We recently asked Level Platforms CEO Peter Sandiford to describe the steps VARs should follow in moving their business to the managed services model. Peter is in an ideal position to answer this question, since his firm has won over some 2,000 solution providers to its next generation remote monitoring and management technologies.

What is the best business model for VARs to use for managed services?

There isn't one single best way. We have thousands of VARs using our platform to deliver managed services, and we've found that they have adopted many different business models depending on the verticals they serve and the products they focus on. There are lots of different types of solution providers. Some sell traditional IT products like servers and printers, others focus on something very specific like IP telephony, some are ISVs (independent software vendors) who focus on their own application and want a way to monitor it. The reality on the ground is highly diverse. A consequence of this diversity is that from our point of view managed services are whatever our VAR customers want them to be.

But doesn't going to a remote monitoring and management platform like Ingram Micro's Seismic require VARs to abandon their old way of doing business based on break-fix services and time and materials billing?

Yes, the majority of our VAR customers do this, but not all of them. You have to distinguish between the platform as a method for delivering remote services to your customers over the Internet and the actual way you package and sell the offering. About 80 percent of our VARs are selling true managed services, which means they take over some or all of the customer's IT services for a fixed recurring fee. They use a results-oriented business model and value-based pricing. But the other 20 percent are just using the platform as an internal efficiency tool that lowers their costs to deliver project-oriented or break-fix services. We don't try to impose a business model on VARs. We just say, "Here are some principles and case studies, look at them and decide how they can help your business."

How do managed services lower a VAR's costs?

The platform helps the VAR to measure and reduce the cost of delivering high-quality services to their customers. We ran a survey of our VARs and asked them how much time they saved serving their customers using our platform, and the average answer was 4.6 hours saved per customer per month. If a technician costs you $100 per hour while use of the managed services tool costs less than that per customer each month, you can see that the result is a pretty fast payback period.

Can you walk us through the process by which a VAR should move an existing customer to managed services?

It may be a high risk strategy to jump into managed services all at once. It's better to look at it as an evolutionary process in several steps that can take a number of months, depending on the circumstances. You should start by doing a quick pilot to get familiar with the potential of remote monitoring and management. Then you can start deploying the technology widely across your customer base. During this stage many VARs will sell it as a proactive network monitoring service. They will typically still be using their existing break-fix agreements, but they will be able offer a quick response to any problems the monitoring detects. The next step is to use the tool to get a deeper understanding of how things are working on the customer's site and where the trouble spots are. You want to make sure the customer's environment is sufficiently stable and up-to-date to be supported effectively. You may find older equipment or software versions that will be harder to support and you will now be armed with the analytical data you need to justify an upgrade sale. When you reach this stage you are ready to move to actual managed services. The typical conversation with your customer may go something like this: you've been spending $3,000 per month with us on break-fix services, but now we're going to commit to meeting certain service levels and charge you a flat fee in exchange. At this point your team will have the new processes in place to deliver managed services effectively. You will have corrected any problems at the customer's site that present a risk for a fixed-price offering. You and your customer will be ready for the mutual benefits of full managed services.

Is the services level agreement (SLA) always a written legal contract?

It depends on the size of the customer. For a large company the SLA might be a legal contract. For a small or medium business it could just be a certain expectation of performance that the VAR has discussed and agreed to with the client.

Should VARs who move to managed services expect to see the product-sales part of their business decline?

Not at all. Once you've moved a customer to managed services and are monitoring everything that goes on at their site, you are going to accumulate a tremendous amount of data and stats that you can leverage to make new sales. You will be able to use data mining to see exactly what is working and not working at that customer's site, and where the opportunities lie. You will go to a customer and say, "I've been looking at your server performance the last few months, and this is how many failures you've had, and this is how much that downtime is costing you." You are now in a position to make a very strong case for an upsell to new servers, or whatever type of equipment or software is required to correct the problems the customer is having.

How should VARs price managed services?

There are many ways of pricing managed services. But the fundamental idea is that you are selling a recurring, results-oriented service that is priced on the basis of its value to the customer rather than just the amount of labor time or materials consumed. Once you have that basic principle, there are lots of possible pricing arrangements. You can have Gold, Silver or Bronze service packages, or a la carte pricing. One model some VARs have been very successful with is to charge a flat fee per network element or system, say $350 per server and $50 per PC per month, or whatever is appropriate in a particular situation. Then you let the customer decide what they need and what they can afford in terms of coverage and level of service.

Should VARs try to move all of their customers to managed services at the same time?

No. What we typically recommend is that the VAR start by moving a small number of customer sites to the new model, say 5 or 10, and then, when they are confident everything is running smoothly, go ahead and switch over the rest of their customers. This might take a few months while you do your customer education and get all your employees trained up.

Is it possible for VARs to move some customers to managed services while keeping others on the break-fix model?

