Go From Big Revenue Break-Fix To Big Profit Managed Services

By The Business Solutions Network

After switching to managed services and changing its sales processes, this MSP’s (managed services provider’s) profits grew by 300 percent.

“One of the biggest rewards of becoming an MSP is working with customers toward the same goal, which is uptime,” says Shawn Maggio, owner of National Networks.

Photos by Romero & Romero

If you compare VAR-turned-MSP National Networks’ business four years ago to now, you might mistakenly think the company is on the decline. For example, in 2011 it did $9.2 million in sales with 50 employees, and this year it’s projecting $5 million in sales with 32 employees. Sounds like a downturn in business, right? Just the opposite, says Shawn Maggio, the owner of the company. “Our primary revenue source used to be large cabling projects and break-fix services, which yielded only a low single-digit profit margin. Today, we’re focused on selling managed services, which is more than four times as profitable and comes with much less drama.”

Maggio subscribes to a simple business philosophy, stating that if his company can help local businesses solve their IT issues, those businesses will be more profitable and successful, and National Networks will inherently grow along with them. Prior to selling managed services, however, he says it would have been impossible to make this claim. “In the break-fix business model, the IT company and customer are working against each other,” he says. “Only when a customer’s computers or network break does the VAR make money. Any steps the VAR takes to prevent future breaks or malfunctions only hurts its future sales opportunities.”

It was while attending a ConnectWise IT Nation event four years ago that Maggio had an encounter with master MSP CharTec (see page 20 to learn more about National Networks’ business partnership with CharTec) that led to four radical shifts in his business practice.

#1: Create A Win-Win Managed Services Offering
To stop working against his clients, Maggio knew that he needed to become an MSP. “In the managed services model, we and our customers have the same goal of eliminating downtime,” he says. “No longer do our customers associate us with productivity loss and pay-by-the-hour services; they now see us as improving their productivity and profitability.”

National Networks’ transition to managed services wasn’t without a few obstacles, however. “Some of our salespeople were not able to make the mindset change necessary to sell managed services,” Maggio says. “As a result, we had to invest in managed services training, and in some cases we needed to hire new salespeople.”

Another challenge the MSP faced was developing a sales commission model for managed services. “The biggest mistake we made initially was paying commissions based on gross sales instead of net sales,” he says. “It’s hard enough to transition from lumpsum project-based revenue to smaller monthly revenue streams. Overpaying your salespeople makes it that much harder and longer for the company to earn a profit.” After receiving personal coaching from its master MSP partner, National Networks changed its sales compensation plan and started seeing immediate results. “We worked with our salespeople to get their input on the changes,” he says. “We landed on a plan that entails paying our reps 100 percent of the customer’s first month’s payment and then paying out a lower percent each subsequent month based on the total value of their managed services business. Our new sales model gives salespeople an immediate reward for bringing in new managed services business, and it gives them an incentive to continue building up their managed services book of business.”

#2: Sell Your Hardware, Software, And Services As A Subscription
One of the appeals of managed services for end users is that they can pay a predictable fee each month. The exception to this rule typically comes at the beginning of the managed services agreement — after an MSP performs a network assessment. Based on the results of the assessment, a customer may be required to purchase new computers, servers, and other equipment to get its IT environment “managed services ready.” Sometimes this $5,000 to $10,000 capital expense (CapEx) can delay or even ruin the sale for some cash-strapped prospects. National Networks overcomes this objection with its HaaS (Hardware-as-a-Service) offering. “Whether a customer needs new printers, servers, computers, or a firewall, I always give them the option to put it on a HaaS subscription plan,” says Maggio. “Sixty percent of our managed services customers prefer our HaaS plan over buying their hardware up front.”

When he started offering HaaS, Maggio used CharTec’s HaaS program to avoid laying out too much of his own capital. More recently, however, he brought this program in-house. “Aside from the need for available cash, selling HaaS requires finding the right price point where it’s worth our while and customers feel it’s more advantageous than owning the equipment. As a general rule, it takes about a year before we recoup our investment and start making money on a HaaS sale.”

#3: Manage All Of Your Customers’ Vendors
After it started experiencing success with its managed services program, one of the next additions National Networks made was to include vendor management as a free value-add. “We don’t sell copy machines, fax machines, or alarm systems, but if our customers have a problem with any of these things, we want them to call us,” says Maggio. While one of the primary goals of vendor management is to enable the MSP’s customers to remain focused on their core business tasks, there is also a secondary benefit for National Networks. “Any vendor we’re not actively working with is a potential wedge between us and our customers,” he says. “Whether the vendor is a copy dealer or an alarm company, sooner or later they are going to approach our customer about buying their managed services. By positioning our company as the lead vendor manager, all communication flows through us. We meet vendors on-site, discuss the problems our customers are experiencing, and we are the ones driving the conversation. This prevents vendors from chipping away at our sales offerings.”

Another benefit of vendor management, says Maggio, is that it prevents customers from being put in the middle of situations where one vendor is placing blame on another vendor. “Internet service providers [ISPs] and telecom companies are notorious for doing this,” says Maggio. “For example, if a customer can’t connect to the internet, and it contacts the ISP, it is likely to be told, ‘There are no problems on our end; it must be on your side.’ The conversation goes much differently when one of our engineers or technicians makes that call, explains to the ISP all the tests we have already done, confirming that the problem is not on our end. When an ISP or other vendor knows it’s dealing with a professional IT company, the problem gets solved quicker, and we avoid being falsely accused of a problem we did not create.”

“The biggest mistake we made initially was paying commissions based on gross sales instead of net sales.”

Shawn Maggio, owner, National Networks

#4: Give Each Customer A Virtual CIO Experience
There are two challenges MSPs experience after a managed services sale. The first is keeping its customers on the program, and the second challenge is upselling customers. “It’s common for customers to ask, ‘Why should we continue paying you each month when everything is working so well?’” says Maggio. “It can be equally difficult to convince customers to buy more services when their current plan appears to be working fine.”

The key to overcoming these challenges, he says, is to remain proactively engaged with customers after the sale. “Every one of our customers is assigned a dedicated account manager who also serves as a virtual CIO,” says Maggio. “Every month our account managers deliver summary reports to our customers, which show all tickets that were auto completed the previous month, including backups performed, viruses removed, and software updates/patches that were completed behind the scenes. Additionally, our account managers speak with users to confirm that everything is working OK.” Sometimes, they uncover problems customers are experiencing that haven’t been entered into the ticket system. “This is a good opportunity to remind customers about how the ticket process works and to take care of any problems before an employee complains to the business owner,” says Maggio.

In addition to monthly meetings, National Networks conducts technology business reviews each quarter to update customers on new technologies, make them aware of IT nearing end of capacity or end of life, and to get updates on customers’ business and IT plans. “This is also a great opportunity to find out if they are hiring more employees, adding a new building or addition, or planning other big changes such as a merger or acquisition,” says Maggio.

Despite some difficult changes National Networks had to make over the past four years to get to where it is today, Maggio says it’s all been well worth it. Not only is his company four times more profitable and more stable than it was previously, but also his customers are happy to see him or one of his employees when they visit. “They know we’re working toward the same goal, which is optimizing their productivity and profitability,” he says. “Now that we are on the same page as them, we can be a true partner rather than a necessary evil.”