the insurance business. Obviously, your first customer is not going to cover all your costs, especially if you have higher labor costs for 24/7, etc. You need some scale and additional customers to make money. So, you have to identify your costs and price the services so that you recoup as much as the market will bear from each client. As you add customers, you will start to recover more costs, because each new customer should cost less to support. You will eventually reach a breakeven point beyond which all revenue is profit. You are spreading the cost recovery, and the risk, across your customer base. If you know how to scale, you will be able to support more and more customers while keeping operating and capital expenses under control.

What is critical mass of customers or revenue needed to be successful with managed services?

There is no standard. This is completely dependent on the specific VAR and that VAR's cost structure and business model. Offerings like Seismic allow a VAR a lower-risk and lower-cost entry into managed services; the payback or breakeven point is much lower than if the VAR were to invest huge sums of capital into tools and infrastructure to offer similar capabilities.

Should a VAR drop customers it has served for years if they don't want to go to managed services?

Only the VAR can determine which customers it wants to keep and how best to serve them. managed services can help VARs to better understand the profitability of specific customers. These customers utilize the VAR's resources in a more efficient, VAR-directed manner. Many VARs present their managed services as a better, more cost-effective way for their customers to procure and use IT services. You want to serve your customers within the cost and profitability parameters that you establish to ensure those customers are, indeed, profitable. If you find that you cannot serve a specific customer in a profitable manner, and they will not allow you to implement a managed methodology to ensure you can raise their support levels and do it in a profitable way, then you should look at whether or not to continue doing business with that customer. Unprofitable customers are not good customers.

Are you saying that VARs should no longer offer break/fix services?

Due to profit pressures, a break/fix-only business is difficult to sustain without large-scale volumes. Break/fix, along with all of the other traditional services that are delivered by a VAR such as project work and time and material labor, are not going to go away in a successful service practice. Break/fix does, however, have to be efficiently and cost-effectively managed. A solid, remote monitoring and management platform can assist with the stabilization of a network infrastructure over time, with remote remediation of certain problems, and a more effective, proactive, on-site, break/fix methodology to reduce delivery costs.

Are managed services really a good deal for end-customers?

Some have claimed that managed services have poor ROI for customers, but this is not true at all. Remember, managed services is a value sell, not a commodity model. If your customers are looking at the ROI strictly from a dollars-to-dollars perspective, pre-managed services to post-managed services, you are not selling it correctly.

If your customers are comparing their IT-support costs in a traditional time and material environment, or reactive model, to their support costs in a managed or proactive model, they are probably not taking into account the improved SLAs you can provide with managed services. There's also the reduced downtime, the improved stability of their infrastructure, and the additional information that you can provide to them to help them make decisions on IT spending.

Managed services, or a recurring revenue offering, can also help the end customer better predict and budget their IT spending over the course of the year. This is opposed to the old model where they paid for everything in a time and material, or project model, and could not predict what they would spend or when they would have to spend it. This can be very beneficial to the budgets of the end customers. Remember, don't be afraid to charge more. Make sure you are clearly articulating these value points to the customer to justify the higher prices.

How should VARs who adopt managed services adjust their compensation model?

What you want to do is move from a "billing-utilization" model to compensation based on "performance against SLA".

In the billable-hours model, you are paying your technical assets to maximize the number of hours they are being billed out to customers in project work, or in reactive service work. You are paying them to be on-site at customer locations. Typically, this has meant that those customers are having problems and paying you to fix them, or that you are performing project-based work for those customers. The way to think about paying your technical labor under a managed-services model is to compensate them based on performance against an SLA that you have written for a customer. In other words, if you are able to maintain the SLAs that you are promising your customers, compensate the technical resource against SLA performance.

So, as you price your managed-service fees to customers, make sure you are taking into account the cost of your technical labor that will be utilized to support the SLAs for that specific customer. Price the services to those customers based on that cost analysis and then compensate your people to ensure that the costs for delivering those services to a specific customer do not exceed the fees you are getting from that customer.

If you hit your SLAs for a specific account, you should be making money if you priced it correctly, and your technical labor should be compensated for doing so. If you fail against SLAs to a specific customer, it will cost you more to service that customer, and your technical folks should be penalized for that.

How is the Seismic service priced to VARs?

I’ll give you an example of the hosted-LPI pricing. VARs pay the standard license costs for use of the LPI application. Then, we will charge the VAR a small, monthly hosting fee per LPI Service Center and Onsite Manager.

Do you provide VARs with sample best practices and template documents for things like billing, marketing and SLAs?

Yes. The Ingram Micro Seismic Success Portal offers the industry-leading best practice and knowledge base sources for these and many additional "how-to" guides. However, this portal is only available to Ingram Micro Seismic partners. To find out how to become a Seismic partner, call (800) 705-7057, option 5 or send an e-mail to services@ingrammicro.com.

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