Eliminate Profit-Draining Practices From Your MSP Business

By The Business Solutions Network

Selling month-by-month, fixed-fee managed services requires this managed services provider’s (MSP’s) vigilance in rooting out activities that threaten its profitability.

Kyle Scofield, IT director at Technology Seed, saw increased ransomware outbreaks among clients and subsequent profitability decreases, until his company developed and implemented a new security solution.

W. Marc Bernsau

The holy grail of managed services is being able to sell a comprehensive bundle of solutions and services at a predictable monthly cost. Unlike the unpredictable hardware expenses (and downtime costs) that break-fix clients experience, managed services clients want a consistent IT experience and a predictable monthly cost.

MSPs vary widely in how close they get to the flat-fee utopia. Some only guarantee a flat fee for software licensing and remote monitoring services, but charge hourly labor fees to address support issues, although oftentimes at a reduced cost compared with what they charge break-fix customers. Others include remote support in their fixed monthly fees, but charge for any services requiring on-site tech support.

Technology Seed has wrestled with all of these options in the past. But five years ago, the MSP made a bold move to differentiate itself with a “Cap Your Costs” managed services offering, where all support and services (besides true anomalies such as office moves) were sold at a fixed monthly rate. The MSP has experienced several consecutive years of double- digit growth since that time, but it hasn’t happened without having to address some difficult challenges along the way.

The First Key To Predictable Managed Services Costs — A Network Assessment
Most MSPs that fail at delivering comprehensive flat-rate services do so within the first six months of a managed services contract. The culprit is almost always a failure to communicate the customer’s responsibility to keep its IT equipment and software current and/or a failure to fully understand the IT environment they’re signing up to manage. To avoid these problems, Technology Seed meets with key stakeholders early in the relationship to get a count of their PCs and servers and to learn how their business processes really work. “We may support five different medical practices that all use the same EMR [electronic medical record] system, but they each have different workflows that govern how they use it,” says Kyle Scofield, IT director, Technology Seed. “Learning these differences and documenting them ahead of time can save our support people a few hours of labor time when diagnosing and troubleshooting an ‘EMR printing problem,’ and it saves our customers from having to walk us through their procedures each time there is a problem.”

Fixed-Fee Backups Are A Must, Too
BDR (backup and disaster recovery) is another area where MSPs struggle to provide a consistent monthly fee, and Technology Seed was no exception. “Anticipating customers’ data usage over a given period is nearly impossible,” says Scofield. “To even get close, the MSP has to meet with multiple stakeholders to understand their employee and business growth projections and the data growth that’s anticipated. Then, if the client exceeds the projected cap before the next evaluation period (typically annually), the MSP has to make a difficult decision. It can either eat the extra costs incurred by the cloud provider or spend even more time prioritizing the client’s data to determine which data sets might not have to be backed up to the cloud.” After its BDR vendor came out with an unlimited backup pricing plan a few years ago, Technology Seed saw its sales and profit margins increase. Scofield’s advice to other MSPs is that, if your vendor is still using a cost-per-gigabyte pricing model, you should start looking at alternative solutions.

Ransomware Can Be A Fixed-Fee MSP’s Worst Nightmare
Malware and cybercrime have been steadily growing security problems for years. But in early September 2013, we saw a new kind of threat emerge that was different from anything before — ransomware. Unlike other malware threats that could be quarantined and removed by most antivirus programs, CryptoLocker and other ransomware threats left antivirus programs defenseless at reversing the encrypted files they left in their wake. And ever since that time, MSPs and other IT professionals have found themselves fighting an uphill battle against a threat that has netted criminals $325 million in revenue, according to a 2015 report from the Cyber Threat Alliance.

Some MSPs are finding success educating clients about avoiding phishing schemes and using advanced technologies such as next-gen firewalls to drive down ransomware outbreaks. Despite adopting these best practices, however, Technology Seed still felt the weight of ransomware attacks last year. “On multiple occasions, we had to respond to ransomware outbreaks, which took an average of four hours to resolve,” says Scofield. “In each case, we were able to get all of our customers’ data back without any of them having to pay the ransom, but it took a major toll on our staff.”