It's possible to run both models at the same time, but it's more difficult. If you stick to break-fix pricing you can still use the managed services platform to reduce your service delivery costs. You can also use a la carte pricing to bridge the two models. But most of our VARs decide to go all the way with managed services.

What size companies are the best prospects for managed services?

Companies of all sizes are using managed services, but the really hot market right now is the midsize company with anywhere from 10 to 250 desktops. The average customer today probably has between 30 and 50 desktops. These are companies that either have no internal IT personnel at all, or maybe have only two or three IT staffers, so they need a lot of help. Whatever vertical industry they might be in, their common characteristic is that IT is important for them.

What is the profile of the typical VAR using LPI's managed- services platform?

You don't have to be a giant. The new managed-services platforms that companies like LPI have developed over the last few years have really opened up this market for the smaller solution providers. Typically it will be a VAR with 6 - 20 employees, though some are larger and some are smaller. They will usually have between 50 and 200 customers in their region, mostly in the 10 - 250 desktop range.

Are larger enterprises also buying managed services?

Yes. Historically, managed services got started in the late 1990s with larger customers who had more than 500 desktops. This is still an important market, but it's not growing as fast as the small and medium business market. The larger companies have big data centers and significant IT staffs of their own, so they require a very different sales approach.

Is the SOHO market also buying managed services?

There's no doubt that the small office and home market has tremendous future potential for managed services. There are five million businesses in North America that have from one to nine desktops. But this market is not penetrated at all yet. Right now the biggest opportunity for VARs selling managed services is in the midsize market, the companies with 10 to 250 desktops.

What does the IT environment look like in the typical midsize customer for managed services today?

Obviously it's a Microsoft world at the desktop and the server. A typical customer might have from three to ten servers, they might be running Exchange, SQL Server, an accounting package, CRM, a web site, the usual things like that. But beyond the basic servers and business applications, you are going to find lots of gear from different vendors, there is a tremendous amount of diversity. They will have all kinds of network switches and routers, all kinds of printers, VOIP PBXs, firewalls, security appliances, and so forth. There are probably several hundred vendors who are selling into this market that LPI is working with so that we can instrument and manage their products. We've created templates for these products, these are just simple XML files that represent the monitoring rules for the device or application so we can pull off the information and consolidate it in the central database that's running at the VAR or being hosted by Ingram Seismic.

Isn't the managed-services market beginning to get a bit saturated now?

Absolutely not. This is a very big market that is still very underpenetrated. In the 10 to 250 desktop range, which is the sweet spot for managed services, there are approximately three million organizations in North America. Today only about 100,000 of them are using managed services. So we are just at the beginning of a massive transformation of the market, and that's not even including five million additional SOHO sites.

How many of these midsize organizations are going to want to rely on outside providers to handle their IT operations?

Of the three million organizations in this segment, LPI estimates that roughly 50 percent already effectively outsource the running of their IT operations to a solution provider or consultant of some kind. Another 30 percent use their own internal IT staff to run things, but still rely heavily on outside partners for assistance. Only the last 20 percent is truly independent and capable of running things without any outside help. So the number of organizations who are predisposed to consider managed services is very large.

Are the big national IT providers going to use managed services to compete with local VARs?

This is definitely a risk that VARs need to think about. You might very well see some of the IBMs or Dells or Verizons or BestBuys of the world entering this market. Since managed services can be provided remotely over the Internet, they are not tied to any specific territory. So the big national IT providers might say to themselves that they don't need these pesky little VARs. The other side of the coin is that VARs who have the most effective business model for serving a particular kind of customer will be able to compete beyond their own geographic territories. It is very important that VARs not sit idly by and think that their personal relationships with customers will tide them over. This is the way things have worked every since the modern PC-based solution-provider model began in the 1980s. But it isn't necessarily going to be this way in the future. VARs can't afford to be complacent. They can't afford to keep the high-cost model of traditional break-fix services in the face of the radical transformation of the cost structure of IT services that we are seeing today.

Can VARs use managed services to keep control of their customer relationships?

Yes. Our core message to solution providers is that your value is in your customer relationships. Managed services really promote this by giving the VAR hard intelligence data about what's actually going on at the customer site. There's no doubt that the remote services- delivery model of managed services is going to allow many other parties to be involved besides the VAR. As I said, you're going to see some other providers entering the market. But this won't be black and white, because you're also going to see collaborative models evolving where the VAR can use the managed services platform to work with other partners in providing the final service to the customer. We're building these collaborative features into the next version of our product. It will have roles and permissions, so for example you could contract out help desk services to India and contract out VOIP support to a VAR in another city who is an expert in that area. VARs will be able to leverage these collaboration features to keep control over their customer accounts. You are not going to lose your relationship with your customer because of managed services. What's going to happen is that it will no longer be the techie who goes out to the customer site, but the boss who goes out with glossy reports to create upsell opportunities and build loyalty with the customer. Ingram Micro's Seismic represents a perfect example of new collaborative approaches that will help VARs compete successfully.

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