Magazine Article | September 15, 2015

The Business Side Of Managed Services

By The Business Solutions Network

A panel of managed services experts shares advice concerning sales, compensation, pricing, and bundling — the right way.

By now, readers of this magazine should know that offering managed services is a great way to make your business more stable through predictable revenue and more profitable from lowered and controlled expenses. Readers should also know that transitioning to managed services isn’t always easy, depending on the current state of your existing practice. In an attempt to address some of the biggest challenges of new (and existing) MSPs (managed services providers), we put together a panel of some of the most sought-after industry experts to share their knowledge and experiences. We discussed common mistakes and best practices on the topics of sales, compensation, pricing, and bundling.

Sales Advice For MSPs
When it comes to sales, many MSPs are challenged with finding the right people, hiring, training, and — unfortunately — firing. Tom Clancy Jr., partner and manager of sales and operations at Valiant Technology, an MSP himself, says that when finding and hiring the right people he thinks it’s a mistake to focus on certifications, degrees, and “stated” skills. Rather, he looks for high-quality people who are honest, hardworking, and ethical. “In Good to Great, Jim Collins says that we must get the right people on the bus first, then decide where you’re going together,” says Clancy. “The right people are defined as loyal and hardworking, not VMWare certified. You can teach a monkey to install Exchange, but you cannot teach a lazy genius to stop being lazy. Ever.”

Rob Rae, Datto’s VP of business development, draws a distinction between traditional VARs and the unique needs of MSPs. “The skillset of someone who is a traditional salesperson selling in the VAR space, compared to the MSP market, is dramatically different,” he cautions. “As a VAR, you are selling the vendor; as an MSP you’re selling your services.” He goes on to say that someone who can sell a known billion-dollar brand might be different from someone who can sell your own managed services brand.

Alistair Forbes, GM for LogicNow, adds that new MSPs shouldn’t assume that the lens that they have been using to assess candidates will be sufficient. “The behaviors and approaches that are required by someone selling managed services are different from those that are appropriate for product sales,” he says. “Focus on relationship skills rather than technical ones in your salespeople.”

Marco La Vecchia, VP North America for AVG Technologies, says to look for salespeople who can bring value to the customer. “Technology may scare an end user, but someone who can go in and understand what kind of business they run and what is important to them will not only speak their language but also win them over as a customer.”

MSP, Jerod Powell, CEO of INFINIT Consulting (and featured in this issue of BSM on page 24), says that if you plan to continue selling traditional offerings, and you can find a way to roughly equalize your compensation plans, then hire specifically for cloud sales and let your traditional sales reps continue under their model. “Over time you can work to combine and integrate the teams into one, giving your customers the power of choice while gradually training your old reps to sell and understand the nuances of cloud,” he says. “As you shift more to services, integrate cloud offerings into all salespeople’s quotas and deliver a fully equalized comp plan.”

If you’re transitioning from VAR to MSP, Rae does believe that it’s possible to get an existing salesperson to make the transition, but you should closely monitor the situation. “Often, time is wasted waiting for a sales force to adapt and change,” he says. “If they’re not doing it after a quarter or half a year, you need to make a change.”

Compensation Models That Work
While every organization will have questions and concerns regarding compensation, the fact that managed services is such a unique business model means that MSPs need MSP-specific answers. Forbes says that commission structures should emphasize the three core elements of a recurring revenue business — land, expand, and retain. “Focusing on new customer acquisition only in the commission scheme will result in lost opportunity with existing clients and higher rates of attrition,” he says. “An overall revenue target on a monthly basis, rather than one tied simply to new business, is more likely to encourage a more rounded approach to customer account management.”

Clancy recommends a base salary of $40,000 to $50,000, plus 10 percent of monthly recurring revenue (MRR) for one year’s worth of the MRR. “You want to inspire them to get out there and keep hunting,” he says. “Maybe give them a bite if they help renew an account for a second year, but not the full 10 percent; maybe a flat kicker commission for the renewal.”

Powell has implemented a hybrid model. “My hunters are paid only on first year revenue to keep them motivated and from building an annuity business,” he says. “My farmers go after renewals as retention Subscribe to Business Solutions magazinemanagers and are compensated yearly as they renew deals. When designing your plan, it is critical that your total sales compensation should not exceed 8 percent to 9 percent of new business revenue, or 3 percent of renewal revenue. Quotes for the blended sales resource selling both should be around 8 percent.” He continues by saying that when you are small, you likely will have a blended resource that does both and will get both types of commission.