The typical ransomware chain of events is as follows:

1. An end user falls victim to a ransomware attack on a PC workstation.
2. Ransomware infects the user’s PC, then begins encrypting files on the network shares the user has access to.
3. By the time the user reports the infection and IT realizes what is happening, tens of thousands of files have already been encrypted, and the only option left is to restore files or pay the ransom.

Earlier this year, Technology Seed developed a way to better protect customers from ransomware. The way it works is that as soon as ransomware begins encrypting files on the network shares (step 2 above), the File Server Resource Manager (FSRM) (a free component on Windows Server 2012 R2) shuts down all shares, thereby ending the infection. “It takes less than 15 minutes to configure the FSRM to perform this function, and the time it saves after a ransomware attack is enormous,” says Scofield. “We still need to rebuild the infected machine, which takes about 10 minutes, but in some instances, it’s saved us from having to restore 30 TB of data on the network, which can easily eat up an entire day.”

Remember: The Customer Is Not Always Right
After a new managed services provider starts earning more money from recurring revenue contracts than break-fix projects, it’s common for an MSP to notice a lower stress level and higher morale among employees. It took Technology Seed a little longer to realize this experience, but not for the reasons one might expect. “We had about a half dozen clients that were consistently rude to our staff,” says Scofield. “If they had a problem, they would call our help desk and yell at whoever picked up the phone. After making their demands, they would hang up on the person, too,” says Scofield. “A couple of years ago, we put a policy in place to put a stop to this kind of behavior. It’s pretty straightforward: clients are not permitted to hang up on our staff or yell or scream at them. If it happens, they get one warning to correct the problem, and if it happens again, they need to find a new IT service provider.”

The policy also addresses clients who take IT matters into their own hands, such as plugging a wireless router into their network without consulting Technology Seed. It also addresses situations where clients fail to take the MSP’s technology recommendations. “Sometimes we may recommend a firewall upgrade, but the client doesn’t want to go with the specific brand we recommend. We’ll try to work with them and find comparable alternatives, but if they prefer to use a consumer-grade firewall, we have to explain why they can’t do that. If they insist on doing things their way, we can’t continue being their managed services provider.”

In the past two years, Scofield says, his company has had to part ways with a few customers that violated its behavior policy, one of which was in the top 10 percent of its largest contracts. “In some cases, the decision to cancel a contract led to an increase in our average profit margin per customer,” says Scofield. “Even if a troublesome customer didn’t have a financial benefit, we believe it shows our employees that they are more important than our bottom line, and that goes a long way in improving morale and retention.”

“Clients are not permitted to hang up on our staff or yell or scream at them. If it happens, they get one warning to correct the problem.”

Kyle Scofield, IT director, Technology Seed

 

Get Ready For Managed Cloud Services
Presently, managed services comprise 70 percent of Technology Seed’s revenue, and the MSP is averaging three new managed services clients each month, according to Scofield. One of the company’s biggest focus points going forward will be the migration of IT from on-premises to the cloud. The MSP is embracing this trend and strengthening its Microsoft partnership, which can be seen in a few areas:

1. Advisor to CSP (cloud service provider) sales model. As a Microsoft Advisor reseller, MSPs make only about a 3 percent profit margin selling Office 365 subscriptions, says Scofield. Plus, if customers need tech support, they contact Microsoft, resulting in additional potential revenue loss for Advisor partners. As a Microsoft CSP reseller, on the other hand, partners earn double-digit margins on Office 365 subscriptions, and partners provide help desk support and billing.
2. Skype for Business. Last year, Technology Seed replaced its legacy desk phones with Skype for Business, so it could learn the technology firsthand. “We recently had our first Skype for Business sale, and we think this solution is going to become a big play for us in the future,” says Scofield.
3. Azure services. The MSP is also broadening its cloud services offerings with Microsoft Azure services, such as Azure Site Recovery, which is a Disaster-Recovery-as-a-Service (DRaaS) offering and Azure File Storage, which is an on-premises folder sync solution. “We anticipate Azure adding tens of thousands of dollars in monthly recurring revenue over the next 24 months,” says Scofield.

Like its move to fixed-rate managed services five years ago, Technology Seed’s transition to a cloud service provider will likely bring several new challenges. But, many of the same principles that led the MSP to two consecutive years in the top 20 fastest-growing family-owned companies spot by Business NH Magazine will continue to drive Technology Seed’s future successes, too.