Rae suggests that, when hiring, you want a big upside. For him, this means the commission portion is high (a minimum of 30 percent, but probably stretches into 50 to 60 percent). “When interviewing, if someone is focused on base salary, that’s a red flag,” he warns. “If someone is excited on what the total is, that’s a salesperson. They’ll always be looking for their maximum earning.” Another key, he says, is to never cap salespeople. If they’re making the money by bringing in sales, pay them for it.

La Vecchia agrees on not capping sales reps. “Any business that caps a sales rep’s income is not incentivizing a sales rep to succeed,” he says. “Also, ensure that you have monthly or quarterly incentives to push the sales rep to overachieve.”

As far as common mistakes are concerned, many mistakes come down to not understanding your margins. For instance, Clancy says it’s easy to give away too much, monies you cannot afford to give. “What is your gross margin on managed services?” he asks. “What is your net profit on it? Know that before you give it away.”

Powell says many VARs-turned-MSPs often fall into the trap of including into a commission structure items that shouldn’t qualify because they don’t generate sufficient margin. “We exclude hardware, third-party software, and Office 365/Intune/EMS/Azure [sold without a managed service attached]. Those tend to be lower cost anyway, and by excluding them you drive sales to shoot for managed services.”

Pricing And Bundling For Success
Other challenges new MSPs face concern pricing and bundling their solutions. Again, many times the challenges and mistakes are related to margins. Powell says that the biggest mistake he sees other MSPs making is not doing a cost analysis and figuring out what they should charge to make the margin they need. Rather, he says, they arbitrarily come up with a number or copy everyone else. “Doing this will just put you in a sea of MSPs that make no money,” he says. “Don’t undervalue your services and give away too much for free.”

To set his prices, Powell calculates his costs and then factors in the margin he wants to make. He says an MSP on the low end should target 30 percent, but he likes to target 45 percent. “It’s a simple numbers game,” he says. “If you run the numbers and you can’t deliver the service at a competitive price, then pick another service.”

Forbes agrees with this logic. “Pricing correctly is a basic process of understanding costs of services in their entirety and pricing to ensure that the business is sustainable,” he says. “Some of the smaller MSPs are losing money but are fearful of asking higher prices because they think they will lose their customers. The truth is that the customers they may lose are most likely to be the ones that are unprofitable for them.” Additionally, Forbes says that many MSPs aren’t confident enough to charge a price that will give them the margin they need to be sustainable and grow. “The most successful MSPs have no problem charging significantly more for their services than smaller MSPs because they are able to articulate the value they deliver rather than getting drawn into a lowest-price-wins type of negotiation,” he says.

Neal Bradbury, cofounder and VP, channel development for Intronis, adds that it’s much easier to come down in price than to go up. He urges MSPs not to be afraid to ask what you’re worth and to use your experience, expertise, reputation, and results to justify the higher service cost. He says another mistake is to post your pricing on your website. “Big mistake,” he says, “as you’re commoditizing your services out of the gate.” Also, he says many MSPs often offer too much for too little. “You need to take into account onboarding a new customer and the costs associated with it. The first month of engagement may be more than every month after. There’s usually a lot of discovery and cleanup — MSPs need to account and charge for it.”

As far as bundling is concerned, Clancy believes you should keep it simple by providing just one bundle. “We don’t offer bronze, silver, and gold packages, just gold,” he explains. “Also, we include the antivirus, rather than fighting with whatever the customer is already using. I am a strong believer in getting it all under one contract — HaaS, firewalls, servers, cloud storage, antivirus, everything.”

Forbes says that the key to bundling is not to position your bundle as a collection of products but rather as a service-led proposition around, for example, managed security. With this mentality, customers don’t need to know all the different components, just that their overall needs are being met.

Inevitably, you’ll have some customers ask to pull apart your bundles to achieve a lower cost. All the experts agree that this is bad for your business. Powell doesn’t allow it. Rather, he tells customers that their bundles are built on 20 years of industry experience and designed to support the customer. Anything less would be unacceptable. “Explain the advantages and benefits and, ultimately, if they are trying to penny pinch an MSP, they are not going to be a good fit for managed services,” he says. “Look for customers who understand the value you provide.”

Clancy says that price shoppers aren’t customers; they are essentially shoplifters that want to steal your time, energy, and profits. “People don’t price shop their doctors or their attorneys,” he says. “They trust them and listen to them. Be a doctor. Tell people what they need to do to get well. If they don’t like it, they can get a second opinion from another doctor. Never compromise your solution.”

Of course, all this advice is just a small portion of what you’ll need to run an efficient and profitable MSP practice. The best advice might be to never stop striving to learn more. Technology and how it’s delivered to customers changes rapidly. Being willing and able to share your learning with other MSPs — and being willing to accept what they can share with you — will ensure your continued growth and prosperity.